LER201:

Lesson 02: The Nature of Employment Relationship

Lesson 02: The Nature of Employment Relationship (1 of 9)
Lesson 02: The Nature of Employment Relationship

Learning Objectives

At the end of this lesson you should be able to:

Key Terms And Concepts

at-will employment proper cause
common law test of employee status protected class employees
compensatory damages public policy
constructive discharge punitive damages
covenant of good faith and fair dealing statutory employees
Worker Adjustment and Retraining Notification Act (WARN) economic realities test of employee status
vicarious liability implied contract
wrongful discharge independent contractor
just cause  

In employment law it is important to determine the employer-employee relationship between the person and the company. Persons who perform work while retaining control over the physical details on how the work is to be performed are contractors (e.g., details such as when the work is to be performed, who will perform the work, what equipment will be used) and may be considered independent.

Whether a worker is an employee or an independent contractor will have implications for the employer in terms of tax withholding, benefits, coverage under anti-discrimination employment statutes, costs and record keeping obligations, vicarious liability, and other liability issues such as gender discrimination. Misclassification of workers who are legally employees as independent contractors could create major liabilities for the employer.

Determining the employee-employer relationship is not always easy and it will depend on the law that is being used. Once it is determined that a worker is an employee, it is important to understand that the legal relationship between an employer and the employee is a contractual one. If there is not a collective-bargaining agreement or individual employment contract for an employee who is not employed by the government, the employee is generally considered to be in an "at-will" employee. At-will employment presumes that either the employer or the employee can terminate the employment relationship at any time and for any reason except for a reason that is prohibited by law. It is illegal to discharge employees who are members of protected classes, based on federal and state anti-discrimination statutes.

It may be illegal to discharge non-protected-class employees as well under certain limited circumstances. This can be considered "wrongful discharge." Types of wrongful discharge may include discharges in violation of state public policies, discharges that breach an implied contract, and tortious discharge.

The Employer-Employee Relationship (2 of 9)
The Employer-Employee Relationship

The Employer–Employee Relationship

To analyze a potential employment-law problem one must first answer the following question: Is there an employer-employee relationship in this situation?

To establish an employer-employee relationship it is not enough that a person is performing work for a company that indisputably does have employees. Rather than an employee, such a person might properly be classified as an independent contractor. Generally, an independent contractor is a person who contracts with the principal (company or person) to perform a task according to his or her own methods. The independent contractor is not under the principal's control regarding the physical details of the work.

More precise definitions of who is and who is not an independent contractor vary, depending on the particular law that is involved and the factual situation of each case. Deciding in a particular case whether or not an individual is an independent contractor is not easy. There are many factors you have to consider.

Why is it important in terms of employment law whether an individual is an employee or an independent contractor? The two relationships create very different sets of legal rights and obligations. Important distinctions are in the areas of

  1. payroll deduction and tax withholding obligations
  2. regulation of payment and fringe benefits made to working persons
  3. protection of working persons by federal and state anti-discrimination statutes
  4. vicarious liability, and
  5. breach-of-contract considerations

Also, companies must be careful to correctly classify the persons who work for them as employees or independent contractors because the legal consequences are expensive.

Why Use Employees Rather Than Independent Contractors? (3 of 9)
Why Use Employees Rather Than Independent Contractors?

Why Use Employees Rather Than Independent Contractors?

Companies like to use employees because it requires control of the physical details of how the work is performed.

Example: A large manufacturing company uses expensive and large-scale equipment to produce its products. The machine has to be run by several persons, working in coordinated fashion, operating the equipment in a very uniform manner. In this situation, the factory worker cannot be an independent contractor because he or she cannot be given choices as to how, when and by what means he or she will perform the work.

Example: A convenience store must schedule its workers at specific times, cash registers must be operated when customers approach the counter to pay, products to be sold and prices to be charged for items are uniformly determined. For the store workers to be considered independent contractors rather than employees, they would each have to be free to determine the items and methods used to sell the store's merchandise, free from control by the store's owner or management.

So companies perform their work through employees because they believe they can be most successful by controlling the times and physical methods by which their work is performed and by having a workforce committed to the company full-time. Exertion of control might enhance the company's success but would also most likely be sufficient to render the agents as employees rather than independent contractors.

Some companies also use employees rather than independent contractors to save costs. For instance, a company might hire an attorney to be a full-time employee at a fixed salary of $60,000 to handle its legal transactions. Even assuming additional fringe-benefits costs increase the company's expenses to $80,000 per year, a self-employed attorney performing work for the company an average 20 hours per week for a year would cost the company $104,000.

Mischaracterization of Employees as Independent Contractors

It is very important for companies to correctly characterize their workers as independent contractors or employees. Failure or refusal to properly classify employees as "employees" can have serious financial repercussions.

  1. Since companies must withhold taxes and pay matching taxes on employees but not independent contractors, a finding that a company has treated an employee as an independent contractor creates an immediate tax liability for the company.
  2. Employee status brings workers under the protection of various wage and benefit statutes as well as federal and state anti-discrimination laws and laws establishing collective-bargaining rights for employees.

Example: An employee is fired because of her religion. This conduct would not violate Title VII of the Civil Rights Act of 1964 if the worker was an independent contractor. It would however, violate Title VII if the worker was considered an employee, and liability would include back wages owed to the employee plus compensatory and punitive damages. Also employers are not always subject to liability for torts committed by independent contractors.

Distinguishing Employees from Independent Contractors (4 of 9)
Distinguishing Employees from Independent Contractors

Distinguishing Employees from Independent Contractors

There is no single test to determine whether a worker and the entity that he or she works for are in an employee-employer relationship or an independent-contractor-principal relationship. The determination is dependent both on the particular law applied and the factual circumstance of the case. The most important characteristic of independent contractors is that they have the right to control the manner in which the work is to be performed. Additionally, independent contractors are not extremely dependent upon the principal for their economic well being. This means that the independent contractors are free to provide services to more than one principal at any given time. This is referred to as the economic realities test. Under the common realities test, courts look at various factors including, but not limited to, the degree of control by the employer over the worker, investment in the business by the worker, skill requirement by the worker, and the extent the work is part of the employer's business.

Several other specific factors are often looked at by courts and government agencies in making employee/independent contractor determinations. The common law test, and the JRS-20 factor analysis are frequently used by courts to determine a worker's status. These factors are set forth in great detail in your text.

If you ever need to make a decision as to whether a worker is an employee or an independent contractor you can undertake a three-step process. First, consider the particular law or laws that the determination is critical to. Do you need to make the determination so that you, as an employer, can pay the worker time-and-a-half of an hourly rate if he or she works more than 40 hours a week? In that case, the applicable law would be the Fair Labor Standard Act (FLSA).

Second, after you have determined the appropriate laws, research court cases in which independent contractor/employee determinations have been made for purposes of those particular laws. Often, after looking at cases you can discover what particular factors are considered to be most important in making these determinations under the particular law or laws in question.

The third step is to attempt to find a case or cases under the laws applicable to business situations that are factually as similar as possible to the situation of your interest. For instance, if you are concerned about whether an attorney is going to be covered by Title VII for a gender discrimination claim, try to find Title VII cases involving independent contractor/employee determination where lawyers are the alleged employees. Such cases will be much more useful to you than a Title VII case where the alleged employee is a commission salesperson.

Remember, you may not always find an independent contractor/employee case under a particular law decided for the type of business or worker that you are concerned with. In such cases, make a determination by comparing your situation to the case or cases that are most similar, factually, to your situation

Example: Suppose that as the owner of a Pennsylvania company, which manufactures vacuum cleaners, you would like to use persons who are paid by commission to sell my products. Because you might face high unemployment-compensation liability if you have to discharge a large number of salespersons for not selling a set volume of products, you would like the salespeople to be considered to be independent contractors rather than employees. Possible steps may include:

  1. Determine the applicable law; in this case it is the unemployment-compensation statute for the state of Pennsylvania.

  2. Review cases decided under the Pennsylvania unemployment-compensation statute in which employee/independent contractor dispute are decided. Find several cases dealing with commission salespeople.

  3. The third step is to find a case or cases as close as possible to the factual situation. In this case, there is a case which involves a sales representative of a vacuum cleaner manufacturer who had no assigned territories, was not required to have a minimum number of sales calls, was not required to attend meetings or file periodic reports, was free to set their own hours, was free to use any sales method, was free to hire help, and had to pay their own expenses and taxes. However, the representatives were prohibited from selling vacuum cleaners made by anyone other than the manufacturer with whom they had their contracts. The court concluded that they were employees rather than independent contractors even though they met the first requirement (free from control) for independent contractors. So what does this mean? Well, for Pennsylvania unemployment-compensation purposes, this case would inform you that you cannot require in the contract that they only sell your company's vacuum cleaners. Also the case provides you the information that, if you grant the sales representatives the types of freedom to control various aspects of how they perform their work, they will most likely satisfy the first part of the two-factor test indicating independent contractors.
At-Will Employment and Exceptions to the At-Will Doctrine (5 of 9)
At-Will Employment and Exceptions to the At-Will Doctrine

At-Will Employment and Exceptions to the At-Will Doctrine

Once it is established that there is an employment relationship, the legal rights of the employee and the legal obligations of the employer will first depend on how the relationship was established and to what degree its details are formalized.

First, legally the employment relationship is a contractual relationship. This is true despite the fact that in the majority of employment relationships there is no written agreement of any kind between the parties! Where there is no legal, written agreement, the relationship between the employer and the employee is presumed to be at-will employment. At will-employment is a relationship in which there is no legal obligation for either party to stay in the relationship; either party may terminate the relationship at any time, and for any reason, so long as the reason for the termination is not illegal.

Another way to summarize the employment-at-will doctrine is that it allows an employer to discharge an employee for "good reasons, bad reasons, or no reasons at all;" provided that the reason for the discharge does not violate the law. Therefore, there is no requirement that the discharge of an at-will employee be fair, for "just cause," or morally justifiable. An employer could legally discharge a worker over 40 years old, despite the ADEA, just because the employer did not like the color of the employee's hair, so long as the real reason for the discharge was that and not the employee's age.

In the past, most at-will employees had no significant right to their jobs. Today, not only are there numerous anti-discrimination statutes that limit the right of employers to terminate employment relationships, but even in situation where there are no statutory limits to an employer's power to discharge, employees and their attorneys are constantly pressuring the courts to recognize exceptions to the at-will doctrine. These types of challenges are based on the notion that the discharges were unfair or not for proper cause. These challenges have been successful.

Exceptions to the At-Will Doctrine: Wrongful Discharge

Although most employees today are technically "at-will," employers are significantly restrained by federal and state anti-discrimination laws in discharging employees in protected class. Protected class employees are simply types of employees who are legally protected from employment related discrimination under particular statutes (discrimination or harrassment based on race, color, religion, national origin and sex).

Example: Employees who are at least 40 years old are protected by the Age Discrimination in Employment ACT (ADEA) from being discriminated because of their age; African Americans are protected by Title VII of the Civil Rights Act of 1964 from workplace discrimination based on their race.

Technically, the anti-discrimination laws do not eliminate employment at-will with respect to employees in protected classes. However, the anti-discrimination laws make it much harder for an employee to fire an employee in a protected class for a "bad (but not illegal) reason or no reason" than an employee who is not in a protected class. Why? If the discharged employee files a claim under an anti-discrimination law, judges and juries often view discharges that don't appear to be justified by good cause as likely having been motivated by the employee's protected class, even if the employer denies it.

If an at-will employee is not in a protected class, does he or she have any protections against unfair discharges? Probably, but that depends on the courts in the state in which the employee works have created or accepted exceptions to the employment at-will doctrine.

If an employee is discharged under circumstance that the courts in the employee's state consider to be an exception to the at-will doctrine, the employee may be able to recover damages from the employer in a wrongful-discharge lawsuit. Wrongful discharge is a common-law legal claim; that is, it is a claim based on law created by court decisions, not state or federal statutes, that the employer did not have the legal right to discharge a particular employee in a particular situation. There are four general categories of exceptions that are available in some (not all) states:

  1. discharge in violation of public policy
  2. discharge in violation of an implied covenant of good faith and fair dealing
  3. discharge in breach of an implied contract
  4. tortious discharge
Discharge in Violation of Public Policy (6 of 9)
Discharge in Violation of Public Policy

Discharge in Violation of Public Policy

The most widely accepted ground for wrongful discharge cases is that the discharge was in violation of a public policy. A court's rationale for holding that a discharge violates public policy is basically that if the court did not invalidate the discharge, the effect would be that it would undermine some policy toward the people as a whole. Example: Courts in some states would consider it illegal for an employer to discharge an employee for taking time off work to serve jury duty.

You have to be careful, though, in attempting to determine what is and what not a "public policy." In some states, where employment at-will is strongly defended by the courts, the plaintiff must show that the alleged public policy is in a written constitution or statute of the state, or even a court decision. On the other hand in states where at-will employment is not respected the courts may accept virtually anything as violating some general public policy.

Some examples of situations considered by some state courts to be wrongful discharge by violation of public policy include discharge for filing workers' compensation claims; discharge for employees who refuse to commit crimes to benefit their employers; discharge for employees who refuse to lie in court testimony; discharges for refusing to falsify records; and exercising a constitutional right. Discharging an employee in retaliation for whistle blowing is another exception to the at-will doctrine and is a violation of public policy. Also retaliatory discharge (terminating an employee for exercising a right) can also violate pubic policy.

Discharge in Violation of an Implied Covenant of Good Faith and Fair Dealing (7 of 9)
Discharge in Violation of an Implied Covenant of Good Faith and Fair Dealing

Discharge in Violation of an Implied Covenant of Good Faith and Fair Dealing

Another basis for wrongful discharge (exception to the at-will doctrine) that has been accepted by the courts in some states is when a discharge occurs under circumstances that violate a covenant of good faith and fair dealing that many consider to be an implied part of any contract, including employment contracts. The implied covenant of good faith and fair dealing requires one party to a contract not to act in such a way as to deliberately attempt to deprive the other party of the benefits that it should legitimately expect to receive from the contract.

Example: An employer transferred the entire six-person crew to another part of its operation without replacing them, and then fired the supervisor (of the crew that was transferred) for not meeting the work group's production quotas. He had no one working for him!

Unless expressly stated in the contract, courts recognize that an agreement is a promise between the parties that they will deal with each other fairly and in good faith. The implied covenant of good faith and fair dealing as a basis for wrongful discharge has not been accepted by a majority of the states.

Discharge in Breach of an Implied Contract (8 of 9)
Discharge in Breach of an Implied Contract

Discharge in Breach of an Implied Contract

A third basis for wrongful discharge cases in some circumstances is breach of an implied contract. An implied contract is determined by a court to exist where there is no written or verbal contract between the parties, but the law imposes duties on the parties as if there were an express contract based on the relationship of the parties. In other words, there is no contract but injustice was done. Generally, this theory is applied to an employer-employee relationship where circumstances exist in which a court determines that it would be unjust to the employee, based on legitimate expectations created by the conduct of the employer.

Example: When employers ask employees to work for them, make promises to them such as "lifetime" employment or employment so long as they perform satisfactory work. Based upon such promise, the employee relocates causing the other spouse to lose paid work due to relocation. Under this example the employee was induced by the employer promises to undergo significant detriments and it would not be fair to deprive him/her of the benefit of long-term employment.

Another implied-contract theory is the premise than an employer's handbook or policy that makes statements directly or indirectly implying that an employee is not at-will can be seen as an implied contract.

Example: A statement in the employee handbook which provides that the employee will only be discharged for "just cause" will be treated as an actual contract and enforced. The easiest way for employers to avoid implied-contract liability is to use a handbook with a specific disclaimer stating that the handbook does not constitute a contract of employment and none of its provisions create any contractual obligations by the employer to the employees.

Tortious Discharge (9 of 9)
Tortious Discharge

Tortious Discharge

A final wrongful-discharge theory is that a particular discharge was "tortious." A "tort" is probably best defined as a type of conduct legally considered to be wrongful. Tortious discharge may have occurred where an employer discharges an employee with a specific intent to harm the employee or where the employer's conduct toward the employee is intentional and outrageous, is intentional infliction of severe emotional distress, or constitutes fraud. The employer violated a duty he owes to the employee and it is not based on a contract.

Example: An employer physically beats up the employee then fires him for being unable to perform his work.

The main benefit of being able to pursue a tortuous-discharge claim is that it entitles the employee to more than contract or compensatory damages, which are limited to replacing what was lost. The remedy for a tortious discharge could also include punitive damages, which are damages intended to punish a defendant employer, not just compensate an employee for what he or she lost by being discharged.

Despite the difficulties that employees may have in successfully pursing wrongful-discharge claims in many states, employers cannot afford to ignore policies and situations at their workplaces that can unnecessarily give rise to such claims. Managers and supervisors should be careful that their written and verbal communications to at-will employees cannot later be interpreted as legally enforceable promises.

Example: A promise that the employee will always have a job as long as he or she receives satisfactory performance appraisals.

Worker Adjustment and Retraining Notification Act (WARN)

Along with the exception to the at-will doctrine discussed above the WARN Act requires employers to provide written notice of least 60 calendar days in advance of covered plant closing and mass layoffs. However, the WARN notice only applies to business with 100 or more full-time workers (not counting workers who have less than 6 months on the job and workers who work fewer than 20 hours per week) is laying off at least 50 people at a single site of employment, or employes 100 or more workers who work at least a combined 4,000 hours per week.

Lesson 02 Assignment

Please respond to the Lesson 02 assignment scenarios and upload your responses in the assignment drop box.


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