Some of the trickiest areas of employment law that arise most often for employers involve issues about hiring, classifying, and terminating employees. This guide will provide a brief primer on these three topics.
If you are a first-time employer, these actions are essential for ensuring basic compliance with relevant employment-related laws and regulations:
- IRS W-4 Form: Employee Withholding
- IRS I-9 Form: Employment Eligibility Verification
- EDD Disability Insurance Provisions brochure, DE 2515 (within 5 days of hire)
- EDD's Paid Family Leave Insurance brochure, DE 2511
- California tax withholding form, DE 4 (if the employee wants her state withholding to differ from her federal withholding status)
- DE 1858 Notice to Employees
- Completed Wage and Employment Notice, Form DLSE-NTE
- California Department of Fair Employment and Housing (DFEH) Sexual Harassment brochure, DFEH-185
- Draft an offer/hiring letter clearly articulating the at-will nature of the employment offer.
- Use care in classifying someone as a contractor instead of an employee. State and federal governments are increasingly cracking down on businesses who misclassify workers as independent contractors.
- After paying the new employee in excess of $100 in wages, complete the EDD 1 form.
- Report new employees to the EDD electronically or by filing a Report of New Empoloyee(s) form DE 34 (within 20 days of the new employee's start-of-work date).
- Post all required notices in the workplace (these can be obtained through the California Chamber of Commerce in a single poster).
- Ensure compliance with federal, state, and local wage and hour laws in terms of how your company is paying its employees.
- Create a workplace handbook that sets forth, at the very least, sexual harassment prevention policies, arbitration, at-will employment, and specify meal and rest periods and overtime provisions. Have an employee acknowledge by signature each of these sections separately.
- Ensure that your company is in compliance with state and local sick leave laws and ordinances, which apply to both full-time and part-time employees.
- Ensure that your company's employment application and hiring processes and guidelines comply with state and federal laws.
- Consult with an employment lawyer before making significant decisions that potentially expose the company to liability, such as terminating or placing an employee on leave.
- Annually update your handbook and check for new employment laws, particularly in the area of wage and hour requirements.
Employees vs.Independent Contractor Classification
Classifying a worker as an employee versus an independent contractor has become an increasing focus of state and federal cases and legislation. Improperly classifying a worker as an independent contractor instead of an employee could expose your company to potential legal liability. Such classifications should be made with a firm understanding of the differences between the two classifications and with supporting evidence to justify the classification.
Most state and federal agencies consider the payer's ability to control the work performed for him or her as the most significant factor in determining whether someone is an independent contractor or an employee. If someone has a specialized skill over which you exert very little control, he or she is more likely a contractor. If an individual works in a specialized field that is not in your area of expertise, then it would be more difficult for you to exercise control over how that person does his or her job.
Another factor to consider that determines a worker's status is whether the person's expertise is something that operates as a support to your office, or if it is entirely independent of your office. If it is not entirely independent of your business, then you are more likely dealing with an employee. Also, the method of how you pay the worker -- whether by the job or by the hour -- is another crucial difference between contractors and employees. Finally, consider whether the service provider has many clients or just a few. If the person works only for you, he or she is much more likely to be considered your employee. If he or she has many clients and holds himself or herself out as a business, then an independent contractor classification is more justified. This is a complex area of law and definitely merits an expert opinion if there is any doubt at all.
Once you make a decision about a worker's classification status, your company should make sure to take these appropriate steps to justify such decision:
1. Maintain a file for the independent contractor that includes supporting evidence showing that the contractor holds himself or herself out as a business. Such evidence can include the contractor's advertising materials, business cards, and proof of insurance. All such supporting evidence should be maintained in this file for the duration of the principal-contractor relationship.
2. Enter into a formal written contract with the contractor providing that the contractor will file tax returns for his earnings and that the principal or company will issue a 1099 form at the end of the year. Consider hiring an attorney to draft or review the contractor agreement to ensure that it complies with the standards for independent contractor classification.
3. Allow the contractor to determine the rate for the job as opposed to you or your company determining the contractor√ïs rate.
4. Maintain evidence that your business is not dependent on the contractor's work for day-to-day functioning. The written agreement with the contractor can explicitly recite this fact by stating that your company is contracting with this contractor because the contractor has specialized expertise unrelated to your company's primary business.
5. Compensate the contractor based on submitted invoices and by the job, instead of based on a pre-determined salary or wage.
Exempt vs. Non-exempt Classification
Overview of Exempt vs. Nonexempt Employees
Nonexempt employees fall within the protections of federal and state wage and hour laws, which require such employees to be paid overtime wages, and under California law, to be provided with mandatory meal and rest periods.
People often assume that a worker's status as either an exempt or nonexempt employee depends on whether the worker is salaried or hourly. People also assume that a worker's job title can determine the worker's exempt or nonexempt status. However, neither the fact that an employee is paid a set salary nor an employee's particular job description determines whether an employee is exempt from wage and hour laws. A proper classification must be based on a substantive evaluation of the actual duties performed by the worker in addition to statutory salary thresholds. Exempt status is generally reserved for employees who exercise a significant amount of supervisory control over other employees or whose work requires a significant exercise of discretion and independent judgment as well as specialized training and knowledge.
Dangers of Misclassification
Misclassifying workers as exempt from federal and state overtime rules and state meal and rest period regulations can be an extraordinarily costly mistake for any employer, especially in California. The penalties and fines for such misclassifications can quickly escalate and include compensation for all overtime earned but not paid, all meal and rest periods not properly observed, the worker's costs and attorney's fees for bringing the claim, and interest due on the amount owed to the worker. Given the significant potential liability exposure for misclassification, we suggest that your company consult with a qualified employment attorney before classifying a worker as exempt whenever there is any question or concern about the legality of such classification.
California is an "at-will" state, meaning that the employer or employee can terminate the employment relationship at any time, with or without cause. However, some employment contracts specify an amount of notice that must be provided. In that case, there is a contractual obligation to provide a certain amount of notice, such as two weeks, before terminating the employment relationship. Also, some employment contracts specify only limited circumstances that allow for termination, and if such circumstances do not exist, then the employee can assert a breach of contract claim against the employer if the employee is terminated.
Final Payment of Wages for Terminated Employees
Employers must provide the employee with his or her final paycheck at the time of termination. This final paycheck should include all outstanding wages owed as well as compensation for unused vacation time, which is considered wages in California.
If the employee resigns, the employer has 72 hours to provide the employee with his or her final paycheck. The nature and circumstances of the employee's resignation do not mitigate an employer's obligation to provide the employee with his or her final paycheck within this 72-hour time frame. If the employee leaves the workplace before the final paycheck can be given to him or her, then the final paycheck should be delivered to the employee's home address or deposited into the employee's bank account within 72 hours. Failure to pay the employee his or her final paycheck at the time of termination could result in hefty fines many times the amount owed.
Notably, California does not require severance pay for at-will employees, regardless of whether the employer or employee terminated the employment relationship. Employers can choose to offer a severance payment for various reasons, including a desire to avoid potential disputes by having the employee release any and all claims against the employer in exchange for receiving an agreed upon severance. Also, employers may want to make a layoff more bearable by offering severance packages to the laid off employees.
Medical Insurance Coverage After Termination
Under federal law, for employers with 20 or more employees, a Consolidated Omnibus Budget Reconciliation Act (COBRA) Notice and Election Form must to be provided to employees who are participating in the employer's group health plan and to any of the terminating employee's dependents on the plan. The Department of Health Care Services requires employers with 20 or more employees to provide the Health Insurance Premium Payment (HIPP) notice, DHCS 9061, to certain employees covered under the program. If termination is due to a layoff or position elimination covered under the WARN Act, notices need to be sent out 60 days prior to termination.
In California, employers must notify any covered, terminated employees of their Cal-COBRA continuation rights. Cal-COBRA must be offered to both terminated employees of small employers (2-19 employees) and terminated employees covered under federal COBRA after their 18 months of federal COBRA coverage expires. Employers must provide notification of all continuation, disability extension, and conversion coverage options under any employer-sponsored coverage for which the employee may remain eligible after employment terminates.
Group coverage can be continued under COBRA for 18 months following termination. Special circumstances can extend coverage to a maximum of 36 months under COBRA, for example, a second event that occurs such as divorce or death of employee. In California, when federal COBRA coverage ends after 18 months, then Cal-COBRA can provide an additional 18 months of coverage, for a total combined coverage of 36 months.
Unemployment Benefits Requirements
The California Employment Development Department (EDD) requires employers to provide the EDD√ïs unemployment benefits brochure, For Your Benefit, DE 2320, to all discharged or laid off employees no later than the effective date of the discharge or layoff.
In California, employers must provide a written notice to the employee as to the Change in Relationship (California Unemployment Insurance Code Section 1089 or its equivalent should be used). This notice must be provided to all discharged or laid off employees immediately upon termination. In addition, at the time of termination, employers must supply the terminated employee with copies of printed statements or materials relating to claims for benefits (Section 1089). If the employee is discharged for misconduct, such as theft, he or she is disqualified from receiving unemployment compensation benefits (Section 1256).
This Employment Guide has been prepared by Maier Law Group for general informational purposes only and does not constitute advertising, solicitation, or legal advice. If you have any questions about a particular matter, please contact Maier Law Group at (415) 413-8099 or firstname.lastname@example.org.