Chapter 1 The Regulation of Employment McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc.
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Transcript Chapter 1 The Regulation of Employment McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc.
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
1-2
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
1-3
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
1-4
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
1-5
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
1-6
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
1-7
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
1-8
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
1-9
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
1-10
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
1-11
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
1-12
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
1-13
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
1-14
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
1-15
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
1-16
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
1-17
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
1-18
The Definition of “Employer”
Most courts hold that supervisors are not liable
for his or her actions under the federal
antidiscrimination statutes
1-19
Statutory Definitions of Employer
1-20
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
1-21
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
1-22
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
1-23
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
1-24
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
1-25