THE TYPES OF EMPLOYMENT RELATIONSHIPS
Enhances the quality of the firm’s hiring decisions.
Enhances the company’s reputation and image as an employer.
Promotes the perception of fairness among job candidates.
Reduces the negative public relations firms experience when people feel they were discriminated against and tell others about their experience.
Reinforces an ethical culture.
Enhances an organization’s performance by ensuring that people are hired or not hired based on their qualifications, not biases.
Promotes diversity, which can enhance an organization’s ability to appeal to a broader customer base.
Given that entire books have been written on employment law, this chapter’s coverage of the major government regulations and legal issues involving staffing cannot cover every detail. This book is not intended as a legal reference, and it does not constitute legal advice. The purpose of this chapter is to provide an overview of some of the key laws and legal issues surrounding staffing and to identify resources for additional information. The chapter will also give you a good understanding of how to prevent discriminatory or illegal staffing practices. Laws change and differ from state to state, and they evolve over time, so you should always consult legal counsel to ensure compliance with current local, state, and federal regulations.
In this chapter, we first discuss various types of employment relationships, their legal implications, and the influence of labor unions. Next, we cover some of the primary laws and regulations regarding staffing, different enforcement agencies, and different types of staffing-related lawsuits. Finally, we discuss barriers to legal recruitment and hiring. After reading this chapter, you should have a good understanding of how to create a legal staffing system.
THE TYPES OF EMPLOYMENT RELATIONSHIPS
Employers use different types of employment relationships to strategically manage their workforce and ensure that they have the number of workers with the skills they need ready to work when they need them. Let’s look at these different employment relationships and their legal implications.
someone hired by another person or business for a wage or fixed payment in exchange for personal services, and who does not provide the services as part of an independent business
EXPLICIT EMPLOYMENT CONTRACT
specific written or verbal employment contract
IMPLICIT EMPLOYMENT CONTRACT
an understanding that is not part of a written or verbal contract
an employment relationship in which either party can terminate the employment relationship at any time for just cause, no cause, or any cause that is not illegal with no liability as long as there is no contract for a definite term of employment
Types of Employees
EMPLOYEES An employee is someone hired by another person or business for a wage or fixed payment in exchange for personal services, and who does not provide the services as part of an independent business. A job offer is made that must be accepted as presented, or the employer and employee negotiate the terms and conditions of their relationship and create an employment contract. Every employee has an employment contract. If a written agreement does not exist, there is often an oral contract in place that in most instances is just as enforceable as a formal written agreement. Even if a written or verbal explicit employment contract does not exist, there is an implicit employment contract reflecting a common understanding between the employer and employee.6 We discuss employment contracts in more detail in Chapter 11.
The employer must withhold employee payroll taxes (income taxes and Social Security taxes) from the paychecks of employees and pay certain taxes (unemployment insurance and the employer’s share of Medicare and Social Security). In addition, employers must abide by the many laws and regulations that govern the employment relationship, and they are liable for the acts of their employees during their time of employment.
AT-WILL EMPLOYEES At-will employment is an employment relationship in which either party can terminate the employment relationship at any time for a just cause, no cause, or even a cause that is morally wrong as long as it is not illegal with no liability as long as there is no contract for a definite term of employment. At-will employment allows an employee to quit for any reason. Firms call upon it most often when they want to fire an employee for any legal reason or for no reason at all. In most states (except Montana), if a formal contract does not govern a company’s employment relationships, these relationships are governed by the “employment-at-will” doctrine.
Although the courts generally have upheld the right to terminate at will, this does not mean that employers should casually terminate employees without giving a reason or without following normal policies and procedures. Companies should follow their formal discipline and termination procedures whenever possible to help avoid discrimination and wrongful termination claims. The at-will clause is best used as a legal defense by organizations when they feel it’s not in their interests to follow their own policies inflexibly.7 For example, at-will employment allows an employer to immediately dismiss an employee who is behaving dangerously. Case law establishing when or if firms can rely on the at-will nature of the relationship varies from state to state.
It is important to note that employment-at-will does not offer blanket protection to employers for all employee discharges. Existing contracts, of course, create exceptions to employment-at-will provisions. These contracts include tenure systems, such as those that exist between universities and tenured professors, formalized (written) employment contracts, and union contracts. “Just cause” clauses in union contracts protect most unionized workers from arbitrary firings and prohibit employers from firing workers unless they can show that a person should reasonably (due to “a just cause”) be terminated. Federal laws, such as equal employment legislation and the National Labor Relations Act (NLRA), protect employees from being retaliated against—fired or punished, for example—for engaging in a protected activity, such as filing a discrimination charge, opposing unlawful employer practices, or filing a valid worker’s compensation claim, regardless of an employee’s at-will status.
Certain state laws also limit employment-at-will provisions. Most states recognize that an implied employment contract exists between employers and employees that creates an exception to at-will employment. An implied employment contract occurs when an employer’s personnel policies, handbooks, or other materials indicate that it will only fire an employee for good cause or specify a procedural process for firing. If an employee is fired in violation of an implied employment contract, the employer may be found liable for breach of contract.
A few states have also recognized that a breach of an implied covenant of good faith and fair dealing is an exception to at-will employment. This covenant presumes that employers are generally obligated to deal fairly and in good faith with all of their employees. For example, firing an employee solely to deny the employee an earned bonus that has not yet been received, or to prevent him or her from soon vesting in the firm’s pension plan is unlawful in some states. Like the federal government, all U.S. states also recognize that a retaliatory discharge is an exception to at-will employment.
The best way to ensure that an employment-at-will message has been adequately communicated to employees is by publishing the policy on something employees sign. Signing an employment application or to acknowledge reading an employee handbook produces a written record that an employee has read and understood the policy. Table 3-1 describes how to develop an at-will employment statement.
CONTINGENT WORKERS In 1989 the Bureau of Labor Statistics defined contingent work CONTINGENT WORK
as “any job in which an individual does not have an explicit or implicit contract for long-term any job in which an individual does employment.”8 In other words, a contingent worker is anyone who has a job of limited duration, not have a contract for long-term
Developing an At-Will Statement
Most courts will find an employment-at-will relationship if the following criteria are met:9
The at-will statement is written in clear, understandable language and thoroughly explains what the at-will relationship means.
The at-will statement clearly states that no company representative may change the at-will relationship through oral or written promises.
The at-will statement explains that the organization’s policies and practices are not intended to create a contract.
The at-will statement is prominently displayed, such as in bold type, a separate introductory policy, or set apart in other policies.
The at-will statement is repeated where appropriate in other policies and handbooks, particularly those outlining work rules and disciplinary procedures.
The at-will statement is contained in other employment documents, such as application forms and offer letters.
nonpermanent workers who can be supplied by staffing agencies or directly hired by the company
employees of a company (also called a professional employer organization) who take on the operation of certain functions, or staff an entire location on a contractual basis for a client company
Contingent workers are outside of a company’s core workforce. In 2012, more than one in four employees were contingent workers.
A company can engage a contingent worker in two ways. It can hire the worker directly, or it can contract with another employer that has hired the worker. One of the primary benefits of contingent workers is that they can be quickly brought on board by placing a request with a temporary staffing firm or an employee-leasing firm. This allows a firm to adjust its staffing levels quickly without having to fire or lay off employees, which can increase a firm’s unemployment insurance premiums and hurt morale. Next, we will discuss several types of contingent workers.
TEMPORARY WORKERS As we discussed in the last chapter, temporary workers are
contingent workers supplied by staffing agencies or directly hired by the company in which they work. Contract workers are a type of temporary worker who provide more specific, advanced, technical, and professional skills than do temporary workers. These people tend to have assignments lasting several months to a year or more. Temporary and contract workers are paid by the hour and are only paid for hours actually on the job. Temporary workers often do not receive the health and other benefits given to full-time employees, and, unlike employees, they do not raise a firm’s unemployment insurance if they are dismissed. Because of the lower cost and nonperma-nent nature of their relationship with the firm, it can be strategic for the firm to utilize temporary workers until it is clear that the additional talent will be needed for the long term. Microsoft, Delphi, and FedEx make extensive use of temporary workers.
When using a staffing agency, the agency can be considered the temporary worker’s employer of record rather than the company’s. But this is only the case if the company using the agency has the right to control or direct only the result of the work done by the worker, and not the means and methods of accomplishing the result. This can shield a company using an agency from charges of age, race, or sex discrimination for the staffing agency’s workers. The agency must also provide performance feedback and scheduling functions or else both the company and the agency may be determined to be co-employers, both subject to the employment laws governing the employer-employee relationship.
It is important to note that firms cannot always legally exclude temporary workers from benefits, such as health insurance. In Burrey v. Pacific Gas & Electric11 the court concluded that employees of temporary agencies working at an unrelated company’s place of business, unless specifically excluded from the firm’s employee benefit plan coverage, are to be treated as the company’s common-law employees for employee benefit plan purposes. Therefore, employers need to have a clearly written benefits policy that specifically excludes temporary workers if that is their intention.
LEASED WORKERS Leased workers are employees of a company who take on the operation of certain functions, or staff an entire office or factory on a contractual basis for a client company. The workers are employees of the contractor and are considered leased workers by the company for which they perform the work. Because the employee-leasing company and the client company are co-employers, both are liable for payment of payroll taxes and workers’ compensation premiums, and compliance with government regulations.12
Leased workers are typically assigned to projects lasting at least a year that require professional and technical expertise. Many smaller firms use employee-leasing companies as a human resource partner. The firm recruits, screens, and hires its own workers, then puts them on the leasing company’s payroll. The agency then “leases” the workers back to the company for a fee. This allows smaller businesses with limited resources to transfer the responsibility for administering payroll and benefits from themselves to the leasing company. Because the employee-leasing agency employs more workers, it can offer better health insurance and retirement benefits at lower cost than small businesses with only a few employees.
PART-TIME AND SEASONAL WORKERS Part-time workers work less than a full workweek and can be contingent workers, but do not have to be. Seasonal employees are employees hired to work only during a particular part of the year. For example, when UPS hires more workers during the busy holiday season, and when growers hire laborers to harvest fruit, they are hiring seasonal workers.
UNIONIZED WORKERS In the United States, labor unions legally represent workers, organizing employees and negotiating the terms and conditions of their employment. In addition to wages and benefits, labor unions bargain over virtually all aspects of the staffing process, including working conditions, facility locations, staffing levels, job descriptions and classifications, promotion and transfer policies, layoff and termination policies, hiring pools, employment discrimination protections, grievance procedures, and seniority provisions. The terms and conditions of employment are contained in a contract called a collective bargaining agreement or a collective employment agreement. The inability of management and the union to reach an agreement may culminate in either a labor strike or a management lockout.
Congress approved the NLRA13 in 1935 to encourage a healthy relationship between private-sector workers and their employers. The NLRA was designed to curtail work stoppages, strikes, and general labor strife. It extends many rights to workers who wish to form, join, or support unions or labor organizations; to workers who are already represented by unions; and to workers who join as a group of two or more nonunionized employees seeking to modify their wages or working conditions. Employers also may not discriminate against pro-union applicants.
U.S. companies that employ workers with a union operate on several different models:
A closed shop exclusively employs people who are already union members. An example is a compulsory hiring hall, where the employer must recruit directly from the union. In 1947, the Taft-Hartley Labor Act declared the closed shop illegal. Although the NLRA permits construction employers to enter into prehire agreements to draw their workforces exclusively from a pool of employees dispatched by the union, construction employers are under no legal obligation to enter into such agreements.
A union shop employs both union and nonunion workers, but new employees must join the union or begin paying dues to the union within a specified time limit.
An agency shop requires nonunion workers to pay a fee to the union for its services in negotiating their contracts.
An open shop does not discriminate based on union membership in employing or keeping workers. Some workers benefit from a union or the collective bargaining process despite not contributing to the union.
A collective bargaining agreement specifying that promotions will be based on seniority rather than merit influences the types of competencies the firm should hire. Seniority-based promotions make leadership competencies important hiring criteria even for lower-level positions because these lower-level hires are likely to become the company’s future leaders. Even in nonunion companies, the effects from competitors’ union agreements can occur as the nonunion companies adjust their pay, benefits, and terms and conditions of employment to successfully compete for new hires and prevent current employees from leaving to work for a competitor.
Although the influence of labor unions has declined significantly in some sectors of the U.S. economy, this is not the case abroad. In many countries, collective labor enjoys a strong presence. In some countries, collective representation differs radically from the United States in that collective agreements often legally apply to an entire industry sector, making even nonunion workers covered by the agreements, and effectively “unionized.” For example, in Brazil, all workers have to be in unions. Europe and Indonesia require employee representative bodies, called works councils, to offer workers a second level of representatives beyond unions.
legally represent workers, organize employees, and negotiate the terms and conditions of union members’ employment
An independent contractor performs services wherein the employer controls or directs only the result of the work. Anyone who performs services for a company is legally an employee if the company controls what is done and how it is done. Independent contractors must make their own Social Security contributions, pay various employment taxes, and report their income to state and federal authorities. From a legal perspective, whether a worker is an employee or an independent contractor with respect to the company determines the obligations the company has to the worker. If an employee is incorrectly classified as an independent contractor instead of an employee, the company can be liable for employment taxes for that worker, plus a penalty.14 The Internal Revenue Service (IRS) gives the example of Vera Elm, an electrician, who submits a job estimate to a housing complex for 400 hours of electrical work at $16 per hour. Elm is to receive $1,280 every two weeks for the next 10 weeks, which is not an hourly payment. No matter how long it takes her to complete the work, Vera will receive $6,400. She also performs
performs services wherein the employer controls or directs only the result of the work
additional electrical installations for other companies under contracts that she obtained through advertisements. The IRS classifies Vera as an independent contractor.15
Companies can strategically use independent contractors to help control costs, temporarily increase capabilities, and bring in needed talents quickly. They can thus be particularly useful for companies competing through innovation or low-cost strategies. Independent contractors often receive a higher salary than do regular employees but do not receive benefits, which can make them cost-effective. Because independent contractors are often highly skilled, they may prefer to work on a project basis for many firms rather than be a single company’s employee. Independent contractors also have greater control over the work they take on and the hours they work, which can enable people to work despite responsibilities preventing them from working traditional hours.
Some companies have tried to reduce costs by wrongly classifying regular employees as independent contractors, and workers have become more reluctant to challenge these practices in the tough job market. But federal and state officials, many facing record budget deficits exacerbated by the lost unemployment insurance and workers’ compensation insurance revenue resulting from this misclassification, are starting to aggressively pursue companies trying to claim that regular employees are independent contractors.16 In 2009, the Illinois Department of Labor imposted $328,500 in penalties on a home improvement company for misclassifying 18 workers by pressing them to incorporate as separate business entities.17
An alternative to contingent work is outsourcing the work to another firm. This typically involves contracting with an outside firm that has a particular expertise to assume complete responsibility for a specific contracted service—not just to supply workers. Firms often outsource their non-core functions, such as their payroll, landscaping, and food service activities.
Offshore outsourcing by opening a location in another country or outsourcing work to an existing company abroad has become increasingly popular for many organizations seeking productivity gains. Half of all Fortune 500 companies are expected to have an outsourcing center in India by 2015.18 Some companies have saved over 70 percent in labor costs by offshoring.19 Offshore outsourcing can be successful if the work is relatively minor or intermittent; for example, if the firm is updating a software module or developing new Web pages. The risks involved with outsourcing are primarily the result of conducting work in two countries having different cultures, different intellectual property laws, and conflicting legal systems. A company must consider the nature of the other country’s judicial system, local laws, and what would happen if the offshore company goes bankrupt. In addition, the company should ensure that an accepted dispute resolution procedure is in the outsourcing contract, including where the case would be filed if a conflict arises.20
LAWS AND REGULATIONS
Social pressures often lead to legislation, such as wage and hour laws and equal employment opportunity legislation, with which employers must comply. Common law, or court-made law, is the body of case-by-case decisions made by the courts that over time determines what is legal and what remedies are appropriate. Each state develops its own common law in response to federal and state legislation and the nature of the specific cases brought before its courts. Over time, these decisions establish the permissibility of various staffing practices as well as appropriate remedies for impermissible practices. For example, workplace tort cases, or civil wrongs in which an employer violates a duty owed to its customers or employees, and employment-at-will cases are treated at the state level. Because case law differs across states, it is necessary to be familiar with the case law in the states in which an organization is operating.
Although most employment discrimination lawsuits are brought under federal statutes, state laws can sometimes be even more restrictive. (A state’s Attorney General’s office can provide you with information about that state’s fair employment practice laws.21) Some laws extend similar protection as provided by the federal acts to employers who are not covered by those statutes. Other statutes provide protection to groups not covered by the federal acts and protection for individuals who are performing civil or family duties outside of their normal employment. The District of Columbia protects workers from family responsibilities discrimination. In Alaska, workers are protected from discrimination based on parental status, and a similar executive order covers federal workers and contractors.22