human resources
BUSINESS BUILDERS
Creating mistake-proof human resource systems by Bill Egan
TIPS 1. Provide prospective hires a copy of noncompete agreements and make signing a condition of employment, otherwise they will not be enforceable. 2. Penalties for misclassification of workers as independent contractors can be daunting. Eligibility for such a classification is governed by state and federal law, not the discretion of a business. 3. Consequences for misclassifying exempt and nonexempt workers can be equally harsh. Follow the guidance of the Fair Labor Standards Act. 4. Address and document an employee’s performance and behavioral concerns prior to terminating them. 5. If something seems amiss, it might be time to call your lawyer, who can help ensure situations are handled properly and in a timely manner.
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UPSIZE MAY • JUNE 2021
“I wish I had known that.” For those of us practicing employment law, this is an all-too-common client response. Usually, it comes after an employee has quit or was terminated and the employer finds out there was a problem. Unfortunately, by the time the employer knows a former employee is threatening to sue, the damage has been done. Early risk management by employers goes a long way toward avoiding future claims. Here are some of the more common mistakes we see as employment lawyers in our day-to-day work, and what you can do to create solid, mistake-proof human resources practices. Untimely execution of noncompete and non-solicitation agreements The most fundamental tenet of contract law is that a valid, enforceable contract requires proof of an offer, acceptance and consideration. For example, an employer will pay you “this” salary in exchange for your performance of “that” job. Many employers require employees to sign confidentiality, non-compete and non-solicitation agreements as a condition of employment. Minnesota employers must provide prospective hires a copy of the noncompete agreement and make it a condition of employment so the agreement will be enforceable. If an employee is asked to sign a confidentiality or noncompete agreement after the offer has been made and accepted, under Minnesota law, the noncompete agreement will be unenforceable. Misclassifying workers as independent contractors “We’ll just make them independent contractors.” A common misconception in the startup world is that a business has discretion to determine whether to make a service provider an employee or an independent contractor. A service provider may prefer the freedom that comes with independent contractor status. An employer may not be quite ready to make the commitment required to enter a formal employment
relationship. Unfortunately, federal and state governments have a different perspective and employers must understand that independent contractors: • Are not entitled to employee benefits • Are not covered by worker’s compensation unless they have their own policies • Are not protected by fair employment practices laws and regulations • Are not entitled to mandatory family medical and other forms of leave • Are not entitled to overtime or minimum wage as mandated by the Fair Labor Standards Act (FLSA) • Must pay their own federal, state, FICA and Medicare costs • Must have independent expertise that doesn’t require direct management of their work The penalties for misclassification of workers as independent contractors can be daunting. Misclassification can even be considered a crime. Excluding workers from employee welfare and retirement plans can carry stiff administrative penalties and may jeopardize the tax-exempt status of those plans. Penalties and fines may be levied against businesses that have: • Improperly classified a worker as an independent contractor • Failed to withhold state and federal payroll taxes • Failed to pay the employer’s share of Social Security and Medicare • Failed to pay unemployment compensation taxes The best current guidance on independent contractor classification is from the U.S. Department of Labor. Under its new rule, the most important factors to take into consideration are: • Whether the service provider has control over the work • The extent of the provider’s opportunity for profit or loss • The amount of skill required for the
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