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  2. 2. EMPLOYER-EMPLOYEE RELATIONSHIP <ul><li>Is a worker an employee or an independent contractor? </li></ul>
  3. 3. The answer is based on the Law of Agency <ul><li>Principle/agent </li></ul><ul><li>Employer/employee </li></ul><ul><li>Master/servant </li></ul><ul><li>Employer/independent contractor </li></ul>
  4. 4. Why does it matter if a worker is an employee or an independent contractor?
  5. 5. Why does it matter if a worker is an employee or an independent contractor? <ul><li>Independent contractor – a person who contracts with a principal to perform a task according to her or his own methods, and who is not under the principal’s control regarding the details of the work </li></ul><ul><li>Distinction between independent contractors and employees significant for taxes, benefits, cost reduction plans and discrimination claims </li></ul>
  6. 6. Why does it matter if a worker is an employee or an independent contractor? <ul><li>Employer payroll deductions </li></ul><ul><ul><li>Employer responsible for FICA, RRTA, FUTA and IRS withholdings for employees </li></ul></ul><ul><ul><li>Independent contractors pay these taxes themselves </li></ul></ul><ul><li>Benefits </li></ul><ul><ul><li>Employee benefits protected </li></ul></ul><ul><ul><li>Independent contractor provides his or her own benefits </li></ul></ul>
  7. 7. Why does it matter if a worker is an employee or an independent contractor? <ul><li>Discrimination and affirmative action </li></ul><ul><ul><li>Antidiscrimination statutes only protect employees </li></ul></ul><ul><ul><li>National Labor Relations Act only protects employees </li></ul></ul><ul><li>Cost reductions </li></ul><ul><ul><li>Employees generally more expensive </li></ul></ul><ul><ul><li>Employees can generally quit at-will </li></ul></ul><ul><ul><li>Employers incur vicarious liability with employees but not independent contractors </li></ul></ul>
  8. 8. Result of failure to appropriately categorize workers <ul><ul><li>IRS assesses harsh penalties for failure to pay FICA and FUTA </li></ul></ul><ul><ul><li>Employer may be liable under National Labor Relations Act </li></ul></ul><ul><ul><li>Employer may be liable under Fair Labor Standards Act </li></ul></ul><ul><ul><li>Employer may be liable for unpaid benefits </li></ul></ul>
  9. 9. ALSO, Employers may be vicariously liable for the actions of employees based on one of several theories : <ul><li>negligent entrustment </li></ul><ul><li>failure to properly supervise </li></ul><ul><li>respondeat superior </li></ul>
  10. 10. An employee’s conduct is within the scope of his/her employment if it meets each of the following four tests: <ul><li>1 .  It was of the kind that the employee was employed to perform. </li></ul><ul><li>2.  It occurred substantially within the authorized time period.  </li></ul><ul><li>  </li></ul><ul><li>3.  It occurred substantially within the location authorized by the employer. </li></ul><ul><li>4.  It was motivated at least in part by the purpose of serving the employer. </li></ul>
  11. 11. EDGEWATER MOTELS, INC. V. GATZKE Gatzke, a district manager for the Walgreen Company, spent several weeks in Duluth, Minnesota, supervising the opening of a new Walgreen restaurant there. He remained at the restaurant approximately 17 hours a day, and he was on call 24 hours a day to handle problems arising in other Walgreen restaurants in the district. While in Duluth, he lived at the Edgewater Motel at Walgreen’s expense.
  12. 12. After some heavy drinking one night, Gatzke returned to his motel room and spent some time at a desk filling out an expense account required by his employer. Gatzke was a heavy smoker, and he testified that he probably smoked a cigarette while completing the expense account. Shortly after Gatzke went to bed, a fire broke out in his motel room. Gatzke escaped, but fire damage to the motel totaled over $330,000. An expert witness testified that the fire was caused by a burning cigarette or match and that it started in or near a wastebasket located beside the desk at which Gatzke worked.   Edgewater sued Walgreen for Gatzke’s negligence. Did Gatzke’s negligence occur within the scope of his employment?
  13. 13. REGARDING INDEPENDENT CONTRACTORS <ul><li>Sometimes hiring independent contractors may be more expensive than having people on staff. </li></ul><ul><li>  </li></ul><ul><li>Tax advantages for business expenses </li></ul>
  14. 14. How do you tell if a worker is an employee? A Variety of Criteria <ul><li>The Economic Realities Test </li></ul><ul><ul><li>Used in FLSA cases regarding overtime, wage cases </li></ul></ul><ul><li>The Common Law Test </li></ul><ul><ul><li>Used by some courts </li></ul></ul><ul><li>The Hybrid Test </li></ul><ul><ul><li>Used by some courts </li></ul></ul><ul><li>The Right to Control Test </li></ul><ul><ul><li>Used in IRS cases regarding withholding, payment of taxes </li></ul></ul>
  15. 15. How do you determine if a worker is an employee? <ul><li>Common-law agency test </li></ul><ul><ul><li>Who has the right to control the manner in which the work is performed? </li></ul></ul><ul><li>IRS test </li></ul><ul><ul><li>20 factors to determine whether someone is an employee or an independent contractor </li></ul></ul><ul><ul><li>Derived from results of court judgments </li></ul></ul>
  16. 16. IRS 20 FACTOR ANALYSIS <ul><li>1.     Instructions </li></ul><ul><li>2.     Training </li></ul><ul><li>3.     Integration </li></ul><ul><li>4.     Services rendered personally. </li></ul><ul><li>5.     Hiring, supervising, and paying </li></ul><ul><li>assistants. </li></ul><ul><li>6.     Continuing relationships </li></ul><ul><li>7.     Set hours of work </li></ul>
  17. 17. IRS 20 FACTOR ANALYSIS <ul><li>8.     Full time required </li></ul><ul><li>9.     Doing work on the employee’s premises </li></ul><ul><li>10.   Order or sequenced set. </li></ul><ul><li>11.   Oral or written reports </li></ul><ul><li>12.   Furnishing tools and materials </li></ul><ul><li>13.   Payment by hour, week, or month. </li></ul><ul><li>14. Payment of business or traveling expenses </li></ul>
  18. 18. IRS 20 FACTOR ANALYSIS <ul><li>15.     Significant investment </li></ul><ul><li>16.     Realization of profit or loss </li></ul><ul><li>17.     Working for more than one firm at a time </li></ul><ul><li>18.     Making services available to the general public. </li></ul><ul><li>19.     Right to discharge </li></ul><ul><li>20.     Right to terminate </li></ul>
  19. 19. Clackamas Gastroenterology Associates v. Wells, Slide 1 of 2 <ul><li>When addressing employee status under the ADA, the U.S. Supreme Court developed a “non-exhaustive” six-factor test to make the determination: </li></ul><ul><ul><li>Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work; </li></ul></ul><ul><ul><li>Whether, and to what extent, the organization supervises the individual’s work; </li></ul></ul>
  20. 20. Clackamas Gastroenterology Associates v. Wells, Slide 2 of 2 <ul><ul><li>Whether the individual reports to someone higher in the organization; </li></ul></ul><ul><ul><li>Whether and to what extent the individual is able to influence the organization; </li></ul></ul><ul><ul><li>Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts; and </li></ul></ul><ul><ul><li>Whether the individual shares in the profits, losses, and liabilities of the organization. </li></ul></ul>
  21. 21. Economic Realities Test <ul><li>Factors: </li></ul><ul><ul><li>Who has the right to control how, when & where the work is done? </li></ul></ul><ul><ul><li>Who provides tools, materials & other resources for the work to be done? </li></ul></ul><ul><ul><li>What is the method of payment? </li></ul></ul><ul><ul><li>What is the duration of the working relationship? </li></ul></ul><ul><ul><li>Does the work require a “special skill?” </li></ul></ul><ul><ul><li>How integral to the business is the work performed? </li></ul></ul><ul><ul><li>Overall, how dependent is the hired party on the hiring party? </li></ul></ul>
  22. 22. PROBLEM <ul><li>Mutual Insurance Company employed insurance agents which it called financing agents. The agents spent six weeks in training. Their job was to sell the policies of the company. For the first six months, the agents were paid a salary. After that, they were paid on commission, although they were guaranteed a minimum salary. </li></ul><ul><li>The agents could only sell Mutual Insurance policies. Consequently, they used Mutual’s paper work, and had desks and phone’s at Mutual’s office. They kept the same hours as everyone in the office. </li></ul>
  23. 23. Agents signed a contract which stated that they were independent contractors. They received no benefits, and no amounts were withheld from their paychecks. The contract included grounds for termination, although it also stated that the contract could be terminated by either side at any time.   The IRS brought an action against the company for failing to deposit Social Security amounts for the agents. Mutual argued that they were not required to pay to deposit Social Security amounts, because the agents were independent contractors. Who is correct?
  24. 24. FedEx and UPS <ul><li>http://www.law.com/jsp/law/LawArticleFriendly.jsp?id=900005546990 </li></ul><ul><li>http://taxprof.typepad.com/taxprof_blog/2008/06/what-can-brown.html </li></ul>
  25. 25. What would you include in an independent contractor agreement?
  26. 26. Smart Practice – IC Agreements 1 <ul><li>Declaring someone to be an independent contractor does not make it so. </li></ul><ul><li>The firm must give up the right of control over the worker. </li></ul><ul><li>The firm should not have ICs doing work that is central to the firm’s business or the same work as employees perform. </li></ul><ul><li>The firm should closely review long term IC agreements and not assign new projects without renewing agreements. </li></ul>
  27. 27. Smart Practice – IC Agreements 2 <ul><li>A good IC Agreement should: </li></ul><ul><ul><li>Require that the IC supply his own tools, materials & equipment, and pay his own assistants and business expenses. </li></ul></ul><ul><ul><li>Document the firm’s payment of a flat fee, rather than hourly or weekly payment. </li></ul></ul><ul><ul><li>Provide no benefits, not even time off. </li></ul></ul><ul><ul><li>Make it clear that the IC is free to offer his services to others. </li></ul></ul>
  28. 28. Other Contingent Workers 1 <ul><li>Temporary Workers </li></ul><ul><ul><li>If hired to do the same work as regular employees or kept on for a long time, they may become employees under the common law test, entitled to the same benefits as regular employees. </li></ul></ul><ul><ul><li>Example: Microsoft’s “permatemps” </li></ul></ul><ul><ul><li>Rule : Employers should not employ temps on a long term basis, or hire them to do the work of regular employees. </li></ul></ul>
  29. 29. Other Contingent Workers 2 <ul><li>Students and Interns </li></ul><ul><ul><li>Are Graduate and teaching assistants who work for their universities employees or students? Generally not. But … </li></ul></ul><ul><ul><ul><li>A graduate assistant was determined to be an employee because she received a stipend and benefits for her work, sick days and annual leave, equipment and training. </li></ul></ul></ul><ul><ul><li>Student Athletes are not employees. </li></ul></ul>
  30. 30. Other Contingent Workers 3 <ul><li>Volunteers </li></ul><ul><ul><li>Volunteers are generally not employees. But auxiliary choristers who were paid a fee for singing on an on-call basis were employees. </li></ul></ul><ul><li>Partners, Officers, Board Members, and Major Shareholders are generally not employees. </li></ul><ul><ul><li>The extent to which the individual acts autonomously and participates in management controls. </li></ul></ul>
  31. 31. Other Employee Status Issues <ul><li>Undocumented Workers </li></ul><ul><ul><li>The general policy of federal agencies is to enforce employment laws without inquiry into immigration status, but illegal status may affect the remedies due. </li></ul></ul><ul><ul><ul><li>Example : The NLRB held that no back pay was due to an illegal immigrant. Instead, the NLRB issued a “cease and desist” letter to the employer, directing it to stop illegal conduct. </li></ul></ul></ul><ul><ul><ul><li>Consider : Will this penalty stop illegal hiring? </li></ul></ul></ul>