Employment Law Issues in a Time of Economic Turmoil

by Joel J. Greenwald, Esq.

In the tumultuous current economy, businesses are very cost conscious, particularly regarding the expense of personnel.  Employers must be careful, however, that they do not violate employment laws in the process of trimming excess.  Unfortunately, while commerce has slowed during the present downturn, claims against employers by disgruntled employees are increasing.  It is therefore essential that employers remember all the rules that govern employment relationships.

Terminations

In a bad economy, a desperate former employee may be inclined to claim to have been terminated for an illegal reason, such as discrimination or retaliation.  Even when such charges are entirely groundless, fighting them is expensive – so employers should invest some effort in a termination process that can prevent liability.

Maintain a paper trail documenting a justifiable, non-discriminatory reason for any termination.  If you are firing an employee for poor performance, disciplinary problems, or excessive absenteeism, the records in the employee’s personnel file should demonstrate that you have been noting and addressing these issues with the employee over time.  Records should also include written performance appraisals done on a regular basis in a consistent, thorough, objective fashion, signed by the employee.

Take appropriate precautions in termination meetings:  Two members of management should be present, one member of whom should take notes.  Key points relating to the termination – employee performance issues, shortage of work, etc. – should be accurately and clearly explained.

A final paycheck should be provided on time, along with required information about continuation of benefits.  Consider offering the employee severance pay in exchange for signing a separation agreement which releases the company from possible claims and assures confidentiality.

Overtime

To avoid layoffs when business is slow, employers may first try to cut overtime pay.  Getting control of working hours – so that employees no longer put in time that is not truly necessary from an operational standpoint – is the best way to go about this.  Declaring that the company will not pay for overtime worked, or arbitrarily reclassifying hourly or low-level salaried workers as “exempt” from overtime pay under wage and hour laws can imperil you company. 

By law, an employer must pay an employee for all hours worked – whether the employee had permission to work the hours or not.  An employee’s right to be paid for time worked cannot be limited by company policy or waived by agreement between employer and employee.  You have every right to discourage employees from putting in unnecessary overtime, but if they work anyway, you have to pay them.

The question of which employees are “exempt” from overtime pay under the law is more complicated.  Many employers incorrectly believe that salaried employees are never entitled to overtime.  This mistake subjects companies to substantial liability. Rather than looking at how an employee is paid, courts and government agencies look at employees’ duties to see if they meet the “duties test” associated with any of the legal overtime exemptions.  The primary tasks of the employee (those performed on a continuous basis), must fall into a specific legally “exempt” category, or the employee is entitled to overtime pay.

Employees and Independent Contractors

Another way that employers may try to cut expenses is by replacing employees with “independent contractors,” or by terminating current employees and re-engaging them as “independent contractors.”  This kind of move looks may seem to generate savings, but if a court or government agency finds that you have misclassified one employee as an independent contractor, it may begin a full-scale audit of your company’s employment and pay practices.

While it is wise to have a written contract with a legitimate independent contractor, the existence of a contract alone will not prevent a worker from being held to be an employee.  Courts and government agencies weigh various factors in making the determination of whether a worker is an employee or an independent contractor.  Many factors are considered by agencies and courts, but the most important factor generally is the degree of control the employer exercises over the employee.  The greater the control, the more likely it is that the individual will be considered an employee. 

Outsourcing Work

Sending certain work out to subcontractors with lower production costs may cut the company payroll, but will only truly save money if subcontractors are legitimate and chosen with care.  Recent court decisions have made it clear that setting up a “sham” subcontractor relationship to avoid meeting legal obligations in relation to employees may have catastrophic results in the form of joint employer liability.    

Take time to analyze any potential joint employer situation before you jump into it.  Employers are most likely to avoid joint employer liability when they keep subcontractors at “arms length,” and when they avoid any implication that their subcontractors should violate wage, discrimination or other employment laws.   Written contracts with subcontractors that require the use of workers eligible to work in this country and that address workers’ compensation and other insurance issues are always in a company’s best interest. 

Conclusion

As stressful as the current economic climate is for many businesses, cutting employment costs without paying attention to essential legal protections can be “penny wise and pound foolish.”   Employers should carefully consider the legal implications of any “cost cutting” measures before taking action.  I look forward to discussing these and other essential issues for today’s employers with JSEC Ulster members at this month’s seminar on November 18th.

The materials contained within this article are for informational purposes only and are not legal advice, nor are they to be used as a substitute for legal advice.  These materials have been prepared by Greenwald Doherty LLP and should not be reproduced without permission.  © 2008 Greenwald Doherty LLP, all rights reserved. Greenwald Doherty LLP, 30 Ramland Road, Suite 201, New York 10962, (845) 589-9300, firm@workplaceattorneys.com.