Employment law is a key cornerstone of business law, because most businesses employ people. This area also touches most people’s lives because most people work. Employment law is a complex area that strives to balance the needs of the employers and employees.

In this chapter we’ll examine several items starting with how to determine when there’s an employment relationship. Then we’ll look at the basic state and federal laws that govern employment relationships. Finally, we’ll take a look at what privacy rights, if any, employees have.

When determining whether an employment relationship exists, the first question you have to consider is whether someone is an employee or an independent contractor. In general, an employee is one who works or provides a service for another at that employer’s direction. There may be a written contract between the employee and employer, or their agreement may be implied through conduct or words.

The key distinction between an employee and an independent contractor is who controls the actions. An employer tells an employee what to do, how to do it, and when to do it. The employer exercises control over the employee’s actions while on the clock.

On the other hand, as discussed in Chapter 16, an independent contractor retains control over how it completes a job. For example, if James wants to have a home built, he will usually hire a general contractor to complete the job. James will give the general contractor a set of plans to follow, tell it which plot of land to build the home on, and give it a timeline for completion of the project. Other than that, the general contractor controls how the home will be built. Usually, it can determine which subcontractors it wants to hire to do the dry-walling, plumbing, electrical work, etc. It also determines when each stage of the construction will be completed and how. The general contractor is thus an independent contractor.

James could choose to fill the role of general contractor. Then depending on how he structures the agreements with the subcontractors, they could be deemed to be his employees, hired specifically to complete a job and given detailed instructions on how and when to do their jobs. Or James could treat them as independent contractors by giving them the plans, telling them when to show up, but allowing them to complete their portion of the job without his supervision.

An employment contract requires both parties to consent to the agreement. It can arise by an express agreement between the parties. This agreement can be verbal or written. Occasionally, the employment relationship grows out of the employer accepting the acts of the “employee” after the fact. In a sense the employer has ratified the efforts of another, which makes that other party an employee.

Regardless of how the contract arose, the parties must agree to terms. Usually any terms will work as long as those terms don’t violate the law. A unique form of contract is collective bargaining, in which the employer negotiates with employee representatives on terms such as wages, hours, and benefits. The collective bargain will also outline a grievance procedure for use if the contract breaks down.

All states follow the employment-at-will doctrine. That doctrine basically allows either the employer or employee to walk away from the employment relationship whenever either party chooses without a reason. There are three basic exceptions to this rule:

An employer has just cause to fire an employee if the employee fails to perform assigned duties, commits fraud to obtain employment, disobeys instructions, is disloyal, commits theft or other acts of dishonesty, possesses or uses drugs or alcohol on the job, or is incompetent.

An employee has several duties that he or she is expected to meet while working for an employer. In exchange, he or she can expect fair compensation from the employer.

First, an employee should provide the contracted services for the employer. The employer can expect the employee to complete the requirements of the job.

Second, an employer can expect the employee to protect its trade secrets. Sophisticated employers will require employees to sign covenants regarding trade secrets, but even if the employees didn’t, there is usually a state law to provide protection. Trade secrets can include client lists, policies, procedures (think design and manufacturing), and similar items essential to the ongoing success of a business. To receive trade secret protection, a company needs to take steps to protect those secrets. Thus, a client list should be password protected if stored on a computer or kept in a locked file cabinet with limited access.

Finally, inventions created while working for the employer are the employer’s property. This is because the inventions are created with employer resources on the employer’s dime. If an employee creates an invention off the clock and without employer resources, that invention is the employee’s. The employer and employee can also reach an agreement that would allow the employee to have an ownership interest in any inventions created on the clock, but that should be in writing.

The employee has the right to compensation for his labor and that the wage complies with the regulations of the Fair Labor Standards Act.

States regulate many areas of employment law from the type of contract between the employer and employee as just discussed to workers’ compensation and hours and wages laws.

When it comes to hours and wages, the state provides regulations that supplement those of the federal government. Where the Fair Labor Standards Act does not apply, the state may step in and provide additional regulations. States have departments of labor that administer those regulations.

One area where state law applies is covenants not to compete, an agreement between the employer and employee that the employee may not directly compete against the employer for a set time in a set geographic area. These covenants must be in writing and contain restrictions on an employee’s future work when the employee leaves the current employer. When examining a covenant not to compete, the courts generally look at three items:

In general, a covenant not to compete is against public policy, because it restricts the future employment options of the employee. That is why courts closely examine them to determine whether the covenant is narrowly constructed. Each state will have its own set of specific guidelines based on case law. In general, though, the geographic scope should be related to the actual area the employee worked. Think a sales region. The covenant should cover that actual area and not more. The time of the restriction should usually be limited to less than three years. The activities that are limited should relate to the actual job the person did and not foreclose them from working in the general field.

Workers’ compensation was designed to protect workers who are injured on the job. Each state has its own law, and that law provides a detailed scheme for providing benefits to injured or killed employees and their families. The benefits usually include partial payment for time off work, payment of medical expenses, and a specific pay-out for permanent injuries or death. Disputes often arise regarding how injured an employee is and whether that injury is permanent or temporary.

There are a host of federal laws that impact employment relationships. I’ll review those that relate to employment discrimination in the next chapter. Here the focus is on the National Labor Relations Act, ERISA, unemployment benefits, family leave, and social security. These laws are complex, often with hundreds of pages of regulations each, so keep in mind this is an overview of the laws and not comprehensive.

The National Labor Relations Act (NLRA) was enacted in 1935 to “protect the rights of employees and employers, to encourage collective bargaining, and to curtail certain private sector labor and management practices, which can harm the general welfare of workers, businesses and the U.S. economy.” The law was a reaction to the violent strikes and union elections that rocked the United States in the early twentieth century. The National Labor Relations Board (NLRB) and its General Counsel enforce the law and oversee disputes growing out of the effort to unionize, union elections, and strikes.

The Act applies to employers with gross incomes of $500,000 or greater. The General Counsel investigates unfair labor practices and then prosecutes those in front of the NLRB. The NLRB also oversees union elections through 32 regional offices. The NLRB has generated preelection rules that govern the actions of employers, employees, and unions, like prohibiting the making of speeches to captive audiences, like employees over a public address system, the 24 hours prior to an election.

The NLRA balances the rights of employees and employers. While employees have the right to unionize, employers have the right to maintain discipline. As a result, employers can generally prohibit unionization activities while employees are on the clock. However, during breaks and other nonworking times, employees can actively engage in unionization unless there exist legitimate safety and efficiency concerns. An employer can also prohibit the distribution of union materials on its property if there are other viable means for the union to distribute the material to the employees.

One thing an employer cannot do is fire an employee for being active in a union or the effort to unionize employees. An employee can even be a salt—a worker that the union plants at the employer for the purpose of encouraging unionization—as long as he is working. The exception to this rule is if the salt lied during the interview about qualifications that are a requirement of the job. The employer is required to bargain collectively once the employees have voted for unionization.

Union employees have the right to participate in picketing and strikes, with limitations. If employees strike to highlight economic actions of the employer, the employer is not required to rehire the striking employees. However, if the employees strike because of unfair labor practices of the employer, the employer must give the strikers their jobs back at the end of the strike.

There are three types of picketing:

Congress passed the Employment Retirement Income Security Act (ERISA) in 1974 to protect employee pension plans. Essentially, ERISA requires pension fund administrators to follow fiduciary standards and requirements for administration, vesting of funds, funding of the plans, and termination insurance. The law prohibits an employer from using the funds in a pension plan as its own, even if it contributed 100 percent of the money in the account. Once the money is contributed to the plan, it belongs to the employee. In addition, ERISA requires that the employee’s right to the money must vest within five to seven years, and the employee may earn a right to a percentage of that money prior to fully vesting. The Secretary of Labor enforces ERISA.

Many employees rely on unemployment benefits to fill the gaps when they are between jobs at no fault of their own. The current system is a combination of federal and state laws. If an employee quits or is fired for some type of misconduct, that employee is usually ineligible for benefits. To be eligible, an unemployed individual must be available for placement in a similar job and willing to accept a job at a comparable rate of pay. Unemployment is funded through a complex system that employers pay into based on the employee’s work rating.

Congress passed the Family and Medical Leave Act (FMLA) in 1993. This law is designed to give employees up to 12 weeks of unpaid leave during any 12-month time period:

The employer must have 50 employees within a 75-mile area for employees to have access to FMLA’s benefits. Employees must have worked for the employer for at least 12 months and worked at least 1,250 hours during that 12-month period to qualify.

The employer must notify the employee that the leave will be FMLA leave, and the employer can require an employee to use vacation and personal time first. Once an employee returns from FMLA leave, the employee is entitled to be restored to the same or equivalent position at the same rate of pay he or she had before.

For example, Donald and his wife are adopting a child from Korea. Donald has worked for his employer for more than a year and accrued sufficient hours to qualify for FLMA leave. As a result, Donald takes FMLA leave for the time he and his wife will be in Korea to receive their daughter and for three weeks after the family returns home. When he returns to work, he should step back into his position, or if his employer had to find someone to do his job, into a similar position.

The Social Security system was created by President Franklin Roosevelt and Congress in 1935 as a reaction to the Great Depression and the deep needs it imposed on the elderly. In addition to providing a pension to the elderly, social security provides disability benefits, life insurance benefits, and health insurance. The program is funded by the payment of social security taxes by employees and employers.

The primary federal vehicle that provides for employees’ safety on the job is the Occupational Health and Safety Act (OSHA). OSHA provides guidelines for safe work environments and penalties for failing to follow the guidelines. The goal of OSHA and its accompanying regulations is to provide an incentive for employers to provide a safe work environment for their employees and to provide incentives through penalties for failure to do so.

Employee privacy is an emerging area of employment law. What rights, if any, do employees have to expect privacy in the workplace? Privacy rights for federal employees grow out of the Fourth Amendment’s prohibition against unreasonable search and seizure. When government employees are involved, the government must have a reasonable and genuine reason for conducting the search.

Not all states recognize a common law right to privacy for employees. Those that do recognize some combination of four rights. The first is the right to be left alone in the employee’s workspace. Second, there may be a right that prohibits disclosure of the employee’s private affairs or medical information. Third, some states recognize a prohibition against defaming an employee. And fourth, some states prevent the misappropriation of an employee’s name or likeness.

Tension occurs when employees believe they should have a right to privacy, yet the employer believes it has a valid reason for monitoring the employee. These disputes normally arise in areas of telephone or e-mail monitoring, computer use, locker searches, or drug and alcohol testing. A wise employer will carve out the areas it claims to have a right to search or monitor in the employee handbook. Then, an employee is on notice that the search could occur at any time.

While the Federal Wiretapping Act penalizes the intercepting of oral and electronic communications, it contains an exception for employers monitoring the company’s telephones in the ordinary course of business. An employee can also consent to the interception. That consent can occur when the employer gives the employee notice that calls may be monitored. Business calls can be monitored. However, once the employer recognizes that the call is personal, it must immediately stop monitoring.

Because so much business is conducted by e-mail in today’s business environment, employers may want to monitor their employees’ e-mail. The Electronic Communications Privacy Act of 1986 was designed to apply in part to e-mail. However the exceptions just discussed (monitoring e-mails in the ordinary course of business and giving prior notice to employees of a company policy) also apply here. With both telephone and e-mail monitoring an employer is wise to publish its policies regarding monitoring in an employee handbook or by giving the policies in writing to employees.

Public employees receive limited protection from unreasonable search and seizure under the Fourth Amendment to the United States Constitution. Even then, if the government has a valid reason for conducting the search, the search may withstand court scrutiny. Private employees have almost no protection from search and seizure. An exception occurs when the employer provides the locker and tells the employee he can lock the locker. However, if the employer provides a locker key, but keeps the master key, there is no expectation of privacy. Similarly, if the employer has a published policy allowing for search and seizure, the employee has no expectation of privacy.

Public employees may be protected by the Fourth and Fifth Amendments, however, the government can require testing if there is a reasonable suspicion of abuse. In general, random testing is not allowed of government employees unless they are involved in public transportation or other safety-related areas. In the private sector, random testing is allowed for safety reasons if the employees work in a field that is safety-sensitive. Employers may also test if there is a reasonable suspicion of abuse.