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

2. 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

3. 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

4. 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

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

6. 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

7. 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

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

9. 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

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

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

12. 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

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

14. 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

15. 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

16. 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

17. 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

18. 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

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

20. Statutory Definitions of Employer
Page 26-27

21. 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

22. 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

23. 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

24. 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

25. 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