by Toni Shibayama
A survey of CEOs revealed their biggest challenge was not in the manufacturing or distribution of their products or services, but rather in hiring, managing and keeping quality employees. When you couple this with the fact company owners, managers and human resource professionals feel they are under attack from a legal system that makes compliance seem like an impossibility, you have a risk management nightmare!
According to a study conducted by the Society for Human Resources Management, three out of five companies are sued by a former employee every year. More than 80% of the time, the company sued considers the claim “frivolous”. The cost of defense on these cases often exceeds $100,000, and the average verdict exceeds $200,000. A large number of these cases have punitive damage awards that exceed the general verdict amount. As a result, even if you win or settle one of these cases, you end up losing. For example, a company recently defended a jury trial against a claim brought by a three-month employee who asked for a million dollars just to settle the case. Even though the company won at trial, the fight cost them in excess of $100,000 in legal fees. That’s the equivalent of over $300,000 in new revenue. The greatest challenge when it comes to today’s employment laws is to never get to a point in the employment relationship where the law becomes an issue.
The above information is taken from the introduction of Lawsuit Free—How to Prevent Employee Lawsuits, an excellent book written by Attorney Don Phin of the Employer Advisor Network, Inc. Don’s book is an exceptional read and the pdf of that document in its entirety is available here (put link to pdf here).
What I am attempting to do in this whitepaper is offer up some of the key points and an overview of what Don has written. I hope you find it helpful and that it has accomplishes its goal; to help you maneuver around any potential employee lawsuits that may be lurking on the periphery of your company.
Key Points
- Ignoring the law doesn’t prevent claims
- Focus on front-end strategies and tools
- Educate managers and employees
Action Items
Claims for discrimination, harassment, disability accommodation, and retaliation make up the vast bulk of the number of EEOC claims filed. Your job is to eliminate the most common claims.
Create a Company Code of Ethics
Key Points
- Create a reference point and guiding light for the hard times
- Good ethics is good business!
- Ask questions and encourage employees to speak up
Action Items
- What ethical values does your company stand for?
- How have you communicated these values to your managers and employees?
- What are the major ethical issues that arise in your industry?
- What strategies and safeguards can you use to prevent those ethical issues from having an adverse affect on your company?
Key Points
- Define the need and take your time
- Avoid laziness, desperation and infatuation
- Make sure to follow a hiring process
Action Items
Identify your current hiring process. Be honest about it. Examine the last 10 people hired at your company. Have they performed as expected? Better? Worse? Did the company have a clear idea of the skills and character traits needed for the different positions? Sit down with the people in the company involved in interviewing and hiring and ask these questions. Discuss the answers and identify solutions to problem areas. Create a concrete hiring process that everyone in the company will follow. Remember, without a process you will be subject to human nature – meaning laziness, desperation, infatuation, cronyism, personal baggage and more.
If you haven’t developed job descriptions for your employees, you should. Everyone from the janitor to the CFO should know his or her primary responsibilities. Involve your employees in the process to create or amend their existing job descriptions. Update the job descriptions on an annual basis so that they remain flexible, responsive documents.
If you do not have the skills and experience necessary to conduct employee skill tests, background checks, reference checks, then outsource that function to someone who does. This will free up valuable time and resources that can be better used in finding and interviewing applicants. If you need a referral please give us a call.
Do Not Misclassify an “Employee” as an “Independent Contractor”
Key Points
- You may not control an Independent Contractor
- The costs of misclassification are substantial
- Enter into an Independent Contractor Agreement
- What guidelines do you use in identifying Independent Contractors vs. Employees? Investigate Federal and State guidelines to analyze whether any of the Independent Contractors you use could be considered employees. How do they stack up when analyzed against the following factors ?
The most significant factors when determining “Employee” vs. “Independent Contractor” status are as follows:
Control. This is the single most important factor. You can tell an Independent Contractor what job you need to have done, and the results you expect, but not when to work on it or how to do it. It is a question of degree as to what extent the company exercises control over the details of the work being performed.
The worker is engaged in a distinct occupation. Is the worker a skilled artesian, trades person, or businessperson who has special training, experience, and education? Is the worker professionally licensed and insured?
Supply of resources. Who supplies the necessary equipment, place of work, and other resources necessary for the worker to perform the job? Do they have an office at your company, at home or somewhere else? Who pays for expenses? What investment does the Independent Contractor have in their business?
Custom in the locality. Is the work usually done under the direction of an employer or by a specialist without supervision? How are similar workers treated by other companies in your industry or community?
Length of work and method of payment. Independent Contractors are generally paid for the job done, and not the hours worked. Method of payment, whether by time or the job, is a significant factor as is the worker’s obligation to devote a set number of hours to the work to be performed every week. Remember, just because they get paid a commission doesn’t make them an Independent Contractor.
Integration of the worker’s job functions into the business. Is the Contractor’s job required to be performed on an on-going basis for the company as part of its regular business? Is there a continuing business relationship? If so, it sounds like an employee.
The worker does or attempts to conduct business elsewhere. To what degree does the Contractor have their own business location, business stationary, licenses, and advertise to the public? Are they free to go to work for another company at any time? Do they have 1099s from other companies?
An employee can be fired by an employer. An independent Contractor cannot be fired so long as they produce a result that meets the specifications of a contract. Likewise, the independent contractor cannot simply leave their job at any time without incurring liability.
Opportunity for profit or loss. Does the Contractor’s profitability relate to their personal business management skills or is it guaranteed as with any wage?
Do they have their own employees? How are the people the Independent Contractor supervises classified? Are they treated as the Independent Contractor’s employees? How are their wages paid?
Belief of the parties. The Independent Contractor relationship should be memorialized in writing (Use the Independent Contractor Agreement form that comes with this Special Report). The IRS is giving greater respect to contractual arrangements.
Clear communication of eligibility provisions for employee benefits. In the wake of the recent Vizcaino v. Microsoft case, courts may be more willing to disregard an Independent Contractor Agreement altogether if benefit eligibility has not been clearly spelled out within the plan itself, and communicated to all employees—regular employees and Independent Contractors alike.
Here is further clarification, courtesy of the State of California.
California Assembly Bill 5 or AB 5 is a California law which limits the use of classifying workers as independent contractors rather than employees by companies in the state. Employees are entitled to greater labor protections, such as minimum wage laws, sick leave, and unemployment and workers’ compensation benefits, which do not apply to independent contractors.
The law codifies a stricter set of requirements regarding the classification of employees. The bill puts the burden of proof on employers to show that a worker is properly classified as an independent contractor where all three of the following conditions are met:
- The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
The law also gives cities in the state the right to sue companies for violating the law, where previously they could not. The California Attorney General’s office and local prosecutors can also sue companies.
Proponents of the bill said it would give workers previously classified as contractor’s minimum wage, overtime, sick leave, unemployment and other benefits, and prevent the state from losing $8 billion in payroll taxes that independent contractors and companies who use them do not pay and social benefits required due to lower pay. Opponents said it would increase labor costs by up to 30%, create higher costs for customers, and reduce service for customers, and reduce flexibility for workers.
Some professions are exempt from AB 5, including doctors, dentists, psychologists, stockbrokers, lawyers, accountants, engineers, and real estate agents, as they are seen to generally directly work with and set their prices to customers. Newspaper delivery workers will be given an extra year before compliance.
Have a Clearly Written Vacation Policy
Key Points
- Define when the vacation starts, stops and can be used
- Vacation is an “accrued benefit”
- Consider using Paid Time Off (PTO)
Action Items
What is your vacation pay policy? Is it defined in writing?
When does an employee begin accumulating vacation?
What is your company’s vacation accrual cap?
How does your company avoid vacation scheduling conflicts and ensure adequate coverage during employee vacations?
Compare the above with your vacation policy. Are all the above items clearly stated in a well-written policy?
Make sure you pay all “unused” or “accrued” vacation at the time of termination.
Key Points
- Make sure it’s not the system
- Document, document, document
- Consider a severance and release agreement
Action Items
The most important factor to consider is whether or not a termination was the fault of the employee, your management system, or both. Consider the last three employees terminated by your company, and what could have been done to prevent their termination. Chances are the seeds of failure were planted long before a termination decision was made. It is imperative to find out if those seeds were the result of poor management decisions – which may have started as early on as the hiring process.
If an employee is performing poorly, it is imperative to document their poor performance and retain any proof of the fact. Before terminating any employee, we suggest you contact an attorney prior to making a termination decision to make sure that you further insulate yourself from any employee claims.
Commit to Your Policy Prohibiting Discrimination and Harassment
Key Points
- You must have an up-to-date EEO policy
- Send a message from the top
- Educate managers and employees on discrimination and harassment issues
Action Items
Make sure you have an up-to-date EEO policy and sexual harassment policy, and that it’s included within your employee handbook, on applicable bulletin boards, and distributed throughout your company. Also make sure you have complied with poster and handout requirements of government entities. Call us if you need an all-in-one poster that applies to your company.
Leadership in this area must come from the top. It is not just a Human Resources function – it has to be part of your corporate mission. How does your company send this message? How can it do it better? How can you teach tolerance and respect?
There is no substitute for educating managers and employees in strategies to avoid discrimination and harassment issues. Have your employees watch videos and go to training classes.
Conduct an Employee Compliance Survey
FEAR = False Expectations Appearing Real
Key Points
- Break past the “culture of silence”
- Make sure they “get it”
- Ask if there is a problem
Action Items
The first step is to acknowledge that there is a “culture of silence” which exists in the workplace. Most employees, including “victims” and witnesses, choose to stand silent in the face of wrongful conduct. As a result, merely because problems have not been brought to your attention doesn’t mean they are not fermenting during your watch. Identify barriers to respect and responsibility in your company. Find out what your employees’ fears might be. Why wouldn’t they want to use your grievance mechanism or otherwise report unfair or wrongful conduct? You’ll never know if you don’t ask!
Investigate, Investigate, Investigate!
Key Points
- Don’t ignore, bury or deny
- Do a prompt and thorough investigation
- Get professional help
Action Items
Determine whether or not your company has developed either a formal or informal investigation procedure, which initiates a prompt and thorough investigation of suspected or reported wrongdoing. Analyze it to see if it engages the power of dialogue and whether the procedure has been followed in specific instances. Most of all guard against the very human tendency to ignore, bury or deny wrongful conduct. If a mistake has been made – fix it – and make sure it doesn’t happen again!
Do not hesitate to have an attorney, human resource professional or a licensed investigator help you out. While they are not cheap, case after case bears out the fact that their involvement considerably lowers the risk of exposure to employee claims. Get some names now, so you’ll have them when you need them.
This information is for illustration purposes only. If you require legal, accounting or tax advise please consult a professional for specific advise pertaining to your particular situation.
Toni Shibayama is a Broker/Risk Consultant for S&K Insurance in Southern California. She has more than 15 years experience in risk management, job safety, Workers’ Compensation, wellness and HR consulting. Toni is also the author of “The Private Club General Manager’s Big Game Playbook.”
She can be reached at toni@sk-insurance.com and by phone at 213.627.5204.
