Employment Flashcards
Can I hire unpaid interns?
Yes, under federal law you may hire unpaid interns subject to some restrictions, but you should also check the laws of your state for additional requirements. Under the federal Fair Labor Standards Act, courts use a seven-part “primary beneficiary test” to determine if an intern is an employee and must be paid. The seven factors are:
Whether the intern and employer understand there is no expectation of compensation.
Whether the internship provides training similar to that which would be given in an educational setting.
Whether the internship is connected to the intern’s formal education program through coursework or academic credit.
Whether the internship accommodates the intern’s academic schedule and commitments.
Whether the internship is limited in duration to a period during which the intern receives beneficial training.
Whether the intern’s work complements rather than replaces paid employees’ work in addition to providing meaningful education benefits to the intern.
Whether the intern and employer understand the intern is not entitled to a paid job when the internship concludes.
Even if your internship program adheres to federal requirements, some states are stricter. For example, California has very strict requirements for unpaid internships including the requirement that all such programs be both conducted through and supervised by an accredited program.
What is the difference between a staffing or recruitment agency, a professional employer organization (PEO), and an employer of record (EOR)?
Staffing and recruiting agencies do not employ the individuals on the company’s behalf, they simply find individuals which the company can then employ, and they’ll take a commission in the process.
A professional employer organization (“PEO”) is a business-to-business (B2B) service provider that helps companies outsource HR functions like payroll and benefits. PEOs provide their services by becoming co-employer (along with the company that is their customer) of certain workers. Certain companies (such as Deel, Velocity Global, Rippling, etc.) provide PEO services along with EOR services (discussed below).
An employer of record (“EOR”) is a B2B service that helps clients hire workers outside the U.S. Unlike a PEO, an EOR hiring a worker overseas becomes the sole employer of that individual, and there is no co-employment.
Can I pay my employees solely with equity?
Paying employees solely with equity is generally not permitted because under both state and federal law, your employees must be paid at least minimum wage, in cash. Equity does not meet this legal requirement. However, the exception is if the employee qualifies for exemption under Section 13(a)(1) of the federal Fair Labor Standards Act (“FLSA”) in which case paying with equity alone is allowed. To qualify, an individual must (1) be employed as an executive, (2) own ≥20% interest in the business, and (3) actively be engaged in managing the business.
Are non-competes enforceable (in California)?
The enforceability and enforcement of non-competes varies by state. Some states only enforce non-compete agreements in certain circumstances or do not enforce them at all. In California, non-competes are only enforceable in connection with the sale of a business (where founders and key employees of the acquired company can be forced to not compete with the acquirer for a period of time), under a separation agreement, and where the person restricted by the non-compete continues to receive compensation during the period of the non-compete.
Other states take into account several different factors to determine whether a specific non-compete agreement is enforceable including:
Does the employer need the non-compete agreement to protect its legitimate business interests like confidential business information?
Is the non-compete agreement limited to a reasonable amount of time (6-12 months)?
Is the non-compete agreement supported by some “consideration” (value for the employee))? If the employee already works for the business and is subsequently asked to sign a non-compete, then the non-compete must have additional consideration beyond their current job and compensation (e.g. a new title or role, or additional cash or equity compensation).
Even in states where non-compete agreements are generally enforced, not meeting the factors listed above may invalidate the agreement.
What is a non-compete agreement?
A non-compete agreement is an employer-employee contract, usually included in the employee’s offer letter or other onboarding documents, that prohibits employees from competing either directly or indirectly with the business during and for a limited time after the end of their employment (e.g., one year). The intent of non-compete agreements is to protect business interests such as: trade secrets, specialized training, relationships between the company and specific existing or potential customers, and confidential professional or business information.
Through a non-compete agreement, an employer may attempt to prohibit employees from starting a competing business, working for a competitor, developing competitive products or services, or recruiting former colleagues to join the former employee’s new business after they quit (this is called non-solicitation).
What is the risk or liability of employee misclassification?
Employee misclassification is when an employer classifies an employee as an independent contractor. If the Internal Revenue Service (IRS) determines that an employee has been misclassified, the IRS can require the company to pay unpaid income tax, Social Security, or Medicare tax. In addition the California Department of Labor (or local employment authority) may levy additional fines. In California these fines range from $5,000 to $25,000 per misclassified employee, and can be higher if it is determined that misclassification was intentional.
What is the federal independent contractor test?
The United States Supreme Court has indicated on multiple occasions that there is no single rule or test to determine whether an individual is an independent contractor or an employee for purposes of the Fair labor Standards Act. However, among the factors that the Supreme Court considers significant when determining whether an employment relationship exists are:
The extent to which services rendered by the worker are integral to the principal’s business.
Whether the relationship is permanent.
The amount of the alleged contractor’s investment in the business’s facilities and equipment.
The nature and degree of the principal’s control over the worker.
The alleged contractor’s profit and loss opportunities.
The amount of “initiative, judgment or foresight in open market competition with others” that the claimed independent contractor requires to be successful.
Some factors are immaterial, meaning they are not considered in determining whether an employment relationship exists. These factors include:
Where the work is performed.
The absence of a formal employment agreement.
Whether an alleged independent contractor is licensed by the State or local government.
Time worked and method or type of payment.
Should I classify contributors as employees or independent contractors? What is the California independent contractor test?
Note: the following information is applicable to a company based in California. Other states or international jurisdictions may have different rules.
Employee classification is a legal test, not a company choice. In many cases companies would prefer contributors to be independent contractors because the company would not be responsible for payroll tax, Social Security and Medicare taxes, and providing the contributor with health insurance or other employee benefits. But only if the contributor meets the ABC Test under California employment law can they be classified as an independent contractor, and the penalties for misclassification are significant. California Labor Code § 2750.3.
Note: the following information is applicable to a company based in California. Other states or international jurisdictions may have different rules.
Employee classification is a legal test, not a company choice. In many cases companies would prefer contributors to be independent contractors because the company would not be responsible for payroll tax, Social Security and Medicare taxes, and providing the contributor with health insurance or other employee benefits. But only if the contributor meets the ABC Test under California employment law can they be classified as an independent contractor, and the penalties for misclassification are significant. California Labor Code § 2750.3.
Under the ABC Test, a worker is an employee and not an independent contractor unless the entity that hired the worker satisfies the following three conditions:
Note: the following information is applicable to a company based in California. Other states or international jurisdictions may have different rules.
Employee classification is a legal test, not a company choice. In many cases companies would prefer contributors to be independent contractors because the company would not be responsible for payroll tax, Social Security and Medicare taxes, and providing the contributor with health insurance or other employee benefits. But only if the contributor meets the ABC Test under California employment law can they be classified as an independent contractor, and the penalties for misclassification are significant. California Labor Code § 2750.3.
Under the ABC Test, a worker is an employee and not an independent contractor unless the entity that hired the worker satisfies the following three conditions:
(A) The worker is free from both control and direction of the hiring entity in connection with performing the entity’s work, both under the worker’s contract and in fact.
To satisfy this condition, the hiring entity can not set the worker’s schedule or direct or control the independent contractor’s production of a product. Rather, the worker must set her own schedule and work without supervision.
Note: the following information is applicable to a company based in California. Other states or international jurisdictions may have different rules.
Employee classification is a legal test, not a company choice. In many cases companies would prefer contributors to be independent contractors because the company would not be responsible for payroll tax, Social Security and Medicare taxes, and providing the contributor with health insurance or other employee benefits. But only if the contributor meets the ABC Test under California employment law can they be classified as an independent contractor, and the penalties for misclassification are significant. California Labor Code § 2750.3.
Under the ABC Test, a worker is an employee and not an independent contractor unless the entity that hired the worker satisfies the following three conditions:
(A) The worker is free from both control and direction of the hiring entity in connection with performing the entity’s work, both under the worker’s contract and in fact.
To satisfy this condition, the hiring entity can not set the worker’s schedule or direct or control the independent contractor’s production of a product. Rather, the worker must set her own schedule and work without supervision.
(B) The worker performs work outside the usual course of the business of the hiring entity.
For example, an outside plumber hired to repair a leak in a bathroom on a retail store’s premise would satisfy this condition. However, a cake decorator hired to work regularly on a bakery’s custom-designed cakes would not.
(C) The worker is typically engaged in an independently established trade, occupation, or business that is the same in nature to that of the hiring entity.
For example, a worker who routinely offered to provide services similar to those provided to the hiring entity to the public or other potential customers satisfies this condition. However, a contract designating a worker as an independent contractor is not sufficient.
If the answer to any of the below questions “yes,” it may indicate that a worker should be classified as an employee:
Does your business pay for the worker’s resources including computer equipment, office supplies, etc.?
Do you give the worker specific instructions on how to perform tasks?
Is the worker required to work full-time hours for your business?
Does your company pay for the worker’s business or travel expenses such as visiting a client or attending a conference?
Does your company demand that the worker not perform similar work for other businesses?
