HR 210 Bennett9e ppt ch01

1. Chapter 1
The Regulation of
Employment
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Learning Objectives 1
• Describe the balance between the freedom to
contract and the regulatory environment for
employment.
• Identify who is subject to which employment laws
and understand the implications of each of these laws
for both the employer and employee.
• Delineate the risks to the employer caused by
employee misclassification.

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Learning Objectives 2
• Explain the differences 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 non-compete
agreements.

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Introduction to the Regulatory
Environment 1
Freedom to contract is crucial to freedom of market.
• 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.
• Congress passed laws to resolve the imbalance of power
between an employer and an employee.
• Set minimum wage.
• Anti-discriminatory laws based on race and gender.

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Is Regulation Necessary?
Opponent view.
• Regulation of discrimination and other areas of employment relationship is
necessary.
• Human beings do not always act rationally.
• Economic forces do not offer absolute protection from employment
discrimination.
Proponent view.
• Market will work to encourage employers’ rational, nonbiased behavior.
• Decisions based on race or gender are inefficient.
• Market imperfections: biased firms can remain competitive while
discriminating.

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Classifications of workers: two types 1
Law of agency.
• Traditional law of master and servant.
• Employee acts on behalf of the employer as its agent.
• Employee acts only as authorized by the employer.
• Employer is obligated to exercise good faith in the relationship
and ensure that no harm comes to the employee during the
relationship.

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Classifications of workers: two types 2
Independent contractor.
• Person who contracts with a principal to perform a task
according to his or her own methods.
• The principal does not have right to exercise control over the
physical details of the work.

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Employees v. Independent Contractors
Discrimination: Title VII applies to Employees, not to Independent Contractors.
Employer payroll deductions.
• Employee - employer responsible for deductions.
• Independent Contractor - responsible for their own taxes, including
deductions.
Benefits.
• Employee eligible to receive them but it is not a requirement.
• Independent Contractor has no access to the benefits.

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Why Use Independent Contractors?
Specialized skills or Intermittent needs.
Seasonality.
Cost factors.
• No overtime.
• Avoids work-related expenses (e.g., insurance, tools, etc.).
• Avoids Overhead - pay for production, not time.
• Liability of contractor for mistakes.

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Costs of Misclassification
Inaccurate classification of workers is violations of:
• International Revenue Service (IRS) laws.
• The National Labor Relations Act.
• The Fair Labor Standards Act.
• Social Security Act.
• State worker’s compensation and unemployment
compensation laws.
Willful misclassification subject to severe penalties.
The fines for each violation are substantial.

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Independent Contractors: Safe Harbor (IRS)
• 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.

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Definitions of “Employee” 1
Legislative definitions are circular, unhelpful to
classification process
Courts use tests to analyze workers in context
• Common-law agency test.
• Determines whether the employer has the right to control.
• IRS 20-factor analysis.
• Analytical tool and not a legal test.

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Definitions of “Employee” 2
Economic realities test.
• Determine whether a worker is economically dependent on the business or is
in business for himself or herself.
• Courts look at the degree of control exerted by the alleged employer.

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Contingent Workers and Joint Liability 1
Contingent or temporary workers.
• Employment is temporary, is sporadic, or differs from the
norm of a full-time employment.
• Often supplied by staffing agency.
Joint employers and staffing firms.
 Staffing firms or client of the firm can be considered to be
employers.
 Worker is paid and training is provided.
 Provide workers’ compensation coverage.

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Contingent Workers and Joint Liability 2
Joint and several liability - staffing firm and client share liability
as employers.
• Worker may collect compensatory damages from either one if wrong is
proven.

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Definition of “Employer”
A person who employs others to do work
Issues may arise when:
• An entity claims to be a private membership club or a
multinational company.

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Statutory Definitions of Employer
Civil Rights Act of 1866.
Title VII of the Civil Rights Act of 1964.
Title VI of the Civil Rights Act of 1964.
Age Discrimination in Employment Act of 1967.
Title I of Americans with Disabilities Act.
Fair Labor Standards Act of 1938.
Rehabilitation Act of 1973.

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Non-compete Agreements 1
• Employee agrees 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 as to whether they will enforce employee
non-compete agreements.
• Non-competes may have “forum selection clauses” that
stipulate the state’s law that applies to it.

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Non-compete Agreements 2
What constitutes a valid non-compete?
• It protects a legitimate business interest and is ancillary to a
legitimate business relationship.
• It provides a benefit to both, employee and employer.
• It is “reasonable” in scope and duration and is not contrary to
the public interest.

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Non-competes and Trade Secrets
Trade secrets - Information that is not publicly available
• May include confidential information, customer preferences,
marketing strategies, etc.
Doctrine of Inevitable Disclosure.
• Employers are protected against disclosure of trade secrets.
• Court can prohibit a former employee from working for a
competitor.

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Management Tips 1
• Important to evaluate and properly classify workers;
mistakes are costly.
• Hiring an independent contractor is not a safe harbor
from liability.
• Staffing firms’ contracts must be carefully negotiated
to clearly spell-out responsibilities and covered risks.

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Management Tips 2
• Review documentation from the employees
perspective.
• Draft balanced non-competes catering to business,
employee, and public interests.