Chapter 1

The Regulation of
Employment

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reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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 and At Will Employment

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. The exceptions are mainly based on the Civil Rights Law.
For example discriminating against a protected class and terminating
an employee because of their status in that class

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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/principals 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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Downside to ICs
There are supposed to be limits on control of ICs. The more control the more likely
the IC is an employee, not an IC
The biggest risk to organizations is tort liability.
Tort a wrong
In Workers Compensation the employee cannot sue their employer for injuries
suffered at work. Workers Comp provides medical, income and rehabilitation for
injured workers but there are no Pain and suffering or punitive damages for
injuries. This results in a substantial savings for the employer
With ICs who are injured due to the negligence of another party they can bring suit
and claim punitive and pain and suffering damages in addition to medical, income
and rehabilitation, etc. This can add millions to injuries suffered on the job.
There can be potential problems with misclassifying personnel by the Department of
Labor, the IRS, OSHA and other state and federal agencies

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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 workers compensation and unemployment compensation
laws
CA: willful miss-classification subject to severe penalties

The fines for each violation are substantial

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Indept. 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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Employee
Person performing the service on behalf of the
employer

In Maine, employees are regarded as at will

employees. Employees are considered to be at
the will of the employer and can be terminated
and there is no just cause requirement. There
doesnt have to be a reason.

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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
workers 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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Employer
Person requesting the personal services for
another in return for compensation

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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 employers 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 states law that applies to it. They dont
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
others 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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Some requirements an Employer can
require
Non Compete covenants agree not to work for a
competitor when employment ceases. Can also be used
to restrict employees ability to start a business in
competition with the employer.
Courts hold that the business has to be harmed
Non disclosure covenants agree to keep confidential
information about employer that could result in economic
harm to the business
Employers can go to court to get an injunction or sue in
court for breach of contract.

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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

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