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