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The Employment Relationship
Employees, Independent Contractors, and Agents
Statutory Employees and Nonemployees
The Employment-at-Will Doctrine
Business Owners' Employment Status
The employment relationship is a mutual, voluntary arrangement between two parties. The employer — which may be a corporation, some other entity, or an individual — voluntarily agrees to pay the employee in exchange for the employee's work.
The employee — who is always an individual — voluntarily agrees to work for the employer in exchange for pay. The relationship is voluntary in the sense that the law does not force anyone to work for a particular employer. The 13th Amendment to the U.S. Constitution declares that "neither slavery nor involuntary servitude ... shall exist within the United States." As implemented by the Congress, the 13th Amendment prohibits forced labor through use of physical restraints, threats of physical harm, or threats of legal action. The prohibitions against forced labor also protect persons from compulsory work to pay off a debt — sometimes called peonage or indentured servitude.
The United Nations International Labour Organization (ILO) has adopted the ILO Declaration on Fundamental Principles and Rights at Work, to which the United States subscribes. The declaration states that all member nations have an obligation to respect four fundamental rights:
"freedom of association and the effective recognition of the right to collective bargaining;
the elimination of all forms of forced or compulsory labour;
the effective abolition of child labour; and
the elimination of discrimination in respect of employment and occupation."
Although the employment relationship is voluntary from the employer's viewpoint, in that the employer usually has no obligation to employ anyone in particular, in limited circumstances an employer can be forced to hire or re-employ a particular individual as a remedy for discriminating against that individual or violating that individual's rights under a protected leave law, such as the Family and Medical Leave Act (FMLA).
The employment relationship is often thought of as a contract between employer and employee. However, it usually does not take the form of a typical bilateral (or mutual) contract, in which each party makes a promise to the other, such as, "I promise to deliver goods to you next week if you promise to pay me $1,000 in 30 days." Instead, the employment relationship usually takes the form of a unilateral contract, in which only one party (the employer) makes a promise, such as, "If you come work for me, I will pay you $12 per hour." The employee usually does not promise to work. He or she just shows up, works, and becomes entitled to the promised pay. Mutual employment contracts are discussed in more detail on the following pages.
EMPLOYEES, INDEPENDENT CONTRACTORS, AND AGENTS
An employer's workforce can be classified broadly as employees and independent contractors. An employee and an independent contractor may or may not be an agent of the employer, depending on the authority given by the employer to obligate the employer to contracts.
An employee is someone whose manner of work the employer has a right to control, even if the employer does not actually exercise that control. An entry-level file clerk will likely be subject to close, daily, or even hour-by-hour supervision and is therefore an employee. So, too, is the president of a large corporation, not because he or she is closely supervised, but because the corporation's board of directors has the right to control his or her work. This right to control is illustrated by the outdated legal terms master and servant used historically to describe the employment relationship.
True employees (as distinguished from independent contractors) are sometimes known as W-2 employees, referring to the Forms W2 issued to them for federal income tax purposes.
As a matter of public policy, the courts hold employers vicariously liable for injuries or property damage caused by their employees if the injury or damage occurred during the course and scope of the employee's employment. This is sometimes referred to as the doctrine of respondeat superior — a doctrine requiring the superior (the employer) to respond (by paying damages) for the conduct of its employee.
Normally, such liability is imposed when the employee acts negligently, such a causing a car accident while driving on the job. But vicarious liability may be imposed even if the employee intentionally causes the injury, so long as the employee acted with the intention to benefit his or her employer and the employment relationship enabled the employee to cause the injury. An example might be a store clerk who physically restrains a customer wrongfully suspected of shoplifting.
Negligence and intentional misconduct that cause injury or damage are referred to in the law as torts — French for wrongs.
An independent contractor, in contrast to an employee, is someone you engage to perform a certain task, but whose manner of work you do not have a right to control. Good examples are professionals, such as outside lawyers or accountants, and trades persons such as electricians and plumbers. In each of these examples, the independent contractor's work is governed by professional standards, state and county codes, and the like, with which you are probably not familiar. Your lack of familiarity is precisely why you engage an independent contractor instead of doing the work yourself or having one of your employees do it.
Certainly you can tell your independent contractor what it is you want done, and you remain free to dismiss him or her if you do not like the work. But it is the result you are interested in; the manner in which that result is accomplished is up to the independent contractor and is not subject to your control.
Unlike an employee, an independent contractor generally cannot impose vicarious (tort) liability on his or her employer.
Whenever a worker's status as an independent contractor could reasonably be questioned, the safest course is to treat that worker as an employee.
Independent contractors are issued Forms 1099 to report income for federal tax purposes, as opposed to Forms W-2 issued to employees. Unlike employees, independent contractors are not subject to income and payroll tax withholding.
Employers sometimes try to classify their workforce as independent contractors, rather than employees, in an effort to avoid being subject to laws and regulations that apply to employees. In response, the various regulatory agencies, such as the Internal Revenue Service (IRS), the U.S. Department of Labor (DOL), the Equal Employment Opportunity Commission (EEOC), the Occupational Safety and Health Administration (OSHA), state wage and hour departments, workers' compensation commissions, and unemployment insurance administrators, have adopted complex tests — that differ from agency to agency — to distinguish employees from independent contractors. These tests tend to be biased in favor of an employer-employee relationship — that is, in favor of finding that the person is covered by the particular employment law or regulation the agency is charged with enforcing. (Tax issues relating to independent contractors are discussed in Chapter 7. See "Contingent Workers" in Chapter 20 for more details about the independent contractor relationship.)
The consequences of misclassifying an employee or a group of employees as independent contractors can be expensive. For example, the employer might be held liable for income taxes that should have been withheld, but were not, wage and hour violations, retroactive coverage under employee benefit plans, back pay, penalties, statutory damages, and interest.
Some workers are required by law to work under another's supervision. This is true, for example, in various health care professions. Even though the worker may otherwise qualify as an independent contractor, the duty to be supervised may convert the worker into an employee.
An agent is someone you authorize to make contracts on your behalf and to bind you to those contracts. Employees can be agents, but employees do not automatically become agents; it depends on what, if any, additional authority you give them. For example, if you told your employee to take a computer to the shop and make arrangements to have it repaired, you have given your employee authority to act as your agent. When he or she signs a work order in your name, you as the principal, not the employee, will have to pay the repair bill.
Similarly, an independent contractor can be, but is not necessarily, an agent. When you engage a landscape architect to prepare a design for the grounds around your new office building, the architect is an independent contractor but not an agent. However, when you then authorize the architect to buy plantings, he or she becomes your agent as well and has the power to obligate you in contract to the nursery.
STATUTORY EMPLOYEES AND NONEMPLOYEES
Some laws classify workers as employees or independent contractors regardless of the employer's right of control or lack of control over the manner in which the work is done.
For payroll tax purposes, the Internal Revenue Code classifies the following four categories of individuals as statutory employees even though they could be independent contractors under the common-law test:
a delivery driver (other than one who delivers milk)
a full-time life insurance agent
an individual who works at home on materials or goods supplied by the employer
a full-time salesperson who sells merchandise for resale or for use in the buyer's business operation
The Internal Revenue Code classifies the following individuals as statutory nonemployees for all federal tax purposes:
direct sellers of consumer products in the home or a place of business other than a permanent retail establishment
licensed real estate agents
companion sitters who are not employed by a companion sitter placement service
Workers' compensation statutes, unemployment insurance statutes, and other laws also state who does or does not qualify as an employee for purposes of the statute.
In a number of situations the law considers an employee to be jointly employed by two or more employers. As a result, both employers may be liable for discrimination or unfair labor practices, obligated to pay overtime and withhold and remit payroll taxes, or provide workers' compensation or other benefits.
A common example of joint employment is the staffing firm that leases an employee to another business. If the business directs the staffing firm to replace the leased employee based on the employee's race or age and the staffing firm does so, both the business and the staffing firm will be liable for discrimination.
In another example, suppose a nurse's aide works for two separate nursing homes that are owned in part by the same individuals. The total hours she works for both nursing homes may be aggregated in determining whether she is entitled to overtime.
In the construction industry, a prime contractor may engage a subcontractor, who in turn provides employees to the job site. If those employees perform work both for the subcontractor and the prime contractor, they may be deemed jointly employed by bothentities. Similarly, franchisers may be considered as joint employers of their franchisees' employees.
In the 2015 decision in Browning-Ferris Industries of California, Inc., the National Labor Relations Board (NLRB) expanded its definition of joint employment in determining what constitutes an appropriate bargaining unit for union representation purposes. According to the NLRB, in evaluating whether an employer possesses sufficient control over employees to qualify as a joint employer, the board considers whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary or whether it has reserved the authority to do so. As of this writing, the case is on appeal to the U.S. Court of Appeals for the D.C. Circuit. (Unions and labor relations are discussed in more detail in Chapter 24.)
In Salinas v. Commercial Interiors, Inc., the U.S. Court of Appeals for the 4th Circuit (headquartered in Richmond, Va.) ruled that joint employment exists when two or more entities "share, agree to allocate responsibility for, or otherwise co-determine — formally or informally, directly or indirectly — the essential terms and conditions of a worker's employment." The Court went on to list a number of factors to be considered in determining that question.
As these cases indicate, joint employment remains a developing legal area and is becoming more common given the growing variety of business models and labor arrangements. It should also be noted, however, that the DOL under the Trump administration has withdrawn a 2015 administrator's interpretations that offered an expansive view of joint employment.
THE EMPLOYMENT-AT-WILL DOCTRINE
Most employment is at will. That means there is no fixed period of time that the employment relationship will last, and either party is free to terminate the relationship at any time, with or without cause. In other words, the employer may fire, or the employee may quit, for any reason or for no reason at all.
In almost all states, there is a presumption that any particular employment relationship is at will. The presumption applies unless it is shown that employment for a specific period of time, such as two years, was intended. The fact that the employer and the employee intended the relationship to last a long time or for an indefinite period does not overcome the presumption of at-will employment, since in almost all cases the parties hope (at least at the outset) that the relationship will last a long time or indefinitely. An employer's promise of work for as long as the job exists and for as long as the employee wants it is nothing more than indefinite, at-will employment. Even so-called permanent employment is still employment at will (although employers should not use the term permanent when intending only an at-will relationship).
An important corollary of the at-will doctrine is the implied covenant of good faith and fair dealing. In most states, every contract is presumed to contain that implied covenant, requiring parties to the contract to act reasonably toward each other. However, the covenant is generally not implied in the normal at-will employment arrangement, since the covenant depends on the existence of an employment contract with a definite term. (A handful of states do recognize the covenant in an at-will employment relationship.) It follows, at least in theory, that an employer may treat at-will employees unreasonably and may fire them without cause, although it is seldom good practice to do so.
The at-will employment doctrine has five important exceptions:
the employment contract exception (discussed later in this chapter)
the abusive discharge exception (see Chapter 4)
the exception for protected leave (see Chapter 8)
the discrimination/retaliation exception (see Chapters 14 through 17)
the exception for collective bargaining agreements (see Chapter 24)
When one of these exceptions applies, discharging an at-will employee may result in a lawsuit, an award of money damages against the employer, or an order that the employer reinstate the employee.
An employment contract (more accurately, a mutual employment contract) is an agreement between the employer and the employee that the employment relationship will last for a fixed, definite period of time or that the relationship can be terminated only for cause or under specified conditions. Employment contracts should be in writing, since oral contracts that cannot be performed within one year are generally unenforceable according to the statute of frauds. Even if an oral contract of employment is enforceable, it can give rise to misunderstandings, and its provisions are difficult to prove.
The contents of any particular employment contract depend on the circumstances. A typical contract might include provisions dealing with the following:
job description, including employee duties and authority
whether the position is exempt or nonexempt under the Fair Labor Standards Act
beginning date and term of the contract and any extensions
bonuses and equity, such as stock options
health and other benefit plans
Excerpted from "The SHRM Essential Guide to Employment Law"
Copyright © 2018 Charles H. Fleischer.
Excerpted by permission of Society For Human Resource Management.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Chapter 1 The Employment Relationship,
Chapter 2 The Hiring Process,
Chapter 3 Evaluations, Work Rules, and Discipline,
Chapter 4 Terminating the Relationship,
Chapter 5 Wage and Hour Requirements,
Chapter 6 Wage Attachments and Assignments,
Chapter 7 Tax Considerations,
Chapter 8 Leave Policies,
Chapter 9 Deferred Compensation and ERISA,
Chapter 10 Group Health and Other Benefit Plans,
Chapter 11 Workers' Compensation,
Chapter 12 Unemployment Insurance,
Chapter 13 Workplace Safety,
Chapter 14 Discrimination in General,
Chapter 15 Gender Discrimination,
Chapter 16 Age Discrimination,
Chapter 17 Persons with Disabilities,
Chapter 18 Employee Privacy,
Chapter 19 Employee Loyalty,
Chapter 20 Alternative Work Arrangements,
Chapter 21 Foreign Workers,
Chapter 22 Government Contractors and Grantees,
Chapter 23 Nonprofit Organizations,
Chapter 24 Unions and Labor Relations,
About the Author,
Appendix: Federal Statutory Thresholds,
Additional SHRM-Published Books,
SHRMStore Books Approved for Recertification Credit,