1. Chapter 1 The Regulation of Employment Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 1-2 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

3. 1-3 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.

4. 1-4 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

5. 1-5 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?

6. 1-6 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

7. 1-7 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

8. 1-8 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

9. 1-9 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

10. 1-10 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

11. 1-11 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

12. 1-12 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

13. 1-13 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

14. 1-14 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

15. 1-15 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

16. 1-16 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

17. 1-17 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

18. 1-18 Statutory Definitions of Employer

19. 1-19 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.

20. 1-20 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

21. 1-21 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

22. 1-22 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