Chapter 1The Regulation of

Employment

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Learning Objectives (1)

• Describe the balance between freedom to contract in general, and the regulatory environment that governs work, specifically

• Identify who is subject to which employment laws, and understand the implications of each law for both the employer and employee

• Note the differences between workers who are employees vs. independent contractors, and apply the various tests used to distinguish them

• Appreciate the many, serious risks of worker misclassification

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Learning Objectives (2)

Articulate the various ways in which the concept “employer” is defined by the various employment-related regulations

Understand the role and effects of non-compete agreements in the employment context, their relationship to trade secret protection, their permissible parameters in most states, and the implications of their invalidity in some other states.

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Intro to the Regulatory Environment (1)

Freedom to contract Employment relationship is a contract: the exchange

of labor for compensation

Most private-sector employment relationships are “at-will” agreements (more on this in Ch. 2)

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, and either party may terminate the relationship at any time, with some exceptions

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Intro to the Regulatory Environment (2)

Congress and states enact laws when they believe that the employee is not on equal bargaining footing with the employer Minimum wage, overtime, safety and health

Collective bargaining rules

Refrain from using certain criteria (race, gender) to arrive at specific employment decisions

Exceptions to at-will doctrine

Query: Is this regulation really necessary?

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Is Regulation Necessary? Opponent view

The market will work to encourage employers’ rational, non-biased behavior

Employers should have freedom to make business decisions

Proponent view

Human beings do not always (usually?) act rationally

Discrimination is unjust and continues on conscious and unconscious levels. People can tend to appreciate similarity, and distrust difference and The Unknown.

Market imperfections: biased firms can remain competitive while discriminating

Social contract: Best angels stand for equality of opportunity

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Classifications of workers: two types

Employee Traditional law of master and servant → law of

agency

Employee serves employer/principal’s interests as its agent, according to instructions (under its control)

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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Examples: Employees v. Ind. 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 Not required, but Employee eligible to receive them

Independent Contractor → no access to Employer benefits

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Why Use Ind. Contractors? Specialized skills or Intermittent need

Seasonality

Cost factors No overtime

Avoids work-related expenses (e.g., insurance)

Avoids Overhead – pay-for-production, not time

Liability of contractor for mistakes

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Costs of Miss-Classification 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

CA: willful miss-classification subject to severe penalties

The fines for each violation are substantial

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Indep’t. 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: critical factor – the right to

control (exercised or not)

Economic realities test: critical factor-- whether a worker is economically dependent or is in business for her/himself

Case: Murray v. Principal Financial Group

Case: Juino v. Livingston Fire District 5

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Definitions of “Employee” (2)

Tax penalties for miss-classification onerous

IRS institutional preference for employee status

Taxpayer may apply to IRS for Determination

IRS 20-Factor Analytical Tool Elements that reflect control or independence

Useful as a general guide, but not a “tally” out of 20

See Opening Scenario 3

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Contingent Workers and Joint Liability

Contingent or temporary workers Often supplied by ‘temp’ or staffing agency

Same classification issues (usually employee)

Staffing firms and clients: Joint Employers? Staffing firms and their clients may have joint liability

for workers

Contract with Agency needs clarity re employer duties

Precautions during engagement to reduce risk of joint liability

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Definition of “Applicant” To fulfill their purpose, some regulations cover

certain prospective employees (e.g., Title VII).

To be covered as an “Applicant:”

Person submits expression of interest, reflecting basic qualifications for a posted position;

Employer considers person for employment in a particular position;

Person does not remove him/herself from selection process or signify disinterest

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Management Considerations (risk reduction)

Classification stakes are high: a written document can help identify the nature of the worker’s relationship, but the “duck test” rules

Independent contractor is best paid on the basis of results rather than time

Minimum-necessary training should be provided to an independent contractor

If independent contractor requires assistance, s/he should supply it

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Definition of “EmployER” Important to recognize that entity must be an

“Employer” for many regulations to attach.

Issues may arise when: an entity claims to be a private membership club

the entity is a multinational company

the entity is close to lower jurisdictional limits of federal laws (Commerce Clause proxy)

The entity supplies goods or services to government

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Statutory Definitions of Employer

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Non-compete Agreements (1)

An agreement by which the employee agrees not to take certain types of jobs or otherwise enter into competition with the employer, within a specified region, for a specific period of time after departure– a Big Gotcha in terms of “switching costs.” May also cover disclosure of employer’s confidential information.

States vary widely as to whether they will enforce employee non-compete agreements (most will, but not CA)

Non-competes may have “forum selection clauses” that stipulate the state’s law that applies to it. They don’t always work.

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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 is “reasonable” in geographic territory, industry scope, and duration period, and is not contrary to the public interest

Inter-company agreements not to hire-away each other’s employees should be avoided (anti-trust concern)

Variations include non-solicitation of customers or suppliers, no raiding of former colleagues

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Non-competes and Trade Secrets Trade secret: information that has value, in part

because it is held confidential, and company takes reasonable steps to protect it from disclosure

Non-disclosure agreements (NDAs): Broad definitions of “confidentiality”

Clear that duties continue after termination, as long as info remains confidential

Doctrine of Inevitable Disclosure

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Management Tips 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

Non-competes and NDAs may be evaluated and used to protect legitimate business interests