If you ask business owners to describe their biggest challenges, one of the top three is almost always related to managing and leading employees. It’s usually not specifically described as “legal compliance,” but the challenges of ensuring employee happiness and productivity. To achieve these goals, we look to build compensation, wellness, flexibility, and autonomy policies that fit the culture of the workplace and needs of the individual employees. To implement them, though, we must incorporate the legal compliance side. This is where the trouble often arises. There can be a disconnect between the hot topics of engagement and wellness and the compliance requirements associated with implementation of those policies.
I thought I’d share a few examples of well-meaning employers who have provided benefits to employees with the intent of effecting practical results – to drive engagement and employee retention – but the results backfired.
Policies inconsistent with practice. A business grants employees a certain number of days of vacation and sick time (PTO) annually but has no policies with respect to the accrual rate and carryforward of PTO received by employees or the payment of unused PTO upon an employee’s termination. In practice, though, the employer has historically paid employees for unused vacation and sick time when they separate from employment because this seems “fair.” At some point, the vacation accrual policy of the business changed limiting the amount of time that could be carried forward into a future calendar year; but the business never actually limited employees from carrying forward and using all unused PTO from a prior year and continued the practice of paying out all accrued PTO upon termination. Finally, one employee who had accrued over 12 weeks of unused PTO separated from the company and expected to have all the unused PTO paid. The business was unprepared for this and stated the policy of limiting carryforward was in effect and only a portion of the unused PTO would be paid. The employee cited a number of instances where other employees had been paid more than the carryforward amount and due to this prior practice, the business had to pay the full amount. Lesson: Be sure your policies make sense for your business and that your practices consistently apply those policies. The potential claims arising from discrimination or failure to comply with state or federal law are significant.
Contractors vs. Employees. A business wants to hire an individual who possesses talents the business needs; but the individual doesn’t want to enter into an employment relationship because the individual has another job and doesn’t want to commit to a permanent position. So they agree the individual is a “contractor”. The business owner doesn’t see a problem with this situation; it actually seems better because there’s no employer liability or tax liability for the individual as would have been the case if the individual were an employee. The individual performs work on a regular basis at the request of the business owner and the business owner issues a check monthly to the individual for the services performed. The individual is hurt while performing services for the businesses and states that the injury occurred while working for the business. The business states there’s no liability since the individual is a contractor. However, the individual does not satisfy many of the requirements set forth by state to qualify as a contractor and is found to be an employee not only by Labor and Industries but also by Employment Security, WA Department of Revenue and the IRS. The tax obligations for back taxes associated with this employee are enormous and constitute a personal obligation of the business owners that could potentially bankrupt the business and the owners. Lesson: For an individual to qualify as a contractor, the individual must operate a business and must meet a number of qualifying criteria set forth by both the State of Washington and the IRS. The risks associated with improper classification are significant.
Comp Time. A company has an employee in the accounting department who is paid on an hourly basis as a non-exempt employee. During a company audit, the employee works approximately 50 hours per week for 4 weeks in preparation for the audit. The employee has a vacation to Europe planned and could use the extra vacation time and the employer prefers not to pay out the extra cash since the audit could result in additional tax payments, so the employee and the company agree that the employee will be able to take these extra hours as vacation time instead of receiving overtime pay. A few months later, the employee leaves the company and demands payment for the unpaid overtime and threatens to file a complaint with the State agencies for unpaid wages. The company didn’t even know they had done something wrong (Note: Washington law does not allow comp time in lieu of overtime pay). Lesson: Employers must have a basic knowledge of state and federal wage and hour laws as well as an advisor such as an HR professional or attorney knowledgeable about these topics to contact when new issues arise.
These examples demonstrate how employers intend to make good business decisions but manage to get into trouble because of a lack of understanding of the complex laws around employment matters. I have said before that whatever you think is logical in the area of employment law is often not what is legal. It’s imperative to have a professional who is knowledgeable about employment law and to know when to reach out to them for help.