Employment Law

Thursday, July 30, 2015

How to Conduct a Legal "Working Interview"

All too often employers are stuck in a situation with a new employee who has overemphasized or fibbed about his or her qualifications for a position.  To better choose candidates, many professions use working interviews to test a job applicant's knowledge, skills, and abilities prior to making an offer of employment.  The interview consist of seeing how the applicant interacts with staff, clients, and patients and often involves participation in routine employment activities over several hours or days to evaluate the candidate.  But are working interviews legal?

The quick answer is yes, but probably not the way you do it!  The IRS and Department of Labor regulations start with the premise that if someone is doing work for your company they are classified as either an employee or independent contractor and must be compensated for his or her time.  That compensation must be in line with labor laws, such as the minimum wage requirements and tax withholding.  If the person is deemed an employee they must complete the pre-employment paperwork including an  I-9, W-4, and be setup in payroll for tax withholding.  The employer will be responsible for its payroll taxes and employer tax obligations on top of the time, expense, and headache that goes along with it.  If a person is deemed an independent contractor, which may be unlikely given the factors explained in our previous entry on 1099 v. W-2 status workers, the employer would collect a W-9 and issue a 1099 at the end of the year (depending on the amount of compensation).  Once again, a headache.  Oh and do not think classifying the interviewee as a volunteer, intern, or extern would change anything.  Misclassifying a worker could result in even higher penalties for non-compliance.  Even if you hired them as a "temporary" employee the above tax implications would apply.  Furthermore, failure to properly classify the worker means they will not be covered by worker's compensation insurance should they get hurt during the "working interview."

If you do not want to go through the steps of paying job applicants to test their skills then just set up a skills test.  For example, a veterinary hospital may want to interview three potential associate veterinarians, but would otherwise have no way to gauge each candidate's surgical skills, laboratory efficacy, or bedside manner.  To evaluate the candidates the hospital could set up fake lab samples to be read, use previously treated patient charts and lab results to test for diagnostic accuracy, have the applicant verbally walk a doctor through a surgery, or use an owner's dog or office pet for roleplaying an exam.  Because the applicant is not performing work for the hospital, and the hospital sees no financial benefit from the testing, a skills test is viewed simply as part of the interview process to evaluate knowledge, skills, and abilities.  Additionally, the interviewee should be covered by a general liability policy should something go awry while on the premises.

Of course, never rely on any interview procedure alone to evaluate an employee.  Most employees are on their best behavior during the first 30 days of employment.  A well-managed practice will have an employee handbook in place with probationary periods to evaluate newly hired employees over periods upwards of 90 days before providing benefits, such as sick days or even salary increases.

Monday, July 6, 2015

Keep Up to Date: What the Same-Sex Marriage Ruling Will Mean for Small Businesses

On June 25, 2015 the Supreme Court of the United States legalized same-sex marriage.  See Obergefell v. Hodges.  Lost in the multitude of political opinions on the matter is how the ruling effects businesses.  In a nutshell, the same-sex opinion solidified that denial of marriage licenses and recognition to same-sex couples violates the Due Process of Equal Protection clauses of the Fourteenth Amendment.

Due process prohibits government from depriving any person of "life, liberty, or property, without due process of law."  Substantively this right of due process protects individuals from policies encroaching on fundamental rights.  In the past due process has provided a right to use contraceptives, to send your children to private schools, to marry a person of a different race, etc.  Equal protection provides that states shall afford every person "the equal protection of the laws."  This clause is historically known for eradicating the "separate but equal" fallacy of segregation.  Like many supreme court cases before it, the same-sex marriage case is grounded in both the Due Process and Equal Protection clauses.

What does this have to do with business?  Justice Kennedy's use of the Due Process and Equal Protection clauses solidifies that a business' disparate treatment based upon a person's sexual orientation will now firmly be considered discrimination.  As a result we recommend all anti-harassment and discrimination policies, and discipline arising from such policies, specifically include a person's sexual orientation as protected.  While discrimination based upon sexual orientation was already illegal in many states, the impact of the Obergefell ruling creates a derivative that if same-sex marriage is a fundamental right so is one's sexual orientation.  So even without a law specifically on point, businesses should be aware that discriminating on the basis of sexual orientation would violate public policy.

The issue expected by lawyers to be litigated in the near future is whether or not a business, such as Hobby Lobby, whose owners hold its first amendment freedom of religion is infringed by implications of the same-sex marriage ruling will likely be met with disappointing results.  If you recall, in Burwell v. Hobby Lobby Stores, Inc. the Supreme Court recognized a corporation's religious beliefs (based upon its closely held owners) and struck down the contraceptive mandate found in the Affordable Care Act requiring employers to cover certain contraceptives for their female employees.  A mandate for employers to provide contraceptives under an act of congress is a far cry from infringing upon "fundamental rights" of an individual.

Make sure your policies protect a person's sexual orientation just as any other protected class. 

For years Mahan Law has provided its clients a list of protected classes so business-owners and managers can properly train staff to avoid unintentional discriminatory conduct.  Our protected-class list includes age, disability, familial status, gender, genetic information, national origin, race, religion, sexual orientation, and veteran's status.  If you haven't already, take the time to update your anti-discrimination and anti-harassment policies to ensure your business stays up-to-date with legal requirements.  As always should you have specific questions please contact your attorney.

Monday, October 27, 2014

1099 or W-2: Contractor or Employee?

The thought of classifying a worker as an independent contractor is appealing to small business owners.  The main benefits of a 1099 independent contractor are that the company does not have to withhold income taxes, social security, medicare, city tax, county tax, school tax, and doesn't pay unemployment compensation or the employer's share of the aforementioned payroll taxes.  Instead, it is the 1099 independent contractor's responsibility to account for his/her/its own tax liability.  The only remaining obligation on the employer is to issue a 1099-MISC form at the end of the year (if the contractor is paid more than $600/year and not a C-corp).  Although an employer has free reign to choose how to classify workers, a misclassified worker can result in severe penalties and interest to federal, state, and local agencies (i.e. the IRS).

Misclassification of a worker as 1099 independent contractor when he or she is truly an employee will result on underpayment of payroll withholding liabilities and ultimately fines and costs associated with the underpayment.  The various agencies can also impose statutory penalties in the $1,000's for each violation.  More importantly, the fines and costs can attribute to losing your occupational permit/business license or other specialized licenses (such as the state's refusal to renew a liquor license or a professional licenses).  Getting caught is not as hard as you think either.  As soon as a worker is terminated and files for unemployment compensation or social security benefits you will be alerted to the failure to pay the required payroll liability.  From there the violations can snowball across the various agencies.

The Independent Contractor/Employee Analysis

There is not a bright-line test to determine if a worker is an independent contractor or employee.  The general rule promulgated by the IRS is "that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."  In determining the degree of control an employer exerts the IRS looks at three main aspects:

  1. Behavioral:  How much control does the employer have as to "what" functions the worker performs and "how" the worker performs those functions?  The more an employer keeps the proverbial thumb over its worker the more it appears the worker is a true employee.  Factors often considered:  Employer's level of instruction, amount of training, extent of autonomy to complete services, control of assistants, continuity of relationship between the parties, flexibility of schedule, demands of full-time work, need for on-site services, required sequence of work, and requirements for reports to be generated.
  2. Financial:  Are the business aspects of the worker's job controller by the employer?  The factors considered here are:  Whether the worker is paid by the job or regularly,  how expenses are reimbursed, who provides tools and materials, whether worker maintains his/her own facilities, who realizes profits and losses, whether worker performs functions for more than one company, control over discharge, and right of termination.
  3. Relationship:  Are there written contracts or employee type benefits?  Will the relationship continue for a specified period of time?  The longer the relationship continues and appears like an employee/employer relationship the greater the chance the person is an employee.  But the agency will consider a written agreement between the parties as evidence of their relationship.

The best way to protect against a misclassification is by a contract that specifies the relationship between the parties with an emphasis on the factors listed above.  An independent contractor agreement provides clarity not only between the parties but also to third parties interested in the relationship, such as the IRS.  There is a delicate balance of the factors in which a knowledgeable business attorney can help with, but practically speaking a contract which sets forth factors in favor of employee status but states the worker is an independent contractor will not suffice.  At the end of the day you will have to act the part set forth in the contract, i.e. file the appropriate 1099-MISC returns and follow what is written.

If you have any questions regarding contractual issues or employee relations please feel free review the IRS standards regarding this issue or contact your attorney.

Anthony Mahan is the managing attorney at Mahan Law and practices in the areas of business law, civil litigation, and estate planning.

Our office is conveniently located in Newport, Kentucky (less than two miles from downtown Cincinnati), but we handle cases throughout the states of Ohio and Kentucky. We also routinely meet with our clients at their offices or homes if more convenient.

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