Human resources

“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 non-compete 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 work
• The degree of permanence of the working relationship

Misclassifying non-exempt employees as exempt

As is the case with independent contractors, employers do not have the luxury of determining who is and who is not an exempt employee. The two primary differences:

• Exempt employees are paid on salary — This status carries fewer administrative compliance and bookkeeping requirements and is often seen as an attractive by employers and employees. 
• Non-exempt employees are paid hourly — There are time-keeping requirements and payment of overtime is required for non-exempt employees.

The Department of Labor publishes detailed guidelines on how to determine whether a position may be classified as exempt under the FLSA.

Consequences to employers of misclassifying employees

Proper classification of employees at the outset of employment is essential. Misclassified employees are entitled to unpaid overtime and in rare circumstances, doubling of the underpaid amount and attorney’s fees. If the employee brings a misclassification claim, that claim cannot be settled without the approval of the U.S. Department of Labor or a United States District Court judge. 

Address and document performance and behavioral concerns prior to termination

The vast majority of employees are at-will employees, and therefore may be terminated by the employer at any time and for any reason not prohibited by law. So, why the need for documentation? There are a few important reasons:

Evidence of employee notification — Documentation is evidence that the employee was notified of the employer’s concerns regarding the employee’s performance or behavior and had an opportunity to take the corrective action needed to meet the employer’s expectations. 

Evidence if the employee sues – Lack of documentation provides the opportunity for employees and their attorneys to draw inferences that, in fact, a termination decision was not based on performance or behavior, but on some other reason, such as discrimination or illegal retaliation.

Employee perception of their performance — Employees rarely see their own performance or behavior as problematic. Documentation provides tangible evidence that the employer does not share the employee’s self-assessment and that the employer has treated the employee fairly by giving the employee the opportunity to improve and meet the employer’s expectations. 

Lawsuit protection — Very often, a well-documented employee file discourages employees and their attorneys from proceeding with a claim.

Legal issues that arise in the workplace can be efficiently addressed with early action and involvement of an employment lawyer, often through a couple short phone calls. If something seems amiss with an employee and you feel the need to act, call your attorney to vet the situation. In most cases, you can proceed as you see fit, but there will be times when the attorney will say, “You can’t do that now, do this first.” In the end, you will be happy you did.