Chapter 1 The Regulation of Employment McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives Describe the balance between the freedom to contract and the current regulatory environment for employment Identify who is subject to which employment laws and understand the implication of each of these laws for both the employer and employee Describe the permissible parameters of noncompete agreements

Learning Objectives Explain the difference between an employee and an independent contractor and the tests that help us in that determination Articulate the various ways in which the concept “employer” is defined by the various employment-related regulations Describe the permissible parameters of noncompete agreements Page 2

Introduction to the Regulatory Environment Freedom to contract An employee may choose to work or not to work for a given employer An employer may choose to hire or not to hire a given applicant Page 3-5

Introduction to the Regulatory Environment Congress passes employment-related laws when it believes that the employee is not on equal footing with the employer Minimum wage Refrain from using certain criteria (race, gender) to arrive at specific employment decisions Page 3-5

Is Regulation Necessary? Opponent view The market will work to encourage employers’ rational, nonbiased behavior Proponent view Human beings do not always act rationally Discrimination continues because often employers are faced with the choice of two equally qualified applicants for a position Biased firms can remain competitive while carrying out discriminative practices Page 5

The Employment Relationship Origins in agency law Traditional law of master and servant → law of agency Independent contractor Person who contracts with a principal to perform a task according to his or her own methods The principal has no control over the physical details of the work Page 6-8

The Employment Relationship Employer payroll deductions Employer → responsible for employee deductions Independent contractor → responsible for their own deductions Benefits Independent contractor → no access to benefits Page 8

The Employment Relationship Discrimination and affirmative action Independent contractors generally not protected Cost reductions for employers in hiring independent contractors Avoids the cost of overtime Avoids work-related expenses Page 8-10

The Cost of Mistakes Inaccurate classification of workers is a violation of Federal tax laws The National Labor Relations Act of 1935 The Fair Labor Standards Act of 1938 Employee Retirement Income Security Act Social Security Act State worker’s compensation and unemployment compensation laws The fines for each violation are substantial Page 10-11

Independent Contractor Criteria The business must have never treated the worker as an employee for the purposes of employment taxes for any period All federal tax returns with respect to this worker were filed consistent with the worker being an independent contractor The company has treated all those in positions substantially similar to that of this worker as independent contractors The company has a reasonable basis for treating the worker as an independent contractor Page 11

The Definition of “Employee” Common-law agency test A test used to determine employee status Critical factor – the right to control IRS 20-factor analysis List of 20 factors used by the IRS to determine whether someone is an employee or an independent contractor Page 11-13

The Definition of “Employee” Economic realities test A test used by courts to determine whether a worker is economically dependent on the business or is in business for himself or herself Page 16

Contingent Workers and Joint Liability Contingent or temporary workers Workers whose job with an employer is temporary Joint Employers and Staffing Firms Staffing firms and their clients may have joint liability of workers A number of factors determine whether a worker placed by a staffing firm with the firm’s clients qualifies as an employee Page 19-20

Definition of an “Applicant” The employer has acted to fill a particular position The individual has followed the employer’s standard procedures for submitting applications The individual has indicated an interest in the particular position Page 20

Management Considerations A written document will help to identify the nature of the association between parties The independent contractor should be paid on the basis of the nature of the job completed, rather than the hours worked to complete it No training should be offered to an independent contractor Page 21

Management Considerations Where additional assistance is required, an independent contractor will be made to supply that extra assistance Where the risk of misclassification is great the employer may choose to obtain an advance ruling from the IRS Page 21

The Definition of “Employer” An employer is someone who employs or uses others to do his or her work, or to work on his or her behalf Issues may arise when an entity claims to be a private membership club the entity is a multinational company the entity is covered under the Rehabilitation Act of 1973 Page 25

The Definition of “Employer” Most courts hold that supervisors are not liable for his or her actions under the federal antidiscrimination statutes Page 25

Statutory Definitions of Employer Page 26-27

Noncompete Agreement An agreement signed by the employee agreeing not to disclose the employer’s confidential information or enter into competition with the employer for a specified period of time and/or within a specified region States vary widely in matters of permitting noncompete agreements Contracts must have forum selection clauses which stipulate the state law that applies to it Page 28

Noncompete Agreement What constitutes a valid restrictive covenant? It protects a legitimate business interest It is ancillary to a legitimate business relationship It provides a benefit to both the employee and employer It is reasonable in scope and duration It is not contrary to the public interest Page 29

Noncompete Agreement A valid noncompete agreement must be supported by consideration offered in a bargained-for exchange Inevitable disclosure: Employers are protected against disclosure of trade secrets even if no noncompete applies Page 29

Management Tips It is important to evaluate the status of workers Miscalculations of employment status can be costly for the employer Hiring an independent contractor is not a safe harbor from liability Page 30

Management Tips Staffing firms under contract must be monitored Employers should review all documentation as if they are bound to it as a contract Noncompete agreements should strive toward reasonableness Page 30