Please see the attached documents and let me know if you have any questions.

· This assignment will be submitted to Turnitin™.

Instructions:

Assignment 1: Independent Contractor or Employee?

This assignment allows you to demonstrate mastery of the following course outcomes:

1. Analyze employment related laws, and ethical considerations  their application, and implications in the workplace 

2. Evaluate rights, obligations, and liabilities in the employment process and relationship.

3. Evaluate compliance with current laws and regulations related to safety and fairness in the workplace.

4. Effectively communicate to internal and external audiences the principles and application of employment laws and ethical considerations in the business environment.

Schultz v. Capital International Security, Inc.

460 F.3d 595 (4th Cir. 2006)

Facts: The plaintiff-agents provided security services for Schultz and his family at his Virginia residence in twelve-hour shifts. The agents were paid a daily rate for each shift; they received no extra pay for overtime. The agents had a command post at the residence, from which they observed security camera monitors, answered the telephone, and kept a daily log of all arrivals and departures. They also made hourly walks of the property, ensured that members of his family were safe when departing and arriving, sorted mail, and performed various tasks upon request of his family. In addition to their security duties, the agents were responsible for having the household’s vehicles washed and fueled, making wake-up calls, moving furniture, and doing research on the Internet.

Schultz’s long-time driver and travel agent, Sammy Hebri, formed a company called Capital International Security, Inc. (CIS). Hebri started CIS for the purpose of becoming Schultz’s security contractor.

Issue: The issue is whether the bodyguards were considered to be employees or independent contractors for the purpose of the Fair Labor Standards Act.

Action: You must respond to all questions below. You must use at least three sources from the class materials for each question and do independent research. Do not combine the five discussion questions and please use the outline below for your paper. Use of the outline will help you organize your research and comments and ensure you do not miss any questions that must be addressed. Your responses to each question must be in narrative format not bullets.  Use the headings below to organize your paper.

Question 1 – Summary: 2 pages

a. Summarize the relevant facts of the “scenario” described in this case.

b. What are the important employment laws that are relevant to this case and describe the laws and relevant citations? Be sure to identify the employment laws specifically with in-line citations.

c. What was the actual case outcome? Describe in detail what was the outcome by reviewing the case at: 

https://caselaw.findlaw.com/us-4th-circuit/1053551.html.

Question 2 – Classification Test: 1 page

a. In the above case, what kind of classification test could have been used and why?

b. What would be the results if using this classification test? (

https://www.workerclassification.com/classification-tests
)

Question 3 – Virginia State Law:
1 page

a. Under Virginia state law would the result be the same, why or why not? Be specific.

b. Discuss in detail the Virginia exemptions for employee classification that apply in this scenario? Be specific and cite the Virginia laws that apply.

Question 4 – Classifying Workers: 2 pages

a. Under Virginia law, are independent contractors eligible for worker’s compensation?  Why or why not? Be specific and cite evidence to support your analysis.

b. What are the consequences for a Virginia employer misclassifying an employee as an independent contractor? Be specific and cite the employment laws.

c. What specific benefits would an employer gain by such misclassification?

Question 5 – Three Preventive Steps: 2 pages

a. As an HR professional, what advice would you provide to prevent this kind of situation in the future? Identify and discuss in narrative detail at least three (3) steps that could have prevented the type of situation discussed in the scenario from happening again. These steps should be feasible, clear and legal. Cite evidence/references as part of your response. 

PLEASE READ CAREFULLY

– Please cite your work in your responses

– Please use APA (7th edition) formatting 

– All questions and each part of the question should be answered in detail (Go into depth)

– Response to questions must demonstrate understanding and application of concepts covered in class, 

– Use in-text citations and at
LEAST 2 resources per discussion from the school materials that I provided to support all answers. –
The use of course materials to support ideas is HIGHLY RECOMMENDED

– Responses MUST be organized (Should be logical and easy to follow)

– Include at least 2 references and include in-text citations.

“USING REFERENCES FROM THE CLASS MATERIALS IS A MUST. Additionally, other outside resources are also welcome besides the class material.

Formatting directions for this assignment #1

· Use the
bold headings and outline in your paper to denote the different questions
.

· Paper must be in APA 7.0 edition style, narrative format (not in bullet points nor PowerPoint). 

· Include a cover page which should have student name and title of your paper.

· Include a reference section at the end of your paper with at least 3 citations/references in APA 7.0 style format.   

PS. I attached the classes materials from week 1 to 3 to help with the in-citation, sources, and references.

The Employment
Relationship

CHAPTER 1

• Overview

• Employees, Independent Contractors, and Agents

• Statutory Employees and Nonemployees

• Joint Employers

• The Employment-at-Will Doctrine

• Employment Contracts

• Indemnity Obligations

• Arbitration Agreements

• Business Owners’ Employment Status

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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/20/2022 3:28 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 1697333 ; Charles Fleischer.; The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals, Managers, Businesses, and Organizations
Account: s4264928.main.eds

Book: The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals,
Managers, Businesses, and Organizations. Author: Charles Fleischer Date: 2017

Link: https://eds-p-ebscohost-com.ezproxy.umgc.edu/eds/ebookviewer/ebook?
sid=359febba-1b95-45b5-b693-1ddfabf75e63%40redis&ppid=pp_1&vid=0&format=EB

The SHRM Essential Guide to Employment Law2

OVERVIEW
The employment relationship is a mutual, voluntary arrange-
ment between two parties. The employer—which may be a
corporation, some other entity, or an individual—voluntarily
agrees to pay the employee in exchange for the employee’s work.

The employee—who is always an individual—voluntarily
agrees to work for the employer in exchange for pay.

The relationship is voluntary in the sense that the law does
not force anyone to work for a particular employer. The 13th
Amendment to the U.S. Constitution declares that “neither
slavery nor involuntary servitude … shall exist within the
United States.” As implemented by the Congress, the 13th
Amendment prohibits forced labor through use of physical
restraints, threats of physical harm, or threats of legal action.
The prohibitions against forced labor also protect persons from
compulsory work to pay off a debt—sometimes called peonage
or indentured servitude.

The United Nations International Labour Organization
(ILO) has adopted the ILO Declaration on Fundamental Prin-
ciples and Rights at Work, to which the United States subscribes.
The declaration states that all member nations have an obliga-
tion to respect four fundamental rights:

• “freedom of association and the effective recognition of the
right to collective bargaining;

• the elimination of all forms of forced or compulsory labour;
• the effective abolition of child labour; and
• the elimination of discrimination in respect of employment
and occupation.”

Although the employment relationship is voluntary from the
employer’s viewpoint, in that the employer usually has no obli-
gation to employ anyone in particular, in limited circumstances
an employer can be forced to hire or re-employ a particular
individual as a remedy for discriminating against that individ-

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The Employment Relationship 3

ual or violating that individual’s rights under a protected leave
law, such as the Family and Medical Leave Act (FMLA).

The employment relationship is often thought of as a contract
between employer and employee. However, it usually does not take
the form of a typical bilateral (or mutual) contract, in which each
party makes a promise to the other, such as, “I promise to deliver
goods to you next week if you promise to pay me $1,000 in 30
days.” Instead, the employment relationship usually takes the form
of a unilateral contract, in which only one party (the employer)
makes a promise, such as, “If you come work for me, I will pay
you $12 per hour.” The employee usually does not promise to
work. He or she just shows up, works, and becomes entitled to the
promised pay. Mutual employment contracts are discussed in more
detail on the following pages.

EMPLOYEES, INDEPENDENT CONTRACTORS, AND AGENTS
An employer’s workforce can be classified broadly as employees and
independent contractors. An employee and an independent contrac-
tor may or may not be an agent of the employer, depending on the
authority given by the employer to obligate the employer to contracts.

Employees
An employee is someone whose manner of work the employer has a
right to control, even if the employer does not actually exercise that
control. An entry-level file clerk will likely be subject to close, daily,
or even hour-by-hour supervision and is therefore an employee.
So, too, is the president of a large corporation, not because he or
she is closely supervised, but because the corporation’s board of
directors has the right to control his or her work. This right to
control is illustrated by the outdated legal terms master and ser-
vant used historically to describe the employment relationship.

True employees (as distinguished from independent contractors)
are sometimes known as W-2 employees, referring to the Forms W-2
issued to them for federal income tax purposes.

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The SHRM Essential Guide to Employment Law4

Vicarious Liability
As a matter of public policy, the courts hold employers vicariously
liable for injuries or property damage caused by their employees if
the injury or damage occurred during the course and scope of the
employee’s employment. This is sometimes referred to as the doctrine
of respondeat superior—a doctrine requiring the superior (the employ-
er) to respond (by paying damages) for the conduct of its employee.

Normally, such liability is imposed when the employee acts neg-
ligently, such a causing a car accident while driving on the job. But
vicarious liability may be imposed even if the employee intentionally
causes the injury, so long as the employee acted with the intention
to benefit his or her employer and the employment relationship
enabled the employee to cause the injury. An example might be a
store clerk who physically restrains a customer wrongfully suspected
of shoplifting.

Negligence and intentional misconduct that cause injury or
damage are referred to in the law as torts—French for wrongs.

Independent Contractors
An independent contractor, in contrast to an employee, is someone
you engage to perform a certain task, but whose manner of work
you do not have a right to control. Good examples are professionals,
such as outside lawyers or accountants, and trades persons such as
electricians and plumbers. In each of these examples, the independent
contractor’s work is governed by professional standards, state and
county codes, and the like, with which you are probably not familiar.
Your lack of familiarity is precisely why you engage an independent
contractor instead of doing the work yourself or having one of your
employees do it.

Certainly you can tell your independent contractor what it is you
want done, and you remain free to dismiss him or her if you do not
like the work. But it is the result you are interested in; the manner in
which that result is accomplished is up to the independent contrac-
tor and is not subject to your control.

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The Employment Relationship 5

Unlike an employee, an independent contractor generally cannot
impose vicarious (tort) liability on his or her employer.

ALERT!
Whenever a worker’s status as an independent contractor could reasonably be ques-

tioned, the safest course is to treat that worker as an employee.

Independent contractors are issued Forms 1099 to report
income for federal tax purposes, as opposed to Forms W-2 issued
to employees. Unlike employees, independent contractors are not
subject to income and payroll tax withholding.

Employers sometimes try to classify their workforce as inde-
pendent contractors, rather than employees, in an effort to avoid
being subject to laws and regulations that apply to employees. In
response, the various regulatory agencies, such as the Internal Rev-
enue Service (IRS), the U.S. Department of Labor (DOL), the
Equal Employment Opportunity Commission (EEOC), the Occu-
pational Safety and Health Administration (OSHA), state wage
and hour departments, workers’ compensation commissions, and
unemployment insurance administrators, have adopted complex
tests—that differ from agency to agency—to distinguish employ-
ees from independent contractors. These tests tend to be biased
in favor of an employer-employee relationship—that is, in favor of
finding that the person is covered by the particular employment
law or regulation the agency is charged with enforcing. (Tax issues
relating to independent contractors are discussed in Chapter 7. See
“Contingent Workers” in Chapter 20 for more details about the
independent contractor relationship.)

The consequences of misclassifying an employee or a group of
employees as independent contractors can be expensive. For exam-
ple, the employer might be held liable for income taxes that should
have been withheld, but were not, wage and hour violations, retro-
active coverage under employee benefit plans, back pay, penalties,
statutory damages, and interest.

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The SHRM Essential Guide to Employment Law6

QUICK TIP
Some workers are required by law to work under another’s supervision. This is true,

for example, in various health care professions. Even though the worker may otherwise

qualify as an independent contractor, the duty to be supervised may convert the worker

into an employee.

Agents
An agent is someone you authorize to make contracts on your behalf
and to bind you to those contracts. Employees can be agents, but
employees do not automatically become agents; it depends on what, if
any, additional authority you give them. For example, if you told your
employee to take a computer to the shop and make arrangements to
have it repaired, you have given your employee authority to act as
your agent. When he or she signs a work order in your name, you as
the principal, not the employee, will have to pay the repair bill.

Similarly, an independent contractor can be, but is not necessarily,
an agent. When you engage a landscape architect to prepare a design
for the grounds around your new office building, the architect is an
independent contractor but not an agent. However, when you then
authorize the architect to buy plantings, he or she becomes your agent
as well and has the power to obligate you in contract to the nursery.

STATUTORY EMPLOYEES AND NONEMPLOYEES
Some laws classify workers as employees or independent contrac-
tors regardless of the employer’s right of control or lack of control
over the manner in which the work is done.

For payroll tax purposes, the Internal Revenue Code classifies
the following four categories of individuals as statutory employees
even though they could be independent contractors under the
common-law test:

• a delivery driver (other than one who delivers milk)
• a full-time life insurance agent
• an individual who works at home on materials or goods supplied
by the employer

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The Employment Relationship 7

• a full-time salesperson who sells merchandise for resale or for use
in the buyer’s business operation

The Internal Revenue Code classifies the following individuals
as statutory nonemployees for all federal tax purposes:

• direct sellers of consumer products in the home or a place of
business other than a permanent retail establishment

• licensed real estate agents
• companion sitters who are not employed by a companion sitter
placement service

Workers’ compensation statutes, unemployment insurance stat-
utes, and other laws also state who does or does not qualify as an
employee for purposes of the statute.

JOINT EMPLOYERS
In a number of situations the law considers an employee to be joint-
ly employed by two or more employers. As a result, both employers
may be liable for discrimination or unfair labor practices, obligated
to pay overtime and withhold and remit payroll taxes, or provide
workers’ compensation or other benefits.

A common example of joint employment is the staffing firm that
leases an employee to another business. If the business directs the
staffing firm to replace the leased employee based on the employ-
ee’s race or age and the staffing firm does so, both the business and
the staffing firm will be liable for discrimination.

In another example, suppose a nurse’s aide works for two sepa-
rate nursing homes that are owned in part by the same individuals.
The total hours she works for both nursing homes may be aggre-
gated in determining whether she is entitled to overtime.

In the construction industry, a prime contractor may engage a
subcontractor, who in turn provides employees to the job site. If
those employees perform work both for the subcontractor and the
prime contractor, they may be deemed jointly employed by both

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The SHRM Essential Guide to Employment Law8

entities. Similarly, franchisers may be considered as joint employers
of their franchisees’ employees.

In the 2015 decision in Browning-Ferris Industries of Califor-
nia, Inc., the National Labor Relations Board (NLRB) expanded
its definition of joint employment in determining what constitutes
an appropriate bargaining unit for union representation purposes.
According to the NLRB, in evaluating whether an employer pos-
sesses sufficient control over employees to qualify as a joint employ-
er, the board considers whether an employer has exercised control
over terms and conditions of employment indirectly through an
intermediary or whether it has reserved the authority to do so. As of
this writing, the case is on appeal to the U.S. Court of Appeals for
the D.C. Circuit. (Unions and labor relations are discussed in more
detail in Chapter 24.)

In Salinas v. Commercial Interiors, Inc., the U.S. Court of Appeals
for the 4th Circuit (headquartered in Richmond, Va.) ruled that
joint employment exists when two or more entities “share, agree to
allocate responsibility for, or otherwise co-determine—formally or
informally, directly or indirectly—the essential terms and conditions
of a worker’s employment.” The Court went on to list a number of
factors to be considered in determining that question.

As these cases indicate, joint employment remains a developing
legal area and is becoming more common given the growing variety
of business models and labor arrangements. It should also be noted,
however, that the DOL under the Trump administration has with-
drawn a 2015 administrator’s interpretations that offered an expan-
sive view of joint employment.

THE EMPLOYMENT-AT-WILL DOCTRINE
Most employment is at will. That means there is no fixed period of
time that the employment relationship will last, and either party is
free to terminate the relationship at any time, with or without cause.
In other words, the employer may fire, or the employee may quit,
for any reason or for no reason at all.

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The Employment Relationship 9

In almost all states, there is a presumption that any particu-
lar employment relationship is at will. The presumption applies
unless it is shown that employment for a specific period of time,
such as two years, was intended. The fact that the employer and
the employee intended the relationship to last a long time or
for an indefinite period does not overcome the presumption of
at-will employment, since in almost all cases the parties hope (at
least at the outset) that the relationship will last a long time or
indefinitely. An employer’s promise of work for as long as the
job exists and for as long as the employee wants it is nothing
more than indefinite, at-will employment. Even so-called perma-
nent employment is still employment at will (although employ-
ers should not use the term permanent when intending only an
at-will relationship).

An important corollary of the at-will doctrine is the implied
covenant of good faith and fair dealing. In most states, every
contract is presumed to contain that implied covenant, requir-
ing parties to the contract to act reasonably toward each other.
However, the covenant is generally not implied in the normal
at-will employment arrangement, since the covenant depends on
the existence of an employment contract with a definite term. (A
handful of states do recognize the covenant in an at-will employ-
ment relationship.) It follows, at least in theory, that an employ-
er may treat at-will employees unreasonably and may fire them
without cause, although it is seldom good practice to do so.

The at-will employment doctrine has five important exceptions:
• the employment contract exception (discussed later in this
chapter)

• the abusive discharge exception (see Chapter 4)
• the exception for protected leave (see Chapter 8)
• the discrimination/retaliation exception (see Chapters 14 through
17)

• the exception for collective bargaining agreements (see Chap-
ter 24)

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The SHRM Essential Guide to Employment Law10

When one of these exceptions applies, discharging an at-will
employee may result in a lawsuit, an award of money damages against
the employer, or an order that the employer reinstate the employee.

EMPLOYMENT CONTRACTS
An employment contract (more accurately, a mutual employment
contract) is an agreement between the employer and the employee
that the employment relationship will last for a fixed, definite period
of time or that the relationship can be terminated only for cause
or under specified conditions. Employment contracts should be in
writing, since oral contracts that cannot be performed within one
year are generally unenforceable according to the statute of frauds.
Even if an oral contract of employment is enforceable, it can give rise
to misunderstandings, and its provisions are difficult to prove.

The contents of any particular employment contract depend
on the circumstances. A typical contract might include provisions
dealing with the following:

• job description, including employee duties and authority
• whether the position is exempt or nonexempt under the Fair
Labor Standards Act

• beginning date and term of the contract and any extensions
• compensation arrangements
• bonuses and equity, such as stock options
• health and other benefit plans
• other fringe benefits, such as a company car or an expense
account

• exclusivity, such as no moonlighting or no conflicts of interest
during term

• vacation and sick leave arrangements
• grounds for early termination, such as death, disability, revoca-
tion of a required license, or dishonesty

• confidentiality and trade secrets
• ownership of intellectual property, such as copyrightable and
patentable works or inventions

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The Employment Relationship 11

• noncompetition and nonsolicitation of customers and fellow
employees after termination

• liquidated damages for breach by employee
• waiver of jury trial or arbitration of disputes, along with prohibi-
tion on participating in class or collective actions

• indemnification
• choice-of-law provision
• choice-of-forum provision
• abbreviated statute of limitations

In most cases, the employer wants to preserve an at-will employ-
ment relationship and avoid being bound by an employment con-
tract or by any implied covenant of good faith and fair dealing. This
would be true, for example, in the case of lower-level employees
who can be replaced fairly easily. However, in a tight labor market
in which qualified employees are difficult to find, the employer
may want the protection of an employment contract. The employ-
er might also want contract protection for employees in whom
costly training is being invested, for employees who have access
to closely guarded company secrets, or for employees who have
unusual or complicated compensation arrangements.

An employee may want the security of a contract when, for
example, the employee is resigning from a stable position to take
a job with a start-up company or making a costly move to the new
employer’s headquarters. Whether the employer gives a contract in
those circumstances depends on the employee’s bargaining power
and worth to the new employer.

Choice-of-law and choice-of-forum provisions are particularly helpful
to large, multistate employers, which might otherwise be subject to
conflicting state laws. They allow the employer to specify which state
law will govern the employment contract and which court will hear
any disputes that arise under the contract. The employer might, for
example, specify the law of the state and the courts of the state where
its headquarters are located or where most of its employees work. So

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The SHRM Essential Guide to Employment Law12

long as the employer’s choices are reasonable and do not impose an
undue burden on the employee, most courts uphold these provisions.

Some employment contracts also seek to shorten the time within
which an employee may bring suit against the employer. If state law
specifies a three-year statute of limitations, the contract might short-
en that time limit to, say, 18 months. While these types of provisions
are controversial, some courts have upheld them.

Fill-in-the-blank contract forms are available from commercial
publishers. Electronic forms can even be purchased or downloaded
from the Internet. But if the employment relationship is important
enough to justify a contract in the first place, it should be important
enough to justify a consultation with employment counsel to be
sure the contract fits the particular circumstances and conforms with
state and local law.

Implied Contracts
Although the parties may not have explicitly intended to enter
into an employment contract, the employer’s actions can inad-
vertently bind the employer to the same extent as if there were a
written, signed agreement. Some courts have found, for example,
that an employee handbook amounts to an employment contract,
even though no contract was actually intended. Even the wording
of a simple employment letter can create a contract if it implies
that a specific time period is contemplated. Consider this letter:

We are pleased to offer you the position of sales manager
beginning January 1. Your base salary will be $50,000
per year, increasing to $60,000 your second year, and
$70,000 your third year. You will also earn an override
commission of 2.5 percent on all sales.

We have already made definite plans to expand our
market into the southeastern states over the next three
years. By the end of the third year, sales should reach
$1.5 million, which translates to a commission to you
of $37,500. We are counting on you to take the lead

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The Employment Relationship 13

in these expansion plans, and we have every confidence
that, with you at the helm of our sales department, we
will reach our goal.

While the letter does not exactly promise a three-year arrange-
ment, it certainly implies that the sales manager should expect to
stay that long. Couple that with the sales manager’s own testi-
mony that he was indeed promised three years, and the employer
might find itself bound to such a contract.

Breach of Contract
When employer and employee have agreed that the employment
will last a fixed period of time, or that the employment can be ter-
minated only for specified reasons, the courts generally enforce such
an agreement by awarding money damages for its breach. If the
employer breaches, it may be liable not only for the compensation
the employee would have earned but also for fringe benefits such
as health insurance, pension plan contributions, and stock options.

If the employee breaches, damages are more difficult to measure,
since it is not easy to quantify just how a particular employee’s
performance would have affected future profitability. Absent a liq-
uidated damages provision (a provision that specifies in advance
the amount of damages to be recovered), the employer’s claim
might be limited to employment agency fees, employee relocation
costs covered by the employer, and any license or similar fees paid
by the employer on the employee’s behalf. Remember that a court
will not order the employee back to work since such an order
would violate the Constitution’s involuntary servitude clause.

ALERT!
Even in employment-at-will situations, the employer may be held liable for misrepre-

sentation if an employee is induced to accept work based on false or incomplete repre-

sentations as to the conditions of employment. (See Chapter 2 for more on fraud and

misrepresentation during the hiring process.)

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The SHRM Essential Guide to Employment Law14

INDEMNITY OBLIGATIONS
In an indemnity agreement, one party agrees to protect the
other party from claims by third parties. For example, a physi-
cian employed by a hospital might agree to indemnify the hospital
from malpractice claims by the physician’s patient. Or a business
corporation might agree to indemnify its senior management from
claims by shareholders or other employees. Such an agreement
serves, in effect, as private insurance between the parties.

Whether an indemnity provision will be included in an employ-
ment contract and, if so, who will be indemnifying whom, are mat-
ters of negotiation between the parties. A highly desired candidate,
for example, might insist on being indemnified as a condition to
accepting a job offer. On the other hand, a candidate with little
bargaining power may have no choice but to agree to indemnify
his or her employer to get the job.

Even absent an indemnity provision in an employment contract,
the employer may have an indemnity obligation to some or all of
its employees under state corporation law or under provisions of its
corporate charter or bylaws.

ALERT!
An indemnity provision in an employment contract or in corporate documents exposes the

employer to a risk of substantial liability. The employer should therefore carry adequate lia-

bility insurance and be sure that the potential indemnity obligation is covered by the policy.

ARBITRATION AGREEMENTS
Arbitration of disputes is often viewed as preferable to litigation. Arbi-
tration is generally faster and cheaper; it involves only limited pretrial
discovery, the proceedings take place in private, and the results are
usually final and unappealable. Since arbitration means no jury trial,
an employer that fears a runaway jury and a runaway damage award
may view arbitration as a highly desirable alternative to litigation.

Both the Federal Arbitration Act (FAA) and its state counter-
parts say that a contract provision for resolution of future disputes

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The Employment Relationship 15

by arbitration is valid and enforceable. The courts have gone so far
as to rule that the law favors arbitration and that when a contract
contains an arbitration clause, a presumption arises that all disputes
relating to the contract must be arbitrated. These principles have
been applied to labor disputes under collective bargaining agree-
ments and to employment disputes in the securities industry, in
which arbitration clauses have been common for years. Arbitration
provisions are now finding their way into more and more con-
tracts, including routine employment agreements.

QUICK TIP
A pre-dispute arbitration agreement—that is, an agreement to arbitrate made at the

outset of employment or at some other time before a dispute has arisen—should

be distinguished from an agreement to arbitrate made after a dispute has arisen.

Courts almost always enforce a post-dispute arbitration agreement that is entered

into knowingly and voluntarily. Enforcement of a pre-dispute arbitration agreement,

however, may be open to a variety of objections, such as unfairness or lack of true

consent.

For some time, there was a question whether an employee
could be forced to submit federal statutory claims to arbitration.
Suppose an employer routinely requires employees, as a condi-
tion of employment, to sign an agreement that subjects all future
employment-related disputes to binding arbitration, including
discrimination claims based on the various federal nondiscrimi-
nation statutes. Under the principle that statutory rights cannot
be waived in advance, some federal courts initially ruled that an
employee would not be bound by such an agreement, made in
advance of any dispute.

The Supreme Court, which is the ultimate authority on interpre-
tation of federal law, resolved the question in March 2001. In a deci-
sion involving an employee of an electronics store in California, the
court ruled that an agreement to arbitrate discrimination claims was
valid and enforceable under the FAA. The court went on to praise

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The SHRM Essential Guide to Employment Law16

arbitration agreements in the employment context, because of the
smaller sums of money normally involved.

The EEOC, which opposes binding arbitration of discrimina-
tion claims, will not stay its own hand in investigating or attempt-
ing to resolve a discrimination charge just because the parties have
entered into an arbitration agreement. In a 2002 case, an employ-
ee of a chain restaurant was fired from his short-order cook job
when the restaurant learned he suffered from seizures. In response
to the EEOC’s suit for violations of the Americans with Disabilities
Act (ADA), the restaurant argued that the employee had signed a
pre-dispute arbitration agreement that barred the EEOC’s suit.
The Supreme Court upheld the EEOC’s suit, saying the EEOC
has an independent statutory right to pursue whatever remedies it
feels appropriate that included not only injunctions against future
violations but also victim-specific relief such as reinstatement and
back pay.

Nor can an arbitration agreement, or any other agreement for
that matter, prevent an employee or former employee from filing a
charge of discrimination with the EEOC or a state fair employment
practices agency.

Arbitration may not always be cheaper than litigation. There
are often significant filing fees just to initiate arbitration. And
while judges are provided by the government without charge,
arbitrators typically charge substantial hourly rates payable by the
parties.

Some employers have tried to shift the burden of arbitration costs
to the employee, so that the employee ends up paying far more to
arbitrate than he or she would in a court suit. Other employers have
drafted arbitration agreements that are so one-sided in favor of the
employer as to be fundamentally unfair to the employee. Decisions
by a number of federal appellate courts have refused to enforce such
agreements, ruling that any attempt to burden an employee with
excessive costs or to give employers unfair procedural advantages is
a denial of the employee’s statutory rights.

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The Employment Relationship 17

QUICK TIP
For companies that require employees to sign noncompetition or nonsolicitation con-

tracts, an arbitration agreement should have an exception allowing the employer to go

to court for an injunction to bar an employee’s or former employee’s violation of the

contract.

Arbitration provisions should not be placed in the employee
handbook, since the employee handbook is not intended to be a
contract of employment. (However, the handbook may mention
the fact that an employer has an arbitration-of-disputes policy.) For
those employees with whom the employer has a formal contract of
employment, the arbitration provision would be included there. For
at-will employees, the employer should use a separate written doc-
ument, dated and signed by the employee, that contains both the
desired arbitration provision and a disclaimer to the effect that the
arbitration provision is not a contract of employment and does not
change the at-will status of the employee.

Despite the Supreme Court’s blessing, legal issues involving
pre-dispute arbitration agreements continue to arise, particularly in
the area of fairness and cost-shifting. To help ensure their validity,
arbitration agreements should do the following:

• contain a clear and unmistakable waiver of the employee’s right to
go to court and specify that arbitration is final and binding

• specifically identify the types of potential claims that the employer
intends to submit to arbitration—claims under Title VII of the
Civil Rights Act, the ADA, the Age Discrimination in Employment
Act (ADEA), the FMLA, state human rights and fair employment
practices acts, county and local nondiscrimination laws, claims for
abusive discharge, pay disputes, etc.

• provide for a neutral arbitrator, not one who is affiliated with the
employer or who regularly hears disputes involving the employer

• allow at least minimal discovery
• not burden the employee with costs in excess of those he or she
would incur in court

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The SHRM Essential Guide to Employment Law18

• be balanced, fair to both sides, and not attempt to give the
employer any procedural advantages

• be binding on the employer as well as the employee (that is, it
should not obligate the employee to arbitrate while giving the
employer the option of arbitrating or not)

• not attempt to take away any of the employee’s substantive statu-
tory rights or limit an employee’s statutory remedies

• require the arbitrator to issue a written award

With increasing frequency, employers are including class- and col-
lective-action waivers in arbitration agreements in an effort to pre-
vent employees from participating with a large group of plaintiffs.
Class and collective actions allow individual plaintiffs to aggregate
their claims into one lawsuit or arbitration proceeding when each
individual claim may be economically too small to pursue.

In AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court
held that class-action waivers are enforceable in the context of a dis-
pute between a business and a consumer. However, the National
Labor Relations Board takes the view that in the employer-employ-
ee context, such waivers violate employees’ rights under the Nation-
al Labor Relations Act (NLRA). (See Chapter 24 for more on the
NLRA.) As of this writing, the issue is before the U.S. Supreme
Court in NLRB v. Murphy Oil USA, Inc.

BUSINESS OWNERS’ EMPLOYMENT STATUS
Business can be conducted in a variety of forms, from the sole
proprietorship to the publicly held, multinational corporation. In
between are general partnerships; small or closely held corpora-
tions that have elected S status for federal income tax purposes
(S corps), limited liability partnerships (LLPs), limited liability
companies (LLCs), and professional corporations (PCs).

The right choice of business entity goes beyond the scope of
this book. This section is concerned with the status of business
owners who also work for the entity they own. Are they con-

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The Employment Relationship 19

sidered employees of the entity? And what liability do they have
for entity obligations or the negligence of other employees? The
answers depend on the specific type of entity involved and on
certain tax elections available to those entities.

Sole Proprietorships
A sole proprietorship is a business owned by a single individual in his or
her individual name. While a sole proprietor can have employees, he
or she is considered self-employed and can never be an employee of the
business. Sole proprietors report their business income and expenses
on Schedule C of Form 1040 for federal income tax purposes.

Sole proprietors are personally liable for their own negligence,
and, as employers, they are vicariously liable for the work-related
negligence of their employees. They are also personally liable for
the business’ obligations, such as wages, lease payments, business
loans, and vendor invoices. For liability reasons, a sole proprietor-
ship is usually not a recommended form for doing business.

General Partnerships
A general partnership is a group of individuals who share profits
and losses of the partnership’s business. Partnerships are treated
as separate entities for some purposes and as pass-through entities
for other purposes. For example, a partnership can have employees
(other than the partners themselves), and it files its own income tax
returns. However, partnerships generally do not pay any income
tax. Instead, any net income or loss shown on the partnership
return is allocated to the partners according to the partnership
agreement. Partners pay tax on their allocated share (as shown on
Schedule K-1 (Form 1065) that the partnership issues to them)
whether or not net income has actually been distributed to them
in cash. Partners are considered to be self-employed.

Partners are personally liable for partnership obligations, just
like sole proprietors. Also, each partner is considered the agent of
each other partner and is personally liable for the negligence and

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The SHRM Essential Guide to Employment Law20

contractual obligations of each partner. (Think of a partner as a
sole proprietor with multiple personalities.) This is the main reason
for the popularity of S corps and, more recently, LLPs and LLCs.

S Corporations
An S corporation, or S corp, is just like any other corporation formed
under state law, but it has elected S status for federal income tax
purposes. (The S refers to the Internal Revenue Code subchap-
ter that permits the election.) As a result, it is treated much like
a partnership for federal income tax purposes, yet it retains the
limited liability features of a corporation. An owner of an S corp
is considered self-employed and gets a Form K-1, just like a part-
ner in a partnership. However, there is no personal liability for
corporate obligations or for the negligence of other employees or
co-owners. Because they have characteristics of both corporations
and partnerships, S corps (along with LLPs and LLCs) are some-
times called hybrids.

S corp status is available only to small business corporations with
one class of stock and fewer than 100 shareholders. Only individu-
als, decedent’s estates, and some types of trusts can be shareholders.
Partnerships and other corporations cannot own stock in an S corp.

Limited Liability Partnerships and Limited Liability Companies
Owners of an LLP (who are called partners) and owners of an
LLC (who are called members) are the equivalent of partners in a
general partnership for tax purposes. Therefore, they are normally
considered self-employed and they get year-end K-1 forms show-
ing their taxable shares of LLP or LLC profits. However, LLPs
and LLCs (or any other entity treated as a partnership under state
law) may take advantage of the IRS’s check-the-box rule and elect
to be taxed as corporations. Worker-owners would then be treated
as employees, as with any other corporation.

Regardless of an LLP’s or LLC’s status for tax purposes, its
partners or members have no personal liability for obligations of

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The Employment Relationship 21

the LLP or LLC, or for the negligence of other partners, mem-
bers, or employees.

QUICK TIP
Small businesses with only a few owners may find it advantageous to organize as LLCs

and then elect to be taxed as S corps. This arrangement enjoys simplicity of organization,

pass-through tax status, and protection of owners from personal liability. In addition, it

allows an income tax deduction for the employer’s portion of FICA due on compensation

paid to owner-employees. Had the LLC not elected corporate taxation status, all compen-

sation to owner-employees would have been subject to self-employment tax for which

no deduction is available.

Professional Corporations
Traditionally, professionals like doctors, lawyers, and accountants
were only permitted to practice as sole proprietors or as partnerships.
The fear was that if they practiced in corporate form, their profes-
sional judgment would be compromised by being subjected to the
wishes of a corporate board of directors. At the same time, however,
federal income tax law (particularly regarding pension plans) strong-
ly favored corporations over partnerships. So professionals brought
pressure on state legislators and licensing boards to allow them to
incorporate. The result was the professional corporation (PC).

QUICK TIP
Depending on a variety of factors, owners of a professional corporation may or may not

be counted as employees for federal nondiscrimination law purposes. In Clackamas Gas-

troenterology Associates, P.C. v. Wells, the Supreme Court applied the common-law test

of whether the employer controls the means and manner of the workers’ performance in

determining whether the physician-shareholders in a medical practice should be counted

as employees.

PCs are in every respect true corporations under state law. An
owner who works for the PC is usually classified as an employee for
tax purposes and receives a Form W-2 at year-end, just like employ-

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The SHRM Essential Guide to Employment Law22

ees of other corporations. (PCs can elect S corp status in which case
owners are treated as self-employed for federal tax purposes.) How-
ever, only licensed members of the particular profession for which
the PC was organized can be shareholders, directors, and officers.

Professionals who work for a PC are personally liable to their cli-
ents for professional negligence, regardless of their status as employ-
ees for other purposes. But the good news is that they are not
personally liable for the negligence of their fellow professionals—a
liability they would have if they had organized in partnership form.

C Corporations
Large businesses have little choice in their type of entity. To participate
effectively in capital markets they must organize in corporate form.
They also cannot qualify as S corps under the Internal Revenue Code
because they have a broad shareholder base, and perhaps several
classes of stock. C corp shareholders may work for the corporation
but they have no special status as shareholder-employees. Both the
president who owns 10,000 shares and the janitor who owns 10
shares get Forms W-2, and neither is generally liable for corporate
obligations or the negligence of fellow employees.

QUICK TIP
Although sole proprietors and partners are considered self-employed, many workers’

compensation statutes allow them to opt in and obtain coverage. Conversely, while

members of LLCs and corporate officers are covered by workers’ comp statutes, they are

often permitted to opt out of coverage. (Workers’ compensation insurance is discussed

in Chapter 11.)

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The Hiring Process

• Job Descriptions

• Advertising the Opening

• Applications

• Interviews

• Background Checks and Consumer Reports

• Pre-Employment Testing

• Employment Offers

• Medical Exams

• New-Employee Procedures

• Fraud and Misrepresentation in Hiring

• Interference with Contractual Relations

• Negligent Employment

CHAPTER 2

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Organizations. Author: Charles Fleischer Date: 2017

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The SHRM Essential Guide to Employment Law24

Employers and employees have numerous interactions during the
employment relationship. While any of these interactions can give
rise to liability, those involving hiring (discussed here), evaluating
(discussed in Chapter 3), and terminating (see Chapter 4) stand
out as particularly critical.

The hiring process has one purpose: to exchange enough infor-
mation so that the parties can make an informed decision about
whether to enter into an employment relationship. Good hiring
practice involves the collection of appropriate information untaint-
ed by information that should not be the basis for a hiring decision.
The hiring procedure usually involves the steps discussed below.

JOB DESCRIPTIONS
To focus on job qualifications, the employer should first prepare a
clear, written description of the job being offered. The description
should include at least the following:

• essential functions of the job—the critical functions that go to
the heart of the job and that the person holding the job must,
unquestionably, be able to do

• less critical functions that the employee may be called on to
perform from time to time or that could be done by others if
necessary

• special skills required, such as ability to operate complex
equipment

• special education, licenses, or certificates required
• title or position of the person to whom the employee reports
• number and classification of persons who report to the employee
• whether the employee is exempt or nonexempt under the Fair
Labor Standards Act

• date the description was prepared or most recently revised

The job description should not include any employee charac-
teristics that the employer is prohibited from considering, such as
age, gender, and race.

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The Hiring Process 25

The job description should be prepared before the job is
advertised and before any candidates are considered. That way,
the employer will have a much easier time defending its deci-
sion to reject a candidate on grounds that he or she could not
perform the essential functions of the job despite reasonable
accommodation.

ADVERTISING THE OPENING
Any want ads the employer runs or notices it posts should describe
the job being offered, not the person the employer thinks it is
looking for. Expressions such as recent graduate, energetic person,
or digital native could provide evidence of age discrimination if
the position is filled by a younger candidate after an older candi-
date has been turned down. Expressions that indicate a gender
preference, such as waitress, should also be avoided. (Discrimina-
tion is discussed in detail in Chapters 14 through 17.)

Use of only a single method for recruiting unduly restricts the
candidate pool and discourages workplace diversity. Word-of-
mouth recruiting, for example, has been attacked by the Equal
Employment Opportunity Commission (EEOC) as potential-
ly discriminatory: if your current workforce consists mostly of
white, middle-age males, word-of-mouth recruiting is likely to
produce candidates who are mostly white, middle-aged males.

Internet Recruiting
Advertising job openings via the Internet is a convenient, relative-
ly inexpensive way to attract resumes—and that is the problem.
An employer can be overwhelmed with the number of responses
and lack sufficient staff time to screen them effectively. Screen-
ing software, while effective, may inadvertently discriminate if
the wrong keywords are used to do the screening. Employers
that limit their recruitment to this medium should also be alert
to possible disability discrimination claims if their website lacks
accessibility.

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The SHRM Essential Guide to Employment Law26

QUICK TIP
Some employers report that electronic applications, particularly those with attachments

purporting to be resumes or supporting documents, contain ransomware or other

destructive code.

APPLICATIONS
A written application form should be developed for initial screening
purposes. The application form should obviously not ask for infor-
mation that the employer is prohibited from considering as part of
the hiring process.

Some seemingly innocuous inquiries can also cause trouble. For
example, the applicant should not be asked to attach a photograph.
Age or birthdate questions should be saved until after the appli-
cant has been hired (although for child labor purposes, the employer
should ask whether the applicant is at least 18). Similarly, immigra-
tion status questions should be saved for later, and the application
should be limited to the question, “Are you legally eligible to work
in the United States?” Even a question about whom to contact in an
emergency should be avoided in the initial application, since it could
reveal marital status or family information.

In the past, application forms routinely asked about a candidate’s
criminal history. The EEOC has weighed in on this practice, assert-
ing that basing employment decisions on such information could
discriminate against groups that, statistically, suffer higher convic-
tion rates than the general population.

According to the EEOC, arrest records alone should never be
considered, because an arrest does not establish guilt. And instead
of a blanket policy excluding every applicant who has a conviction
record, the employer should consider, on a case-by-case basis, the
following:

• the nature and gravity of the criminal offense
• the time that has passed since the offense and/or completion of
sentence

• the nature of the job

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The Hiring Process 27

In short, the employer must be able to show that its criminal his-
tory policy accurately distinguishes between applicants who pose an
unacceptable risk and those who do not.

Complicating the issue, states and even counties and cities have
begun adopting ban-the-box rules that prohibit or restrict employ-
ers from asking about a candidate’s criminal history. In one local
jurisdiction, for example, employers can ask about criminal history,
but only after the initial interview. These social policies may be well
intended, but to the extent they limit an employer’s ability to obtain
information relevant to the hiring decision, they could expose the
employer, fellow employees, and the public generally to avoidable
risks.

Further complicating matters, a few jurisdictions have adopted
or are considering the adoption of laws prohibiting employers from
asking about compensation history (on the theory that this perpet-
uates pay disparities suffered by women and minorities) and from
discriminating against persons who are currently unemployed.

QUICK TIP
When hiring a former U.S. government employee, it is important to know whether the

employee is restricted in the type of work he or she may engage in. Either by law or by

executive order, many former government employees are prohibited for specific time

periods, and in some cases forever, from working on matters that would create a conflict

of interest or the appearance of a conflict.

INTERVIEWS
Interviews should be conducted by experienced personnel using
a standard written interview form. The interview form should be
limited to questions or topics directly relevant to job performance,
and the interviewer should stick to the form, noting the applicant’s
responses. By having and following a standard written form, the
employer can more easily show that it did not inquire about any
prohibited matters and that no particular applicant was singled out
for special questioning.

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The SHRM Essential Guide to Employment Law28

It is difficult to get a feel for an applicant’s personality and com-
munications skills if all that is asked are yes-or-no questions, so inter-
viewers naturally like to ask open-ended questions, such as “Why do
you want to work here?” or “Tell me what you like and don’t like
about your current job.” There are risks to open-ended questions,
however, particularly when they are not strictly job-related, because
they may elicit personal information that can later form the basis of
a discrimination claim.

Another common pitfall in the hiring process is family status.
Suppose an interviewer asks, “Do you have any family responsibili-
ties that could keep you from getting to the office?” The applicant
responds, “I’m a single parent and my son has special needs, but
I have day care arrangements that work pretty well.” Later, when
checking with the applicant’s previous employer, the interviewer
learns of a tardiness problem. If the applicant is rejected, the employ-
er is open to charges of violating the Americans with Disabilities Act
(ADA) or other nondiscrimination laws.

An employer may not ask, “Are you disabled?” or “Do you have
any medical conditions that could interfere with your performance?”
However, an employer may inquire, “Can you do this job?”—pro-
vided the question is asked of every applicant and not just those who
may appear to have disabilities.

BACKGROUND CHECKS AND CONSUMER REPORTS
Once you have a short list of candidates, or have tentatively chosen
a single candidate, it is time for background checking. This could
include, as appropriate, calls to references and previous employers,
ordering a consumer or credit report (see below), ordering a crimi-
nal convictions check (if warranted by the nature of the job and per-
mitted by state law), and obtaining a copy of the candidate’s driving
record. It may even include a drug test. Background checking will
not include a lie detector test, and until you have actually made a
conditional offer to the candidate, it will not include a medical exam.
(Chapter 17 discusses medical examinations.)

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The Hiring Process 29

Federal law regulates the use by employers of credit and investi-
gative reports prepared by consumer reporting agencies. The feder-
al Fair Credit Reporting Act (FCRA) defines a consumer reporting
agency (CRA) as a person or entity that, for a fee, assembles or
evaluates credit information or other information on consumers
(defined to include employees and candidates for employment) for
the purpose of regularly furnishing consumer reports to third par-
ties (such as employers). Even an online search engine that assem-
bles personal data from public sources may qualify as a CRA.

In general, employers may obtain consumer reports from CRAs,
including investigative reports, to assess character and general
reputation for purposes of evaluating, promoting, reassigning, or
retaining an applicant or employee. The law places limits on how
far back the credit reporting agency may search for various types of
information, but those limits do not apply when highly compen-
sated positions are being filled.

When requesting a consumer report, the employer must dis-
close to the applicant or employee in writing that it is request-
ing such a report and must obtain the applicant’s or employee’s
written authorization to obtain the report. The disclosure and
authorization must be a separate, stand-alone document and not
be embedded in the employment application or some other form.
The applicant may in turn make a written request to be informed
of the full nature and scope of the report being requested, and the
employer must then furnish that information.

If the employer intends to make an adverse employment deci-
sion based wholly or partly on the consumer report, the employer
must first inform the applicant of this intention. In addition, the
employer must supply the applicant or employee with the name
and address of the CRA that made the report, a copy of the report,
and a statement explaining the applicant’s rights under federal
law to challenge the accuracy of the report. The federal Consum-
er Financial Protection Bureau, which enforces the FCRA, has
developed a form statement of employee rights under federal law

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The SHRM Essential Guide to Employment Law30

that satisfies the employer’s FCRA obligations, available on the
bureau’s website.

CASE STUDY:
EXTRANEOUS TEXT IN FCRA DISCLOSURES
An employer obtained a consumer report on its applicants, using a
disclosure form that also contained a waiver of liability in connection
with the use and dissemination of any information contained in the
consumer report. In a 2017 case, the U.S. Court of Appeals for the 9th
Circuit (headquartered in San Francisco) held that inclusion of the
liability waiver violated the FCRA requirement that the disclosure be
a stand-alone document. The court also held that, since the stand-alone
requirement is so clear, the employer’s conduct amounted to a willful
violation of the law.

Pursuant to a 2003 amendment to the FCRA known as the Fair
and Accurate Credit Transactions Act (FACT Act), the Federal
Trade Commission (FTC) adopted regulations governing the dis-
posal of consumer information. The FTC’s Disposal Rule requires
employers and others that have such information to properly dis-
pose of it when no longer needed by taking reasonable measures to
protect against unauthorized access or use. Examples of reasonable
measures include burning, pulverizing, or shredding papers contain-
ing consumer information and implementing and enforcing policies
for erasure of electronic media containing consumer information.

ALERT!
Some states flatly prohibit employers, with limited exceptions, from obtaining an appli-

cant’s or employee’s credit information for employment purposes, even though the

employer has fully complied with the FCRA. Other states permit the obtaining of credit

information, but they regulate the process.

Should employers search social media as part of a background
investigation? There are dangers in doing so, since so much personal

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The Hiring Process 31

information—such as family status, recreational activities, and reli-
gious affiliations—is posted online. One solution is to have someone
who is not the decision-maker screen social media content, delete
irrelevant personal information, and report only job-relevant data
to the decision-maker. (Social media policies are discussed in more
detail in Chapter 18.) Employers that decide to include a social
media search in their background investigations should develop a
standard list of media to search, so that all applicants are treated
similarly.

Some states prohibit employers from requesting applicants or cur-
rent employees to provide social media passwords. And of course,
it is illegal for an employer to hack another’s social media account.

PRE-EMPLOYMENT TESTING
Title VII of the federal Civil Rights Act makes it unlawful for an
employer, when selecting candidates for employment, to adjust
the scores of, use different cutoff scores for, or otherwise alter
the results of employment-related tests on the basis of race, color,
religion, sex, or national origin. Even short of such blatant dis-
crimination as using different cutoff scores, tests that have the
unintended effect of excluding certain groups could result in
disparate impact discrimination. For enforcement purposes, the
EEOC has adopted a four-fifths rule—if a particular test (or any
other selection procedure, for that matter) results in a selection
rate for any race, sex, or ethnic group that is less than four-fifths
(80 percent) of the rate for the group with the highest selec-
tion rate, the procedure will generally be regarded as evidence of
adverse discriminatory impact.

Tests also need to be validated—that is, shown by statistical or
other evidence to be good predictors of job performance. The
EEOC has adopted detailed regulations on validation requirements,
which go beyond the scope of this book. The regulations also require
employers to keep records on the impact of their testing procedures,
classified by gender, race, and ethnic group.

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The SHRM Essential Guide to Employment Law32

EMPLOYMENT OFFERS
When you have finally identified a single candidate, the next step
is to make an offer. A written offer is recommended to avoid any
misunderstandings and reduce the possibility of disputes down the
road. For at-will employees, the offer will usually be in the form of a
simple letter. Figure 2.1 is an example of a written offer.

FIGURE 2.1: AT-WILL OFFER LETTER

Dear [candidate name]:

We are pleased to offer you the full-time exempt position of [job title] at a starting salary
of $[amount] per year, beginning [date]. This offer is subject to your furnishing sufficient
evidence that you are eligible to work in the United States [and to completion of a
background check, drug test, and medical exam at the company’s expense].

Vacation and sick leave policies, benefit plans, and other company policies and procedures
are explained in our employee handbook, a copy of which will be provided on your start
date. You are expected to read and be familiar with the employee handbook and to sign a
receipt for the handbook. [As part of the hiring process you will be required to sign [company
name]’s standard forms of Noncompetition Agreement and Arbitration Agreement, copies of
which have previously been provided to you.]

This letter is not intended to be a contract of employment or a promise of employment for
a specific period of time. You will be an at-will employee of [company name], meaning that
either you or [company name] can terminate the employment relationship at any time for any
reason, with or without cause, and meaning that [company name] can change the terms and
conditions of your employment at any time.

If you accept this offer, please sign and return the enclosed copy of this letter no later than
[date].

You should report to [employee name] at [time] on your first day of work to complete the
hiring process.

All previous discussions and negotiations are merged in and superseded by this letter.

Very truly yours,
[company name]

By ______________________________________________________________________
[employee name], [title]

I accept this offer of employment:

Signature: ________________________________________ Date: _________________

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The Hiring Process 33

MEDICAL EXAMS
Medical exams (but not tests for illegal drugs) are governed by the
ADA, discussed in Chapter 17. Before actually offering employ-
ment, an employer may never require an applicant to undergo a
medical exam. When the employer actually offers employment, the
offer may be conditioned on the results of a medical exam if the
following apply:

• all entering employees in the job category are subject to
examination

• the exam requirement can be shown to be job-related and consis-
tent with business necessity

• the resulting medical information is separately maintained and
treated as confidential

• the results are not used to discriminate against persons with
disabilities

If the offer is subject to any conditions in addition to the medical
exam, the medical exam will violate the ADA.

NEW-EMPLOYEE PROCEDURES
The employer should take the following steps when the employee
actually starts work:

• Obtain evidence of the employee’s eligibility to work in the U.S.
and complete Form I-9 (discussed in Chapter 21).

• Check the employee’s work eligibility status using E-Verify (if the
employer participates in the E-Verify system).

• Have the employee complete Internal Revenue Service Form W-4
and the appropriate state counterpart (see Chapter 7).

• Obtain any additional personal information not given on the
application, such as birthdate and emergency contact.

• Collect information as to the employee’s race, sex, and national
origin if required to file an EEO-1 report (see Chapter 14).

• Give the employee copies of the employee handbook and other
applicable work rules and policies, and obtain signed receipts.

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The SHRM Essential Guide to Employment Law34

• Give the employee a copy of his or her job description and obtain
a signed receipt.

• Have the employee sign an arbitration agreement, if appropriate
(see Chapter 1).

• Have the employee sign a confidentiality, noncompete, and non-
solicitation agreement, if appropriate (discussed in Chapter 19).

• Have the employee enroll in any benefit plans for which he or
she is then eligible.

• Notify the appropriate state agency of the new hire within 20
days after the employee begins employment.

National Directory of New Hires Database
Federal law requires each state to establish a National Directory of
New Hires database that is then shared with other states to track
persons who have child-support obligations. The information is
also used to detect fraud or abuse in welfare and unemployment
programs. The states, in turn, have passed laws to establish the
directory and to require in-state employers to report new hires
within 20 days after hiring. The one-page form can be mailed
or faxed. Forms can be obtained, and in some cases completed,
online.

Multistate employers (employers with employees in more than
one state) have two reporting options: they may report each newly
hired employee to the state where the employee is working, fol-
lowing the new-hire reporting regulations of that particular state,
or they may select one state where they have employees work-
ing and report all new hires electronically to that state. Employ-
ers must choose between the two options; they cannot use both.
Employers that choose the second option must register with the
U.S. Department of Health and Human Services (HHS) as a mul-
tistate employer.

More information on new-hire reporting and forms for regis-
tering as a multistate employer are available online at the Office of
Child Support Enforcement of the HHS.

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The Hiring Process 35

Probationary Periods
Many employers consider the first 90 or 180 days of employment
as a probationary period, during which a new employee is under
close scrutiny and can be summarily discharged if not performing
to expectation. Such a policy may make sense in a union setting,
in which employees enjoy job protections after expiration of the
probationary period, but the policy makes little sense in an at-will
employment situation. If an employee is at will, what is his or her
status after successfully completing probation? It is still at will, as
far as the employer is concerned, but the employee might reason-
ably expect that he or she can now be fired only for cause. In a true
at-will situation, everyone is always on probation!

FRAUD AND MISREPRESENTATION IN HIRING

Resume Fraud
Prospective employees sometimes lie on their job applications.
When the position being applied for involves risk to the public,
the employer should take reasonable steps to verify the infor-
mation. Even when no obvious risk is involved, the employer
may wish to verify education or past experience that bears on the
applicant’s qualifications for the job.

While ferreting out these lies is becoming increasingly burden-
some, employers can take steps to ensure they obtain an accurate
picture of the candidate:

• Check each reference.
• Ask each reference to furnish the name of another person who
knows the candidate and check with that person as well.

• Require the candidate to complete a standard written employ-
ment application and check the application against the resume
for inconsistencies.

• If the candidate claims knowledge or experience in a particular
technical field, have one of the company’s technicians partici-
pate in interviewing the candidate.

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The SHRM Essential Guide to Employment Law36

• Require candidates to present original documentation in support of
resume claims (for example, degrees, certifications, drivers’ licenses).

• Obtain official transcripts directly from schools the candidate
attended.

• Obtain driving records from state motor vehicle authorities.
• Search the Internet for publicly available information (but see the
discussion above and in Chapter 18 about social media).

• Contract with companies to obtain background investigations,
criminal conviction checks, and credit checks (but be sure to
comply with FCRA requirements, discussed above).

• Hire candidates provided by employment agencies that prescreen
their referrals.

Suppose a falsified resume slips past the employer and is not dis-
covered until months or years down the road. What rights and rem-
edies does the employer then have?

At-will employees may, of course, be discharged for any reason
(except an illegal reason) or for no reason. As for those employees
with employment contracts, if the resume contains a false statement
about a material matter (that is, about a matter that a reasonable
person would find significant), and the employer actually relied on
the statement in offering employment, then the employment contract
is the product of the employee’s fraud. The employer may avoid the
contract and discharge the employee so long as the employer acts
promptly after discovering the fraud. However, if the false statement is
an obvious typographical error (say, inversion of two digits in the date
for previous employment), it is trivial, or it is so inherently improba-
ble that the employer could not reasonably have relied on it, then the
contract of employment remains enforceable.

QUICK TIP
For both contract and at-will positions, it is a good idea to include in the employment

application a certification by the applicant that the application is truthful and that all

supporting items such as transcripts and reference letters are genuine and unaltered.

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The Hiring Process 37

Employer Misrepresentations
Suppose an employer makes an offer of at-will employment and, in
the process, makes certain statements to the prospective employee
about, for example, the nature of the job or working conditions.
The applicant relies on those statements, accepts the job, turns
down other offers, and begins work. Then, for the first time, the
employee learns that the employer’s prehiring statements were
untrue and that actual job conditions are much less favorable than
as represented.

It could be argued that the employee has no basis to complain
about the employer’s false prehiring statements, since in an at-will
relationship the employer has the absolute right to change work-
ing conditions at any time and to fire an employee whenever the
employer feels like doing so. However, several courts have ruled
that an at-will employee who, in reliance on an employer’s false
statements, resigns from another job, turns down other offers, or
incurs relocation expenses, can sue the employer for fraud, deceit,
and negligent misrepresentation.

CASE STUDY:
EMPLOYER LIABLE FOR MISREPRESENTATION
When an applicant for a physical therapist position at a hospital was
interviewed, the hospital’s CEO represented that the hospital’s contract
with an outside therapy provider would be ending and that the
hospital would be bringing physical therapy services in-house. However,
the CEO lacked authority to make those changes on his own. He also
lacked authority to hire without approval by certain other officials.
Nevertheless, the CEO made a firm offer to the therapist.

The therapist accepted the offer and turned down another opportunity.
Only then did he learn that the offer had not been authorized and that,
in fact, the offered position was not available. In the therapist’s suit
against the hospital for negligent misrepresentation, the hospital argued
that, since the offer was only for at-will employment, the hospital could
have gone through with the hiring, then fired the therapist the next

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The SHRM Essential Guide to Employment Law38

day. The court answered that argument by saying that while the at-will
nature of the offer would affect the amount of damages that could be
awarded, that factor had no bearing on whether the therapist could
bring suit for negligent misrepresentation in the first place.

Employers can protect themselves from negligent misrepresenta-
tion suits brought by disappointed applicants by doing the following:

• describing the job accurately and furnishing a written job descrip-
tion that is complete and up-to-date, without overselling the
position

• giving accurate estimates of job features that are likely to be of
interest or concern to an employee, such as overtime require-
ments and travel

• allowing the applicant an opportunity to review the employee
handbook and all documents the applicant will be required to
sign upon hiring, such as arbitration and noncompete agreements

• describing the hiring process, including who makes the decision
to offer a job and what further approvals, if any, are necessary

• stating clearly and explicitly that the offer is conditioned on
approval by the company’s board of directors or by some other
official, if that is the case

• disclosing other relevant facts, such as that the company is about
to move its facilities, is considering a possible bankruptcy, or is
facing the loss of an important contract that could significantly
affect the applicant’s job

• giving the applicant a firm date by which the company will make
a decision and, if the company has not made a decision by that
deadline, contacting the applicant, informing him or her that the
decision is still pending, and asking whether the applicant wishes
to continue being considered

• informing the applicant promptly once a decision is made
• if the applicant is being rejected, sending a note confirming
the rejection, thanking the applicant for his or her interest, and
making clear that the applicant is no longer under consideration

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The Hiring Process 39

INTERFERENCE WITH CONTRACTUAL RELATIONS
One of the questions every applicant should be asked, both in the
application and during the interview, is whether the applicant is
bound by any restrictive covenants (such as a confidentiality, nonso-
licitation, or noncompete agreement) from previous employment. If
the applicant says yes, a copy of the document should be obtained
and reviewed by employment counsel to determine whether the
applicant can be hired at all and, if so, whether his or her job duties
need to be restricted. If the applicant says no, the applicant should
be required to certify that fact in writing.

An employer that hires a candidate with knowledge that the
employment violates a restrictive covenant with a previous employer
is exposed to possible suit by the previous employer for interference
with contractual relations.

NEGLIGENT EMPLOYMENT
Chapter 1 discusses an employer’s vicarious liability under the doc-
trine of respondeat superior—an employer will generally be held
liable for torts committed by its employees in the course and scope
of employment. But even if the employee’s negligent or willful con-
duct is outside the course and scope of employment, the employer
might still be liable for injury or damages to third parties under the
doctrine of negligent employment.

Take, for example, an apartment building owner who hires a
resident manager and provides him with a passkey to all the units.
The manager later uses the passkey to enter units whose tenants
are on vacation and steal jewelry and electronics. Many courts
would conclude that such criminal activity is outside the course
and scope of the manager’s employment and that therefore the
building owner is not vicariously liable for the thefts. But if it
turns out that the manager had several recent convictions for
theft, which the building owner could easily have discovered but
did not, the building owner may be directly liable under the doc-
trine of negligent hiring.

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The SHRM Essential Guide to Employment Law40

The negligent hiring doctrine is based on the notion that the
employer has a duty to use reasonable care to select employees com-
petent and fit for the work assigned to them and to refrain from
retaining the services of an unfit employee. Particularly in positions in
which an employee is expected to come into contact with the public,
the employer must make some reasonable inquiry before hiring or
retaining the employee to ascertain his or her fitness. (Chapter 18
discusses criminal records checks in more detail.)

ALERT!
The negligent employment doctrine is not limited to hiring. An employer that learns

about the dangerous propensities of an existing employee but who takes no action to

protect the public can be sued for negligent retention.

Ban-the-box rules, discrimination concerns, and possible inva-
sions of privacy all work to restrict an employer’s ability to make
inquiries about criminal history or perform criminal records checks.
On the other hand, the doctrine of negligent employment holds an
employer liable for its employee’s criminal conduct if the employee’s
propensity for misconduct could reasonably have been discovered.
So what should an employer do in the face of this dilemma? Unfor-
tunately, there is no easy answer.

Obviously, the employer must comply with any state and local
restrictions. To the extent those restrictions allow inquiries or a
records check, the employer should do so only if a criminal history
would be relevant to the position being filled, such as involving con-
tact with the public or access to company finances. And if a criminal
history is discovered, the employer should disregard crimes that are
old or otherwise irrelevant to the position being filled.

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CHAPTER 6

• Garnishments

• Withholding Orders

• Tax Levies

• Debtors in Bankruptcy

• Department of Education Garnishments

• Wage Assignments

Wage Attachments
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Businesses, and Organizations. Author: Charles Fleischer Date: 2017

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The SHRM Essential Guide to Employment Law114

The obligations an employer owes its employees under wage and
hour laws (discussed in Chapter 5) are trumped by a variety of
court-ordered garnishments and wage attachments. When an
employee’s wages are garnished or attached, the employer satisfies
its wage-payment obligations by paying a portion of the employ-
ee’s wages to a third party to whom the employee is indebted.

GARNISHMENTS
When an employee’s creditor sues your employee on an unpaid
debt and obtains a court judgment, the creditor is authorized to
execute on the judgment, meaning the creditor can try to col-
lect the judgment out of assets belonging to the employee or
income due or to become due the employee. Collecting a judg-
ment out of an employee’s wages is known as a garnishment.
The cast of characters in that arrangement is the judgment debtor
(your employee), the judgment creditor or garnisher, and you,
the garnishee.

An employer usually first finds out about a garnishment when
served with a court writ. (When the garnishment relates to family
support obligations in a domestic relations case, it is called a with-
holding order.) The employer must respond by filing an answer in
court within the time limit specified in the writ, stating whether
the judgment debtor is in fact an employee and, if so, what his or
her wages are. If the employer states that the judgment debtor is
not an employee, that usually ends the matter, unless the judg-
ment creditor requests a hearing to explore the issue further.

While the employer can assert defenses to the garnishment,
including defenses the employee may have, it should be up to
the employee, not the employer, to litigate the lawfulness of the
garnishment. Employers may wish to include in their handbooks
a disclaimer like the one in Figure 6.1.

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Wage Attachments and Assignments 115

FIGURE 6.1: GARNISHMENT DISCLAIMER

Garnishments, withholding orders and tax levies, are orders attaching a portion
of an employee’s compensation to satisfy a court judgment, support obligation,
or tax obligation of the employee. As required by law, the company will honor all
garnishments, withholding orders and tax levies that appear to be lawful and proper.
The company has no obligation to dispute the lawfulness of any garnishment,
withholding order, or tax levy. An employee who wishes to dispute a garnishment,
withholding order, or tax levy does so at his or her own expense, without involving the
company.

ALERT!
Some employers may be tempted to help their employees evade garnishments

and withholding orders by falsifying information about compensation or by paying

employees off the books. Doing so exposes the employer to criminal prosecution as

well as civil liability.

Attachable Wages
Assuming the judgment debtor is an employee, the employer is
required to withhold the attachable wages of the employee and
remit them periodically to the garnisher (the judgment credi-
tor) until the judgment is paid or the employment ends. The
garnishment applies to any wages that are unpaid at the time of
the attachment, as well as wages that become due in the future.
The attachable wages are limited by the federal Consumer Credit
Protection Act to the lesser of (a) 25 percent of the employee’s
disposable earnings (after deducting tax and similar withhold-
ings and after deducting the employee’s portion of any medical
insurance premiums) or (b) the amount by which the weekly dis-
posable earnings exceed 30 times the federal minimum hourly
wage. The writ of attachment will say exactly how to compute the
amount to be withheld.

Even though an employer is making payments to a garnisher,
the employer must treat the payments as part of the employee’s
compensation for purposes of computing income tax withhold-
ing, FICA, etc. (See Chapter 7 for more details.)

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The SHRM Essential Guide to Employment Law116

Penalties
Penalties for ignoring a garnishment can be substantial. In some cir-
cumstances, the employer might be held in contempt or might be
required to cover the costs and attorneys’ fees incurred by the gar-
nisher to enforce the garnishment. The employer might even have to
pay double wages—once to the employee and again to the garnisher.
In other words, it is a good idea to take garnishments seriously.

If the employee quits or is fired while the garnishment is in effect,
the employer’s obligation to remit attachable wages ends. (In some
states, rehiring an employee within a short time period automati-
cally revives the garnishment.) If several garnishments for the same
employee are received, the employer must honor the garnishments
in the order they are served, paying off the first one completely
before starting payments on the next one.

Federal law prohibits an employer from firing an employee
because the employee’s wages are subjected to attachment for any
one indebtedness within a calendar year. Many states have similar
laws protecting the jobs of garnished employees.

Wages Subject to Garnishment
State law defines what constitutes wages for garnishment purposes.
The definition generally covers bonuses and commissions, as well as
regular compensation. In some states, employee tips may also have
to be included.

Contributions to a pension plan that is subject to the Employ-
ee Retirement Income Security Act (ERISA) are exempt from gar-
nishment, even when state law seems to provide otherwise. ERISA
requires plan documents to contain a provision protecting benefits
from an employee’s creditors, and ERISA preempts (supersedes)
state law relating to pension plans. (ERISA is covered in Chapter 9.)

WITHHOLDING ORDERS
A withholding order is a special kind of wage attachment issued in a
domestic relations case in connection with spousal or child support.

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Wage Attachments and Assignments 117

Alimony and child support used to be the exclusive concerns of
state courts. With enactment of amendments to the Social Security
Act in 1975, which established the child support enforcement pro-
gram (Title IV-D of the act), the federal government got involved
in a big way. Under Title IV-D, each state must develop a formal
program, which is subject to approval by the secretary of health
and human services, for locating noncustodial parents and obtain-
ing child support and support for the spouse (or former spouse)
with whom the noncustodial parent’s child is living. Child support
must include health care coverage whenever it is available to the
noncustodial parent at a reasonable cost, without regard to enroll-
ment or open season restrictions.

Each state has a Directory of New Hires (discussed in Chap-
ter 2) along with support guidelines and collection procedures, in
accordance with the program.

When a current employee who is obligated to make support
payments becomes more than 30 days delinquent, the delinquen-
cy usually results in issuance of a withholding order directing the
employer to withhold the support payments from the employee’s
wages. Within 20 days after an employer hires a new employee,
the employer must submit the employee’s name, Social Security
number, and other identifying information for inclusion in the
state’s Directory of New Hires. If that information matches with
an outstanding withholding order, then the state sends a notice
directing the employer to withhold the required amount from the
employee’s wages.

As with garnishments, the federal Consumer Credit Protection
Act also sets limits on the amount of wages that may be withheld
pursuant to a withholding order. However, the limit may be as
high as 65 percent of disposable earnings if the employee is in
arrears in support payments and has no new spouse or dependent
children to support.

Pursuant to the a state’s Title IV-D program, withholding
orders will direct the employer to remit withheld payments not to

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The SHRM Essential Guide to Employment Law118

the employee’s child or to the parent who has custody of the child,
but instead to the state agency or court that monitors enforcement
of such orders.

Employers are prohibited from retaliating in any way, such as by
firing or disciplining an employee who is the subject of a withhold-
ing order. States may, however, permit employers to charge a fee
for processing withholding orders.

(See also Qualified Medical Child Support Orders in Chapter 10.)

TAX LEVIES
When your employee fails to pay his or her federal income taxes,
the Internal Revenue Service (IRS) can collect the unpaid taxes
from you, the employer, by serving you with a levy. Levies, like
garnishments, require the employer to pay to a third party (in this
case, the U.S. Department of Treasury) some portion of the wages
otherwise due the employee to extinguish the employee’s debt to
that party. Corporate officials who are responsible for payroll mat-
ters can have personal liability for disregarding a tax levy.

State law also provides means for collecting delinquent taxes
through garnishment of salary or wages. The procedures and
exemptions differ from state to state.

If your employee disputes the validity of the levy and sues you
for unpaid wages, you are discharged from any obligation or lia-
bility to the employee because you made payments in accordance
with an IRS levy.

ALERT!
Under a 2015 amendment to the Internal Revenue Code, a taxpayer who has a seri-

ously delinquent tax debt can have his or her passport revoked or limited. A serious-

ly delinquent tax debt is a debt greater than $50,000 and as to which the IRS has

filed a lien or issued a levy. The impact on employees who travel internationally for

a living could obviously be substantial.

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Wage Attachments and Assignments 119

DEBTORS IN BANKRUPTCY
Chapter 13 of the federal Bankruptcy Code is titled “Adjustment
of Debts of an Individual with Regular Income.” Under Chapter
13, a debtor with a regular income may ask a bankruptcy court to
prohibit creditors from suing him or her or otherwise attempting
to collect debts. In exchange, the debtor must propose a plan to
pay down the debts out of ongoing disposable income (generally
defined as income not reasonably necessary for the support of the
debtor). The plan can last no more than three years, and it must be
designed so that the creditors receive at least as much under the plan
as they would have received had the debtor simply brought all assets
into court in a Chapter 7 liquidation.

ALERT!
Federal law prohibits discrimination against persons who have filed for bankruptcy.

If the bankruptcy court confirms (approves) the plan, then the
court will issue an order directing the debtor’s employer to pay
specified amounts to a Chapter 13 trustee. The trustee, in turn,
makes periodic payments to the creditors. Bankruptcy orders are
exempt from the limitations imposed by the Consumer Credit
Protection Act.

DEPARTMENT OF EDUCATION GARNISHMENTS
Under the federal Higher Education Act, the U.S. Department
of Education (DOE) may garnish the disposable pay of individu-
als who are delinquent in repaying student loans made, insured, or
guaranteed by the federal government. Under the garnishment pro-
cedure, the department issues a withholding order to the employer.
If the employer fails to withhold in accordance with the order, the
employer can be sued both for the amount that was not withheld
and for attorneys’ fees and punitive damages. The term disposable
pay is defined as compensation remaining after deduction of any
amounts required by law to be withheld.

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The SHRM Essential Guide to Employment Law120

Employers may not retaliate by discharging or disciplining an
employee whose pay is subject to a DOE withholding order. Employ-
ers are also prohibited from refusing to hire a prospective employee
because he or she is the subject of a DOE withholding order.

WAGE ASSIGNMENTS
An assignment of wages is different from a garnishment. Garnish-
ments are government orders with which the employer must comply.
Assignments, on the other hand, are private agreements between
an employee and a third person—usually a creditor to whom the
employee owes money—that may or may not be valid, depending
on whether they comply with state law.

State law often restricts the ability of an employee to make a volun-
tary assignment of wages. It may also impose specific requirements
and procedures to make a valid assignment. The safest practice is
for an employer to adopt a uniform policy and distribute it to all
employees, such as through the employee handbook, stating that
the employer will not honor any wage assignments and—except as
otherwise required by law—will pay all wages directly to the employ-
ee without regard to any assignment. See Figure 6.2 for a suggested
handbook provision.

FIGURE 6.2: ASSIGNMENT OF WAGES PROVISION

Except for garnishments and similar government orders, all net wages earned by an
employee are payable to the employee only. Employees are prohibited from making any
assignments of their wages. The company considers any attempted assignment of wages
to be void and will not honor any attempted assignment.

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Tax Considerations

• Deductibility of Wages and Benefits

• Limitations on Deductibility

• Independent Contractors

• Federal Withholding Requirements

• Tips

• Other Taxable Payments

• State Withholding Requirements

• Earned Income Tax Credit

• Deposit and Reporting Requirements

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AN: 1697333 ; Charles Fleischer.; The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals, Managers, Businesses, and Organizations
Account: s4264928.main.eds

Book: The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals, Managers,
Businesses, and Organizations. Author: Charles Fleischer Date: 2017

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The SHRM Essential Guide to Employment Law122

Tax considerations drive, or at least help shape, any number of
transactions in the business world. The same is true for the
employer-employee relationship. With combined federal and
state income tax rates at or above 40 percent, the deductibility
of employer expenditures becomes a critical factor in a business’s
survival. At the same time, employees look to limit or defer tax on
their employment-related benefits. The result is a complex web of
employer opportunities and requirements.

DEDUCTIBILITY OF WAGES AND BENEFITS
Wages and benefits paid to employees are deductible from the
employer’s gross income for purposes of computing the employ-
er’s federal and state income tax, so long as the amounts are rea-
sonable, ordinary, and necessary. This means, for example, that for
a corporate employer that is in the 39 percent marginal federal tax
bracket and the 7 percent state tax bracket, 46 cents of each addi-
tional dollar in wages and benefits are effectively paid by federal
and state governments in the form of reduced tax liabilities.

QUICK TIP
As an alternative to taking a deduction for wages, an employer may claim a work oppor-

tunity tax credit (WOTC) against its income tax for a portion of the first- and second-year

wages paid to targeted groups of hard-to-employ individuals, such as those receiving

benefits under the Temporary Aid for Needy Families (TANF) program or the Supplemental

Nutrition Assistance Program (SNAP), long-term unemployed individuals, summer youth

employees, and certain veterans and ex-offenders. The individuals must be certified as

qualified for the credit through the employer’s State Workforce Agency. The amount of the

credit varies, depending on which targeted group the specific individual is a member of

and the number of hours the individual was employed during the year for which the credit

is being claimed. See Internal Revenue Service (IRS) Forms 8850 and 5884 and instruc-

tions. As of this writing, the WOTC is scheduled to expire in December 2019.

As a general rule, whenever the employer takes a deduction for a
wage or benefits payment, the employee who receives the payment

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Tax Considerations 123

must include it in his or her own gross income for federal and state
tax purposes. The IRS keeps track of these shifting tax burdens by
requiring employers to report employee payments on Form W-2
and payments to independent contractors on Form 1099.

However, the general rule has important exceptions. One excep-
tion is for items of deferred compensation—compensation that the
employee cannot immediately enjoy, such as qualified retirement
plan contributions. It may make little difference to an employer
whether compensation to employees is in the form of wages or partly
in wages and partly in the form of a qualified retirement plan con-
tribution, since both are fully deductible if they are within the limits
imposed by law. But it can make a big difference to the employee
because of the time value of money.

Take, for example, an employee whose marginal tax bracket for
federal and state tax purposes is 40 percent. For each additional
dollar received in wages, 40 cents is paid to the government, and
only 60 cents is left to save or spend. (The employee’s portion of
FICA and Medicare reduce even more the amount left to save or
spend.) And if that 60 cents is invested, any investment income is
subject to additional taxation.

In contrast, a dollar of deferred compensation is not subject to
immediate tax, so the full dollar can be invested without reduc-
tion for taxes. In addition, earnings on that dollar—called inside
build-up—are not subject to immediate tax either. In the end, the
employee should have a greater nest egg than if he or she had
received and invested after-tax wages. Of course, that nest egg is
subject to income tax as it is withdrawn during retirement, but in
most cases, the employee is still better off, particularly since his or
her tax bracket in retirement is probably lower than when actively
working.

There are other important exceptions to the general rule that
whatever the employer deducts, the employee must report. For
example, employer contributions to group health insurance, health
savings accounts, and group term life insurance up to $50,000 in

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The SHRM Essential Guide to Employment Law124

coverage (all discussed in Chapter 10) are generally deductible by
the employer but not includable in the employee’s income.

Some noncash fringe benefits may be deductible for the employer
but, subject to specified limits and conditions, not includable in the
employee’s gross income (see IRS Publication 15-B). These include
the following:

• no-additional-cost service, which is a service to an employee that
the employer normally provides to its customers, as long as doing
so is without substantial additional cost to the employer

• employee discounts on goods (provided that the discount does
not exceed the employer’s profit margin) and on services (pro-
vided that the discount does not exceed 20 percent of the retail
price)

• working condition benefits, such as upscale office appointments
and use of a company car for business purposes

• de minimis benefits, such as use of the copying machine or office
supplies for personal purposes and such as eating facilities at or
near the employer’s premises (so long as the facility is operated on
at least a break-even basis and the employer does not discriminate
in favor of highly compensated employees)

• transportation benefits, including a transit pass, parking, bicycle
expenses, or cash reimbursements for those items (up to specified
statutory limits)

• cellphones provided primarily for business reasons, even though
employees may use their phones for personal purposes as well

Federal tax law allows companies to deduct all ordinary and neces-
sary expenses of carrying on a trade or business. These include reim-
bursements to employees who have incurred expenses on behalf
of their employers. But special rules apply to transportation and
travel expenses. For example, while companies can reimburse their
employees for, and then deduct, actual expenses incurred in operat-
ing an automobile for business, IRS regulations have long allowed
use of standard mileage rates in lieu of providing substantiation for

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Tax Considerations 125

actual expenses. (For 2017, the standard rate for business use of an
automobile is 53.5 cents per mile.)

The IRS takes a similar approach to per diem business travel
expenses (meals, lodging, and incidental expenses), allowing stan-
dard reimbursement/deduction rates instead of requiring substan-
tiation of actual expenses. Employers may use one of two methods
to reimburse employees, either of which satisfies the substantia-
tion requirement. One, called the high-low method (available only
for travel within the continental U.S.), allows a deduction of $282
per day for specified high-cost areas, and $189 for all other areas
for 2017. See Internal Revenue Bulletin 2016-41, available on the
IRS’s website. Alternatively, employers may use the federal per diem
rates method, based on location-specific rates established by the fed-
eral government for cities within the continental U.S. (the CONUS
rates) and outside the continental U.S. (the OCONUS rates). The
U.S. Government Services Administration (GSA) establishes and
publishes these rates.

The deduction for food, beverages, and entertainment (but not
lodging) is limited to 50 percent of the otherwise deductible amount,
subject to a number of exceptions. Amounts paid to employees in
excess of deductible amounts constitute income to the employees
and are subject to withholding requirements and payroll taxes.

LIMITATIONS ON DEDUCTIBILITY
Most business corporations are classified as C corporations (C corps)
for federal income tax purposes. C corps are separate taxable enti-
ties whose taxable income is determined by starting with the cor-
poration’s gross revenue and deducting the cost of goods sold,
salaries, rent, and other expenses. After paying tax on the resulting
net income, the corporation may choose to distribute some or all of
what is left to its shareholders in the form of a dividend. Dividends
represent taxable income to the shareholders.

Because a C corp is a taxable entity, income is taxed twice on its
way through the corporation to its shareholders: one tax is paid at the

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The SHRM Essential Guide to Employment Law126

corporate level, and a second tax is paid at the individual shareholder
level. Particularly in the case of small, closely held corporations, in
which the shareholder-owners are also the directors, officers, and
employees, this double taxation burden is problematic.

One way to avoid double taxation is to accumulate earnings inside
the corporation and not pay dividends. But if the corporation accu-
mulates earnings beyond its reasonable business needs, the corpora-
tion may end up owing an accumulated earnings tax that is designed
to stop that very practice.

Another way to avoid double taxation is to elect S corporation
(S corp) status. (This is discussed in more depth in Chapter 1.)
Although S corps are generally not subject to tax as separate entities,
there are restrictions on who may elect S status. There may also be
undesirable tax consequences to S corp owners.

Yet another way is to pay year-end bonuses to owner-employ-
ees. Through careful calculation, the bonuses can be set so that the
corporation has virtually zero taxable income, and it pays almost
no tax. (It is usually not possible to reach exactly zero, since some
cash expenditures during the year, such as equipment purchases and
meals, may not be fully deductible, but they reduce the amount of
cash available to pay bonuses.) The owner-employees, of course, will
owe tax on the bonuses along with whatever other compensation
they receive, but that is still just one tax, not two.

The taxpayer corporation has the burden of proving that its com-
pensation payments are reasonable under Internal Revenue Code
§162. And particularly when the taxpayer corporation is controlled
by the employees receiving the compensation, the payments are
subject to careful scrutiny by the IRS to be sure that they truly
represent (deductible) compensation for services rendered, rather
than disguised (nondeductible) dividends. In determining whether
compensation is reasonable, the courts look at a number of factors,
including the following:

• the employee’s qualifications
• the nature, extent, and scope of the employee’s work

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Tax Considerations 127

• the size and complexity of the employer’s business
• a comparison of salaries paid with the employer’s income
• prevailing rates of compensation for comparable positions in com-
parable companies

• the amount of compensation paid to the employee in previous
years

• whether the employer offers pension and profit-sharing plans to
its employees

These factors are applied on an individual employee basis, rather
than in the aggregate to a group of employees. In other words, that
the company’s overall deduction for compensation is reasonable
does not matter; each individual employee’s compensation must be
reasonable as well.

QUICK TIP
Payments to partners in a partnership and to members of a limited liability company are

generally treated as nondeductible distributions rather than deductible wages and sala-

ries. This occurs even when the partner or member works for the partnership or limited

liability company.

Public Companies
Under Internal Revenue Code §162(m), publicly held corporations
also face limits on the amount they can deduct. In general, the code
places a $1 million-per-year cap on deductions for remuneration paid
to covered employees—defined as the chief executive officer and the
four highest-paid officers other than the CEO—unless the board of
directors takes special steps to authorize higher compensation.

Closely related to these income tax caps are several execu-
tive compensation disclosure requirements. The Securities and
Exchange Commission (SEC) requires each publicly held company
to disclose in its annual proxy statement the amount of compen-
sation paid to its high-level executives—its chief executive officer,
chief financial officer, and its three other most highly compensat-

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The SHRM Essential Guide to Employment Law128

ed executive officers. The company also must disclose the criteria
used in reaching executive compensation decisions and the rela-
tionship between the company’s executive compensation practices
and corporate performance.

And a 2010 amendment to the Dodd-Frank Act, known as the
say-on-pay rule, requires public companies periodically to disclose
in its proxy statements, and give shareholders a vote on, executive
compensation and any golden parachute payments, although the
vote in not binding on the company.

Dodd-Frank also requires the SEC to issue a pay-ratio rule, under
which most public companies would have to disclose the following:

• the median of the total annual compensation of all employees
(except the CEO)

• the CEO’s total annual compensation
• the ratio of the above two numbers

In 2015 the SEC issued final rules as required by Dodd-Frank,
and in September 2017, the SEC issued further interpretive guid-
ance on the rules.

INDEPENDENT CONTRACTORS
As pointed out in Chapter 1, employers sometimes try to classify
their workers as independent contractors to avoid the laws and reg-
ulations that apply to employees. When a worker is misclassified as
an independent contractor, the results can be financially ruinous for
the employer. For example, employees (but not independent con-
tractors) are subject to federal and state income tax withholding,
they are entitled to have employer FICA contributions made on
their behalf, they are covered by workers’ compensation and unem-
ployment insurance for which the employer must pay premiums,
and they are entitled to participate in the employer’s various ben-
efit plans. So if an employer wrongly treats a group of employees
as independent contractors over a period of years, the total cost of
remedying the error can be substantial.

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Tax Considerations 129

Traditionally, the question whether a worker is an employee or an
independent contractor turns on whether the employer has a right
to control the manner in which the worker does his or her job. This
is sometimes known as the common-law test. To determine whether
there is a right of control, a number of subsidiary factors are consid-
ered, such as who sets the worker’s hours, whether the worker works
for one or several employers, whether the worker or the employ-
er provides necessary tools and workspace, whether the worker has
specialized knowledge or requires a license or a professional degree
to do the job, and so on. The problem with the common-law test
is its lack of certainty. If the employer guesses wrong, disaster can
strike.

In an effort to resolve this uncertainty, Congress enacted legisla-
tion to provide a safe harbor for employers. Under these safe harbor
provisions, an employer’s treatment of a worker as an independent
contractor is relatively safe from IRS challenge if the employer meets
the following criteria:

• It has never treated the worker as an employee.
• It filed all required tax reports and returns relating to the worker
on a timely and consistent basis.

• It had a reasonable basis for treating the worker as an independent
contractor.

The employer will be considered to have a reasonable basis for
treating the worker as an independent contractor if the employer
relied on a court decision involving facts similar to the employer’s
own or if the employer relied on rulings or technical advice from the
IRS. The employer can also demonstrate a reasonable basis if a signif-
icant segment of the industry in which the worker is engaged has a
long-standing recognized practice of treating such workers as indepen-
dent contractors. A significant segment of the industry is 25 percent.
However, the employer will not have a reasonable basis for treating
a particular worker as an independent contractor if the employer has
other workers doing similar jobs who are treated as employees.

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The SHRM Essential Guide to Employment Law130

While the IRS can still challenge a safe harbor classification,
the burden of proving that the classification is wrong falls on
the IRS. To ensure that the safe harbor provisions are fully
effective, the IRS must provide the employer with a written
notice of the provisions when it audits an employer in connec-
tion with a worker classification issue. The IRS is also prohib-
ited from issuing regulations or rulings dealing with the safe
harbor provisions.

CASE STUDY:
SAFE HARBOR PROVISION APPLIED
A company licensed as a residential service agency wants to provide
nonskilled, home health aides for the elderly in the Washington,
D.C., area. Before opening for business, the company conducts a
survey of some 20 to 30 local competitors. It finds that approximately
80 percent of the agencies surveyed treat their aides as independent
contractors, while only 10 percent treat them as employees. (The
other 10 percent did not respond.) Upon opening additional offices
in Baltimore and Richmond, the company conducts similar surveys
in those areas and obtains similar results. Based on these surveys,
the company classifies its workers as independent contractors. The
company’s reliance on its surveys is reasonable, and the company’s
classification of its aides is accepted by the court.

Another approach to resolving the employee/independent con-
tractor issue for federal tax and withholding purposes is to ask the
IRS to decide. Upon filing Form SS-8 (either by the employer or
by the worker whose status is in doubt), the IRS will determine
whether the worker is an employee or an independent contractor.
The determination can then be relied on for safe harbor pur-
poses. It is probably fair to assume that the IRS resolves close
questions by concluding that the worker is an employee, not an
independent contractor. So as a practical matter, the SS-8 route
may not be very helpful to employers.

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Tax Considerations 131

Yet another solution is to participate in the IRS’s Voluntary Clas-
sification Settlement Program. Employers that want to voluntarily
change the prospective classification of a worker or group of work-
ers from independent contractors to employees file IRS Form 8952
and enter into a closing agreement with the IRS. Under the closing
agreement, the employer agrees to treat the workers as employees
for future tax periods. The IRS in turn limits the employer’s pre-
vious tax liability to 10 percent of what would have been due on
compensation paid to the workers for the most recent tax year. In
addition, the IRS waives penalties and interest, and it agrees not to
conduct an employment tax audit with respect to those workers.

Suppose an employer incorrectly classifies a worker as an inde-
pendent contractor when, in reality, the worker should have
been treated as an employee. As an independent contractor, for
2017 the worker pays a self-employment tax equal to 15.3 per-
cent of earnings up to $127,200 (which equals $19,461.60),
plus an additional Medicare tax of 2.9 percent on any earnings
above $127,200. Had the worker been properly classified as an
employee, however, the employee would have paid only half the
$19,461.60 as the employee’s share of FICA, and the employer
would have paid the other half. So the question arises wheth-
er, as a result of misclassification, the worker has a claim against
the employer for the $9,730.80 that the employer should have
matched but did not.

In a case from the U.S. 11th Circuit Court of Appeals (headquar-
tered in Atlanta), the court ruled that FICA is a tax statute that only
the federal government can enforce and that it does not create a
private right of action. In other words, so far as FICA is concerned,
an employer may be liable to the government for misclassification,
but the employer is not liable to the misclassified employee.

FEDERAL WITHHOLDING REQUIREMENTS
We are all used to seeing a long list of deductions and with-
holdings on our pay stubs. Some of them are voluntary, like the

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The SHRM Essential Guide to Employment Law132

employee portions of retirement plan contributions and health
insurance premiums. Others are required by law.

How does the employer know how much to withhold? And
what is done with the money? The first step in the process is
for the employer to obtain an Employer Identification Number
(EIN). The number has nine digits, as do Social Security num-
bers, but instead of being in the format 123-45-6789, an EIN is
formatted 12-3456789. EINs are obtained by filing Form SS-4
with the IRS and may also be obtained by phone or fax or by
completing an online application.

The next step is for the employee to submit IRS Form W-4 and
the applicable state equivalent to the employer. This must be done at
hiring time and whenever the employee’s tax withholdings need to be
changed. Form W-4 calls for basic information, such as the employ-
ee’s name, address, Social Security number, and marital status. It also
contains a worksheet for figuring the number of exemptions to be
claimed on the employee’s tax return and various other factors that
affect the employee’s tax liability. These factors, known as allowances,
are then totaled and entered on the form. Finally, Form W-4 permits
the employee to claim a complete exemption from federal income tax
withholding under certain conditions.

ALERT!
While an employer cannot challenge the allowances claimed by the employee, the IRS cer-

tainly can. The IRS may request an employer to provide copies of Forms W-4 for specific

employees. If the IRS concludes that an employee is not entitled to claim married status

or is not entitled to the allowances he or she claimed on the W-4, the IRS will instruct the

employer (by what is commonly known called a lock-in letter) as to how to withhold for

the future.

When is an employee considered married? According to the IRS’s
Publication 15 (also known as Circular E), a marriage of two individu-
als is recognized for federal tax purposes if the marriage is recognized
by the state, possession, or territory of the United States in which the

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Tax Considerations 133

marriage is entered into. As a result of the Supreme Court’s 2015
decision in Obergefell v. Hodges, states no longer have a choice about
recognizing same-sex marriages.

The employer has four basic federal tax obligations relating to
employees:

• federal income tax
• Social Security tax (FICA)
• Medicare tax
• unemployment insurance contributions

The first three are discussed below. Unemployment insurance is
covered in Chapter 12.

Federal Income Tax
With Form W-4 in hand, the employer turns to a set of tables issued
by the IRS in Publication 15 to determine how much to withhold
from each paycheck. The tables are based on four variables:

• the frequency of paydays (for example, weekly, biweekly)
• the employee’s marital status as shown on Form W-4
• the amount of the wage payment
• the number of allowances claimed by the employee

Publication 15 (updated annually) is really the employer’s bible
when it comes to federal employment tax matters. It can be viewed
and downloaded from the IRS’s website.

Social Security (FICA) Tax
The tax rate for an employee is 6.2 percent on a maximum wage base of
$128,400 for calendar year 2018, which translates to a maximum with-
holding of $7,960.80. The employer must match whatever amount is
withheld from the employee. So for an employee whose annual salary
is at least $128,400, the total payment on account of Social Security
is $15,921.60, half of which is withheld from the employee and half
of which is the employer’s own matching contribution. The amount

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The SHRM Essential Guide to Employment Law134

to be withheld from each paycheck is simply 6.2 percent of the gross
payment until the maximum amount $7,960.80 has been withheld.
These rates and the wage base are subject to periodic change.

Medicare Tax
The Medicare tax rate is 1.45 percent of all wages for the employee
and a matching amount of 1.45 percent for the employer. There is no
wage base cap—the Medicare tax applies to all wages. The amount to
be withheld from each paycheck is 1.45 percent of the gross payment.

ALERT!
Owner-employees of S corporations engaged in personal services (for example, doctors,

lawyers, accountants) may try to reduce their payroll tax obligations by paying themselves

unreasonably small salaries (which are subject to payroll taxes) and treating the remaining

corporate profits as shareholder income (which is not subject to payroll taxes). When this

scheme comes to the IRS’s attention, it will recharacterize all or most of the corporate

profits as salary.

Exceptions
In general, all employees who are U.S. citizens or resident aliens are
subject to withholding for federal income tax, FICA, and Medicare.
Publication 15 contains a list of situations in which special rules apply,
including the following:

• nonresident aliens
• household employees
• clergy
• disabled workers
• deceased workers

Independent contractors are also exempt from withholding
requirements. However, a few, limited types of workers called stat-
utory employees are required by law to be treated as employees, even
though they might otherwise qualify as independent contractors. (See
Chapter 1 for more information.)

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Tax Considerations 135

QUICK TIP
Workers’ compensation benefits (discussed in Chapter 11) are exempt from income tax.

Irregular Pay
Questions sometimes arise regarding withholding on back wages paid
to an employee for some earlier year. Suppose, for example, that the
employer and employee are in dispute over the exact amount due, and
the dispute gets resolved in court, years after the employee did the
work. Or suppose back pay is awarded in connection with a discrimi-
nation suit or an unfair labor practice complaint. Should the employer
treat the wages as paid when they were originally due or as paid in the
year they were actually paid? (The answer can make a big difference
if the tax rates or FICA cap changed.) The IRS has long taken the
position that the wages should be treated as paid currently, and the
Supreme Court affirmed that position in a 2001 case involving the
Cleveland Indians baseball club.

Other taxable benefits subject to withholding include bonuses,
commissions, expense reimbursements (unless the reimbursement
is pursuant to an arrangement that requires the employee to verify
expenses), payments in kind, meals, and lodging (unless provided for
the employer’s convenience on the employer’s premises).

TIPS
In addition to withholding for wages, the employer must withhold
on account of tips. Employees are required to report tips to their
employer no later than the 10th of the month after the month the tips
are received, unless tips for the month are less than $20. The report
should include not only cash tips the employee receives directly from
customers but also tips received in a sharing arrangement with other
employees and tips paid by credit card. Employees may use Form
4070 (contained in IRS Publication 1244) or a similar statement to
report tips to their employers.

The employer then must figure tax withholdings, payroll taxes,
and garnishments just as if the tips were wages paid by the employer.

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The SHRM Essential Guide to Employment Law136

However, the employer is not liable to taxing authorities or garnish-
ers for more money than actually comes into the employer’s hands.
Employers that operate large food and beverage establishments (defined
as employing more than 10 people who work more than 80 hours per
week in the aggregate) must file Form 8027 annually with the IRS
showing total tips.

The IRS has developed a Tip Rate Determination and Education
Program in which employers may participate. The program primar-
ily consists of two voluntary agreements developed to improve tip
income reporting: the Tip Rate Determination Agreement and the
Tip Reporting Alternative Commitment. For more information, see
IRS Publication 3144.

OTHER TAXABLE PAYMENTS
Suppose an employee is laid off under circumstances that could give
rise to a claim of abusive discharge. Fearing a claim, the employer
obtains a written release of claims from the employee and, as consider-
ation for the release, makes a lump sum payment to the employee. Or
suppose the employee refuses to sign a release and instead files a law-
suit that results in a money judgment against the employer. Are those
payments deductible by the employer and taxable to the employee?
Are they subject to withholding and reporting requirements? To pay-
roll taxes?

It has long been the rule that the proceeds of a personal injury
action (a suit claiming injury to the body or person of the suing party)
are excluded from taxation and from any withholding or reporting
requirements. In the past, the parties to an employment dispute
often characterized payments in settlement of the dispute as damages
for emotional distress, injury to reputation, and so on to avoid tax
obligations.

In 1996, the Internal Revenue Code was amended to narrow the
exclusion. The code now states that gross income does not include
damages received on account of personal physical injuries or physical
sickness. A private letter ruling by the IRS defines personal physical

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Tax Considerations 137

injuries as “direct unwanted or uninvited physical contacts resulting in
observable bodily harms such as bruises, cuts, swelling, and bleeding.”

As a result of the 1996 amendment, most payments in employment
dispute situations will be includable in the recipient’s gross income for
federal income tax purposes. At the same time, the payments will be
deductible by the employer. In addition, since damages in an employ-
ment dispute are usually based on lost wages, the payments are gener-
ally viewed as the equivalent of employee compensation and therefore
subject to wage withholding and FICA requirements.

When an employer and employee settle an employment dispute,
they may agree to treat only a portion of the settlement payment as
wages and allocate the remainder to emotional distress. The IRS will
respect such an allocation for wage withholding and FICA purposes,
so long as the allocation is reasonable, but the IRS will nevertheless
view the entire payment as taxable income to the employee. There-
fore, the employer should report the portion allocated to wages as
Form W-2 income subject to withholding and payroll taxes, and the
portion allocated to emotional distress as Form 1099 income not sub-
ject to withholding or payroll taxes.

Sometimes the employer agrees to pay the employee’s attorney’s
fees as part of a settlement. Before the American Jobs Creation Act
of 2004, most courts took the view that the attorney’s fee portion
of the settlement was taxable income to the employee, even when
the attorney’s fee portion was paid directly to the employee’s lawyer.
The American Jobs Creation Act now provides that, in most employ-
ment disputes, the attorney’s fee portion is not taxable income to the
employee, although it is taxable, of course, to the lawyer.

When negotiating a settlement agreement, a prudent employer
should insist that the agreement explicitly state how all payments are
being allocated and how they will be reported for tax purposes. If the
agreement attempts to characterize any portion of the payment as
nontaxable (a risky arrangement), the agreement should at least con-
tain a provision requiring the employee to indemnify the employer
should the IRS later recharacterize the payment as taxable.

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The SHRM Essential Guide to Employment Law138

QUICK TIP
The settlement of an employment dispute should be in writing and include a provision

by which the employee, former employee, or applicant for employment clearly releases

all employment-related claims against the employer. If the release is intended to cover

an actual or potential age discrimination claim, the release must conform to special rules

contained in the Age Discrimination in Employment Act. (See Chapter 16 for specifics on

age discrimination.)

Garnishments
When an employer satisfies a garnishment by paying a portion of the
employee’s salary to the employee’s creditor, the employer is discharg-
ing a debt the employee owes. Economically, it is as if the employer
paid wages to the employee and the employee, in turn, paid down the
debt. So for tax withholding and reporting purposes, a garnishment
payment is treated just like a wage payment to the employee.

STATE WITHHOLDING REQUIREMENTS
Most states impose their own taxes on income and require employ-
ers to withhold against that tax. State withholding requirements
can get confusing, particularly for employees who commute to
work from out of state. For each employee, the first step is to
determine the state or states in which the employee may have to
file a state income tax return. If the employee both lives and works
in the same state, then only that state’s withholding requirements
apply. If the employee lives in one state but commutes to work in
another state, then both states’ withholding requirements need to
be considered, since the employee potentially has tax filing obliga-
tions in both states. (Those few states that do not have any income
tax at all can be ignored.)

Even though an employee may have a tax filing obligation in a
particular state, the employer might not be required to withhold
under that state’s law. This situation could occur if the employ-
er itself is not subject to the jurisdiction of that particular state,
because the employer has no office in that state and does not do

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Tax Considerations 139

business in that state. Take, for example, a Maryland company
whose employees all work in Maryland, but some of whom live
in Virginia. Virginia might like the company to withhold from its
Virginia employees, but if the company is not subject to Virginia’s
jurisdiction, Virginia has no power to compel the company to do
so. At the same time, Maryland, where the company is subject to
jurisdiction, has no interest in enforcing Virginia’s tax laws.

The company could withhold Maryland income tax from all its
employees. But this would mean that its Virginia employees would
face a big Virginia tax bill not covered by withholdings, plus they
would need to deal with Maryland to get back some or all of their
Maryland withholdings. To resolve this situation, Maryland and
Virginia have entered into reciprocal agreements with each other.
Under these agreements, the Maryland company in the example
above withholds Maryland tax from its Maryland employees and
Virginia tax from its Virginia employees.

Many other states that have common borders have entered into
reciprocal agreements similar to those between Maryland and Vir-
ginia. Contact your state employment tax office for details.

QUICK TIP
At least one state (New Jersey) takes the view that a company that has no offices in the

state but that employs a teleworker there is subject to New Jersey’s jurisdiction for tax

and corporate purposes. (See Chapter 20 for details.)

EARNED INCOME TAX CREDIT
The Earned Income Tax Credit (EITC) is a tax credit available to
low- and moderate-income employees. The amount of the credit
ranges from a few hundred dollars for an employee with no depen-
dent children up to $6,318 for an employee with three or more
dependent children. The credit is refundable, meaning that if the
credit reduces the employee’s tax liability below zero, the employ-
ee owes no tax and the government pays the amount of the nega-
tive tax to the employee.

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The SHRM Essential Guide to Employment Law140

Employers must notify their employees who have no federal income
tax withheld that they may be able to claim a tax refund because of the
EITC. The back of copy B of Form W-2 contains the required notice.

DEPOSIT AND REPORTING REQUIREMENTS
All employment-related federal tax payments—taxes withheld from
employees, and employers’ and employees’ Social Security and Medi-
care taxes—must be deposited using electronic funds transfer (EFT).
Deposits are made using either the IRS’s Electronic Federal Tax Pay-
ment System (EFTPS) or by having a third party, such as the employ-
er’s tax professional, financial institution or payroll service, make the
deposit. Employers must enroll in EFTPS to use that system.

The frequency of deposits depends on the amount of taxes
involved. In general, if the annual amount is less than $50,000,
the deposits are made monthly, and if the amount is $50,000 or
more, the deposits are made semiweekly. However, if an employer
accumulates a tax liability of $100,000 or more on any day during
a deposit period, the deposit must be made by the next banking
day. An employer owing less than $2,500 in employment taxes per
quarter may remit those taxes with its quarterly return, rather than
depositing the taxes separately.

The rules governing employment taxes under the Federal Unem-
ployment Tax Act (FUTA) are covered in Chapter 12.

Trust Fund Penalty
Taxes withheld from employees are considered to be held by the
employer in trust. Rather than just owing the money to the IRS, the
employer is treated as having a fiduciary duty to ensure that deposits
get made as required by law. If the employer fails to do so, the IRS
may impose a trust fund penalty equal to the amount of the unde-
posited tax in addition to collecting the tax itself.

The corporate shield offers no protection when it comes to
the trust fund penalty, since any person responsible for collecting,
accounting for, or depositing the tax will have personal liability for

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Tax Considerations 141

the penalty. Responsible persons can include corporate officers,
employees, directors, anyone who signs checks or has authority for
spending business funds, and even volunteers of nonprofit orga-
nizations. (Volunteers of tax-exempt organizations are relieved of
personal liability if they are serving in an honorary capacity, if they
do not participate in the day-to-day or financial operations of the
organization, and if they had no actual knowledge of the failure to
withhold or make the required deposit—so long as there are at least
some remaining responsible persons left to pay the taxes.) Liability
for withholding taxes and for trust fund penalties is not discharge-
able in bankruptcy.

QUICK TIP
Even though a single-member limited liability company is considered a disregarded

entity so that its owner is treated as a sole proprietorship for federal income tax pur-

poses, under IRS regulations the owner of the LLC is not liable for the LLC’s share

of employment taxes (although he or she would be liable for taxes withheld from

employees).

W-2s, 1099s and K-1s
No later than January 31 of each year, employers must issue IRS
Form W-2 to each employee, reporting the employee’s compen-
sation for the previous calendar year. Copies of the Forms W-2 are
then transmitted to the Social Security Administration using IRS
Form W-3. If an employee quits or is terminated during the year,
the employer must, if so requested by the employee, issue a W-2
within 30 days. Forms W-2 may also be filed electronically.

Independent contractors that have been paid more than $600
during the previous calendar year are issued Form 1099-MISC by
January 31. Although corporate independent contractors (including
limited liability companies that have elected to be taxed as corpo-
rations) do not have to be issued Forms 1099, payments to attor-
neys, regardless of their corporate status, do have to be reported on
Forms 1099.

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The SHRM Essential Guide to Employment Law142

Partners in general partnerships, members of LLCs that have not
elected to be taxed as corporations, and shareholders of corpora-
tions that have elected S corporation status are issued Schedule K-1
(Form 1065) at the time the partnership, LLC, or S corp files its
own tax return. (See Chapter 1 for more information.)

Payroll Services
For very modest charges, a commercial payroll service provides the
following:

• calculates each employee’s deductions and withholdings
• issues net checks to employees using the employer’s preprinted
check stock (or makes deposits directly to the employees’ bank
accounts)

• provides a paper or electronic check stub to each employee show-
ing current and year-to-date earnings, deductions, withholdings,
and leave accruals

• makes all required federal and state tax deposits
• prepares all federal and state reports
• prepares Forms W-2 and appropriate transmittal forms

Particularly for smaller employers, this service is difficult to beat.
Be cautioned, however, that the employer will be held responsible
if the payroll service fails to make required tax deposits. For that
reason, it is a good idea to check with the IRS periodically to be sure
no deficiencies exist. The address on file with the IRS for mailing
deficiency notices should be the employer’s address, not that of the
payroll service.

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CHAPTER 5

• Minimum Wages

• Overtime

• Alternatives to Overtime

• Exemptions from Overtime

• Settling FLSA Wage Disputes

• Other Wage Regulations

• Child Labor

• Priority of Wages and Benefits in Bankruptcy

• Anti-Trust Considerations

Wage and Hour
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Book: The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals,
Managers, Businesses, and Organizations. Author: Charles Fleischer Date: 2017

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The SHRM Essential Guide to Employment Law86

Wage and hour requirements are a mix of federal and state law.
The principal federal law is the Fair Labor Standards Act (FLSA)
enacted in 1938.

In general, and subject to the exemptions discussed later in this
chapter, the FLSA applies to all employees of a business or organi-
zation (referred to in the law as an enterprise) that meets any of the
following descriptions:

• has an annual dollar volume of sales or business of at least
$500,000

• is a hospital, a business providing medical or nursing care for
residents, or a school or preschool

• is a government agency

In addition to enterprise coverage, the FLSA applies to employ-
ees who are engaged in interstate commerce or in the production
of goods for interstate commerce, even if they are not employed
by an enterprise.

Employees cannot waive their right to the minimum wage
and overtime guaranties of the FLSA because, according to the
Supreme Court, allowing them to do so “would nullify the purpos-
es of the FLSA and thwart the legislative policies it was designed to
effectuate.” So a private agreement that an employee will be paid
and will accept less than the minimum wage, or will not be paid an
overtime premium to which he or she would otherwise be entitled,
is unenforceable.

MINIMUM WAGES
The FLSA requires every employer to pay each covered employee
a minimum wage at this writing of $7.25 per hour. The minimum
rate for newly hired employees who are under 20 years of age is
currently $4.25 per hour, but that rate is applicable only during
the first 90 days of employment. Although an employee need not
receive the minimum wage for every hour worked, the employer
must average the minimum wage every workweek.

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Wage and Hour Requirements 87

There is a long list of occupations that are exempt from min-
imum wage requirements. The exceptions are narrowly drawn,
however, and apply only in limited circumstances. Employers
should assume that they owe the minimum wage to each of their
employees unless they have obtained competent advice to the
contrary.

Volunteer Employees
Among the potential pitfalls for an employer is the volunteer
employee or unpaid intern.

The FLSA allows individuals to volunteer their services, with-
out pay, to state or local government agencies and to nonprofit
food banks for humanitarian purposes. U.S. Department of Labor
(DOL) guidance goes a bit further, expanding humanitarian pur-
poses to include individuals who volunteer their time, freely and
without anticipation of compensation, for religious, charitable,
civic, or humanitarian purposes to nonprofit organizations.

Despite the DOL’s somewhat expanded view of humanitarian
purposes, however, an unpaid intern may volunteer at a for-profit,
private-sector employer only if each of the following six criteria is
satisfied (according to the DOL):

• The internship, even though it includes actual operation of the
facilities of the employer, is similar to training that would be
given in an educational environment.

• The internship experience is for the benefit of the intern.
• The intern does not displace regular employees, but works under
close supervision of existing staff.

• The employer that provides the training derives no immediate
advantage from the activities of the intern, and on occasion its
operations may actually be impeded.

• The intern is not necessarily entitled to a job at the conclusion
of the internship.

• The employer and the intern understand that the intern is not
entitled to wages for the time spent in the internship.

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The SHRM Essential Guide to Employment Law88

EXAMPLE: A for-profit architectural firm receives an inquiry
for summer employment from a third-year architecture major at
a local university. She says that job opportunities are extremely
tight and, to gain experience and build her resume, she is will-
ing to work for free helping existing employees with drafting
and other duties. Since the proposed arrangement would be of
direct benefit to the employer and since the student would be
performing work for free that the employer normally has to pay
for, the FLSA’s minimum wage requirement applies.

In Glatt v. Fox Searchlight Pictures, a 2016 decision by the U.S.
Court of Appeals for the 2nd Circuit (headquartered in New York
City), the court rejected the DOL’s six-factor test in favor of a prima-
ry beneficiary test—whether the intern or the employer is the primary
beneficiary of the relationship. Ironically, the court then proceeded to
list not six, but seven, factors to be considered in applying the primary
beneficiary test, many of which sound similar to the DOL’s list.

Eventually the Supreme Court will need to resolve the question
of when an unpaid intern may volunteer services to a for-profit
employer. In the meantime, for-profit employers should seek com-
petent counsel when considering an unpaid internship program.

Meals and Lodging
The FLSA allows employers to credit against their minimum wage
obligation the fair value of meals and lodging provided by the
employer. The credit for lodging will be allowed only if the follow-
ing conditions apply:

• The lodging is regularly provided.
• The employee voluntarily accepts the lodging.
• The lodging is furnished in compliance with all applicable laws.
• The lodging is provided primarily for the benefit of the employ-
ee rather than the employer.

• The employer maintains accurate records of the cost of the
lodging.

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Wage and Hour Requirements 89

ALERT!
The value of meals and lodging provided in partial satisfaction of the employer’s min-

imum wage obligation is taxable income to employee. Meals and lodging provided for

the employer’s convenience are not taxable to the employee, but they also do not count

against the employer’s minimum wage obligation.

Tips
Special rules apply to employees who receive tips. Tips may be
counted against the minimum wage, but only up to $5.12 per hour
at this writing. The employer must pay at least $2.13 in cash wages
and, if actual tips combined with cash wages do not equal the mini-
mum wage, the employer must make up the difference. (Some state
minimum wage laws do not count tips or count tips only up to a
lesser dollar amount.)

Tips are subject to withholding and other tax requirements just
like regular compensation. (See Chapter 7 for more specific infor-
mation regarding tax requirements.)

Breaks
Except for nursing mothers (discussed below in this chapter), the
FLSA does not require employers to grant rest breaks. Nevertheless,
many employers provide brief morning and afternoon breaks to their
nonexempt employees. When those rest breaks are no longer than
20 minutes, they must be accounted and paid for as hours worked.
However, according to the DOL’s Field Operations Handbook,
when an employee extends his or her break past 20 minutes without
authorization, the employer need not compensate the employee for
the unauthorized extension if the employer has expressly and unam-
biguously communicated to its employees that the authorized break
may last only a specified length of time and that any extension of the
break is against the employer’s rules and will be punished.

State and Local Laws
States and local jurisdictions are free to adopt higher minimum

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The SHRM Essential Guide to Employment Law90

wages, and some have done so. Some state and local governments
have also adopted living wage or prevailing wage laws that require
government contractors doing business with those jurisdictions to
pay their employees a minimum wage substantially in excess of the
federal floor. Aside from the economic debate over the effect of
minimum wages, this lack of federal uniformity imposes substantial
compliance burdens on multistate employers and encourages them
to move their workforces to more business-friendly states.

ALERT!
Pay differentials based on gender or on any other prohibited consideration such as race

or national origin are illegal under nondiscrimination laws. (See Chapter 15.)

Penalties
Penalties for violating the FLSA and state laws are substantial,
including liquidated damages, attorneys’ fees payable to the employ-
ee involved, criminal fines, and even prison sentences.

CASE STUDY:
MANAGERS’ PERSONAL LIABILITY FOR AN FLSA VIOLATION
After Castaways Casino filed for bankruptcy protection, a former
employee sued Castaways’ individual managers under the FLSA for
unpaid wages. The employee claimed that the managers qualified as
his “employer,” which the FLSA defines as “any person acting directly or
indirectly in the interest of the employer in relation to an employee.” The
federal appeals court for the 9th Circuit ruled that when an individual
exercises control over the nature and structure of the employment
relationship or economic control over the relationship, that individual
is an employer within the meaning of the FLSA.

OVERTIME
Overtime requirements under the FLSA give rise to issues of how
much to pay and when to pay. The basic rules for nonexempt, pri-
vate-sector employees are the following:

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Wage and Hour Requirements 91

• The maximum number of hours an employee may work in any
workweek without receiving overtime compensation is 40.

• Overtime compensation is one and one-half times the employee’s
regular hourly rate of pay.

• Overtime compensation must be paid on the next regular payday
(or as soon thereafter as practical if the amount due cannot be
computed by that payday).

ALERT!
The FLSA imposes a time-and-a-half overtime premium on work in excess of 40 hours

in any workweek. Some state laws require overtime for work in excess of eight hours per

day and impose a double-time premium for overtime work. Collective bargaining agree-

ments in union shops may also impose additional overtime requirements.

Calculating Work Time
The workweek is a period of 168 hours (24 hours per day times
seven days per week). It is up to the employer to establish when
the workweek begins and ends, and it need not coincide with pay
periods. When the two do not coincide (for example, when the
employer’s pay period is semimonthly, or 24 paydays per year),
each paycheck includes regular pay for 13, 14, 15, or 16 days and
includes overtime pay for one, two, or three workweeks, depend-
ing on how many workweeks end during the particular pay period
involved. An employer may establish different workweeks for dif-
ferent employees, but the employer cannot repeatedly change the
workweek to manipulate overtime obligations.

Overtime must be paid at one and one-half times the employ-
ee’s regular hourly rate. In general, the regular hourly rate is the
hourly rate actually paid the employee for the normal, nonover-
time workweek for which the employee is employed. Employers
are not required to compensate their employees on an hourly rate
basis, however. They may, for example, compensate on piece-rate,
salary, commission, or other basis, but in such cases a regular
hourly rate must be computed to determine what the overtime

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The SHRM Essential Guide to Employment Law92

rate should be. In computing the regular hourly rate, all remu-
neration for employment must be included, such as commissions
and production bonuses. However, the FLSA specifies that the
following items are not included in computing the regular hourly
rate:

• gifts, so long as they are not measured by or dependent on hours
worked, production, or efficiency

• payments made while the employee is on leave
• expense reimbursements
• bonuses paid at the sole discretion of the employer and not pur-
suant to any previous contract or promise

• profit-sharing payments
• employer contributions to employee benefit plans
• premium payments for work on weekends and holidays, so long
as the premium rate is at least one and one-half times the rate for
regular work

As the above list suggests, bonuses that are tied to productivity
are included in computing the employee’s regular pay rate for
overtime purposes. So if an employer pays a quarterly or year-end
productivity bonus to nonexempt employees, the employer must
recalculate the employees’ regular pay rate for the period covered
by the bonus and pay any additional overtime that may result.

EXAMPLE: A company’s normal workday is 9:00 a.m. to
5:30 p.m. with an hour for lunch. That equates to 37.5 hours
of work per workweek. If an hourly employee works 39.5
hours in a particular week, at what rate should he or she be
paid for the extra two hours? The company is free to pay
overtime at one and one-half times the normal rate after 37.5
hours, but it is not required to do so. The company is in full
compliance with the FLSA if it pays only straight time for the
two hours, since the FLSA’s overtime obligations kick in only
after 40 hours.

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Wage and Hour Requirements 93

Employers should not overlook the effect of holidays, vaca-
tions, and other time off on their overtime obligations. For time
to be counted toward overtime, the employee must actually be at
work. Even though an employee may be on paid leave, if he or
she is not actually working, the time is not included in comput-
ing overtime. For that reason, overtime is usually not a problem
during periods such as the Christmas week, when many employ-
ees take time off.

Wage and hour violations can occur unintentionally. Employers
should be alert to the following pitfalls:

• “Would you mind running an errand for me on your lunch
hour?” “I’d appreciate your taking the late mail to the post
office when you leave today.” “Could you drop off this package
on your way in tomorrow?” If these favors take more than a few
minutes of an employee’s time, they need to be counted for pay
and overtime purposes.

• “Company policy prohibits overtime unless explicitly approved
by your supervisor.” If the time actually required to complete
the assigned job is more than the standard workday, an offi-
cial policy limiting overtime will not excuse the employer from
paying time-and-a-half.

• “I need you to carry a beeper.” “In your job, you’re on call 24
hours a day.” “You can’t drink on your off hours, since I may
need you in on short notice.” “I want you at home where I can
reach you.” Restrictions on off hours can trigger pay and over-
time obligations if they substantially limit the employee’s free-
dom. The you’re-on-call-24-hours-a-day dictate, without more,
is probably not a substantial restriction, nor is the alcohol pro-
hibition. But the beeper requirement could be, if the beeper’s
range is very limited. The stay-at-home requirement definitely
would need to be counted as work time.

• “You can eat lunch at your desk if you like, but that’s unpaid
time.” Unless the employee is entirely free from work responsi-
bilities during a so-called lunch break, the time is compensable.

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The SHRM Essential Guide to Employment Law94

• “The company encourages you to get involved in civic and char-
itable activities in the community.” Truly volunteer activities,
performed after working hours, are not compensable. Howev-
er, activities performed during normal working hours with the
approval of the employer are compensable and need to be count-
ed for overtime purposes. Even after-hours activities can be com-
pensable if they are done at the employer’s specific request or
direction, or if the employer coerces or pressures the employee
into volunteering.

Portal-to-Portal Act
Another risk involves activities immediately before and immediately
after regular work periods. The Portal-to-Portal Act (an amendment
to the FLSA) makes clear that an employee’s commuting time—
time walking, riding, or traveling to and from the actual place of
performance of the principal activity or activities that the employee
is employed to perform—is not compensable for minimum wage
or overtime purposes. Similarly, activities that are preliminary or
postliminary to principal activities are not compensable.

On the other hand, an activity is compensable if it is primarily for
the employer’s benefit, if there is an express written or oral contract
that the employer will pay for the activity, or if it is compensable
by custom or practice. Examples of activities that may or may not
be compensable, depending on the circumstances, include changing
into or out of a work uniform, punching a time clock, waiting in line
to punch a time clock, settling up a cash register drawer at the end
of a shift, cleaning or repairing tools, showering after working with
hazardous or toxic materials, and inspecting a motor vehicle before
or after driving a delivery route.

ALTERNATIVES TO OVERTIME
Overtime obligations significantly increase an employer’s pay-
roll costs. In addition to time-and-a-half, other costs such as pay-
roll taxes, workers’ compensation premiums, and retirement plan

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Wage and Hour Requirements 95

contributions may increase as well. So it is usually in an employer’s
interest to avoid overtime when possible. The following alternatives
to overtime may be available, depending on the employer’s specific
circumstances.

Compensatory Time
If an employee who normally works an 8-hour day happens to
work 9 or 10 hours on a particular day, he or she may be offered
the opportunity (or may even be required) to work fewer hours
on another day, so long as it is in the same 168-hour workweek.
However, with few exceptions overtime may not be taken as com-
pensatory time (or comp time) in another workweek. If overtime is
not offset by time off within the same 168-hour workweek, wages
at the overtime rate must be paid. This rule applies regardless of the
pay periods established by the employer. For example, even though
the pay period may be every two weeks, 45 hours of work in week 1
cannot be offset by 35 hours in week 2.

The rule also applies even if the employee is perfectly willing to
waive overtime pay and take comp time the following week. Sup-
pose an employee wants to take an extended vacation later in the
year and offers to build up comp time so that regular paychecks will
continue during vacation. The request cannot be honored, since
neither the employer nor the employee can agree to an arrangement
different from the overtime requirements of federal and state law.

On a number of occasions, Congress has considered amending
the FLSA to permit comp time in the private sector. (Comp time has
long been allowed for federal government employees.) Organized
labor has generally opposed any such change, however, and the pro-
posed amendments have all died without passage.

Time-Off Plan
There is one exception to the rule that comp time in workweek 2
does not satisfy the employer’s obligation for overtime in work-
week 1—the so-called time-off plan. Suppose an employer pays

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The SHRM Essential Guide to Employment Law96

every other week. If a nonexempt salaried employee works over-
time in workweek 1, the employer can give the employee time
off in workweek 2 at the rate of 1.5 hours for each hour of over-
time worked in workweek 1. By paying the employee the regular
salary for both workweeks, the employer fully satisfies its overtime
obligation.

EXAMPLE: Suppose an employee normally works 40 hours per
workweek and is paid a biweekly salary of $800 ($400 per week
or $10 per hour). If the employee works 50 hours in workweek
1, the employee can take (or be ordered to take) 15 hours off in
workweek 2, since 1.5 times the 10 hours of overtime worked
in workweek 1 equals 15 hours. In this example, the employee
has worked a total of 75 hours over both workweeks, but will
be paid his or her regular biweekly salary of $800. In effect, the
employer satisfies its overtime obligation by paying comp time
at a premium rate instead of paying a cash premium.

A time-off plan for salaried employees works only if the employer’s
pay period is longer than one workweek and if overtime occurs in
the first workweek. In the above example, if the overtime occurred
in workweek 2, the employer would have to pay the overtime pre-
mium in cash.

Belo Plan
Belo plans (from a Supreme Court case of that name) are available only
for employees whose duties necessitate irregular hours because of the
nature of the work. Examples might include on-call service workers
and emergency repair crews. Under a Belo plan, the employer enters
into a contract with the employee that guarantees the employee a
fixed salary regardless of the number of hours worked. The contract
specifies a regular hourly rate for the normal 40 hours and 1.5 times
that regular hourly rate for guaranteed overtime (so long as total
time covered by the plan is no more than 60 hours per workweek).

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Wage and Hour Requirements 97

EXAMPLE: A power company employee’s job is to restore
electrical service following outages caused by storms, traffic
accidents, construction mishaps, and the like. The amount of
work needed is unpredictable, typically varying anywhere from
30 to 50 hours per workweek, so the employer enters into a
contract guaranteeing the employee a fixed weekly salary of
$550, representing 40 hours at $10 per hour and 10 hours at
a $15 overtime rate. In other words, the contract guarantees
the employee 10 hours of overtime each week. Then, regardless
of the number of hours worked (up to the agreed total of 50
hours in this example), the employer has no additional over-
time obligation. Of course, if the employee works fewer than
50 hours, he or she still gets paid $550.

In the above example, any time worked in excess of 50 hours
would have to be compensated at $15 per hour. While the parties
could have agreed to guarantee more than 10 hours of overtime,
their agreement could not go beyond 20 hours of overtime under
a Belo plan.

Half-Time Plan
Belo plans are available only when the inherent nature of the work
necessitates irregular hours and when the number of hours per
workweek vary both above and below a normal 40-hour workweek.
In contrast, under a half-time plan (sometimes called a fluctuating
workweek plan), the fluctuation can be subject to the employer’s
control, and hours worked can routinely exceed 40.

Under a fluctuating workweek plan, the employer and employ-
ee agree that the employee will be paid a fixed salary covering all
time worked in the workweek. This should be a written agreement
by which the employee clearly acknowledges that the fixed salary
covers the straight-time component of all hours worked even if
they exceed 40. For any given workweek, the employee’s regular
hourly rate is computed by dividing the fixed salary by the number

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The SHRM Essential Guide to Employment Law98

of hours actually worked in that workweek. If the number of hours
worked exceeds 40, the employer pays the employee half (not
one and one-half) of his or her regular hourly rate for the hours
exceeding 40. The reason the employer pays only half-time for the
overtime is that the straight-time component is already covered by
the fixed salary.

EXAMPLE: Employer and employee agree to a fixed salary
of $400 per week. If, in a particular workweek, the employ-
ee works 50 hours, then the employee’s regular hourly rate
for that workweek is $8 ($400 / 50). Therefore, the employ-
er’s overtime obligation for that workweek is $40 (.5 x $8 x
10 hours), and total compensation due the employee for that
workweek is $440. Now suppose the employee works 55 hours.
His or her regular hourly rate would then be approximately
$7.27 ($400 / 55), and the total compensation due would be
$454.53 ($400 + (.5 x $7.27 x 15 hours)).

As the above example shows, as overtime increases, both the reg-
ular hourly rate and the overtime rate decrease. If the employee
worked 80 hours in a particular workweek, his or her regular hourly
rate would then drop to $5.00 per hour, which is below the mini-
mum wage and which would therefore violate federal law. The fixed
salary under a half-time plan must be high enough to guarantee at
least the minimum wage.

EXEMPTIONS FROM OVERTIME
Overtime requirements are subject to a long list of exemptions
under both federal and state law. Although the federal and state
exemptions often overlap, they are not identical. An employee (or
position) covered by one of these exemptions is referred to as exempt
and is not entitled to time-and-a-half for overtime. In contrast, an
employee (or position) not covered by any exemption is referred to
as nonexempt and is entitled to overtime.

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Wage and Hour Requirements 99

QUICK TIP
Even though an employee is exempt from minimum wage or overtime requirements,

the employer must still comply with the FLSA’s equal pay provisions, which prohibit

gender-based wage discrimination. (See Chapter 14 for more information.)

White-Collar Exemptions
Probably the most significant exemptions for most business-
es are for salaried employees employed in a bona fide execu-
tive, administrative, or professional capacity. These exemptions,
together with the exemption for outside salespersons, are some-
times called the white-collar exemptions. For an employee to
qualify as exempt in one of these categories, his or her position
must meet one of the duties tests specified in DOL regulations
and described below. In most cases, a salary test applies as well,
requiring that the employee be paid on a salary basis of at least
$455 per week.

ALERT!
In May 2016, the DOL (then under President Obama) issued final regulations raising the

$455-per-week salary basis requirement to $913 per week, effective December 1, 2016.

A Texas federal court temporarily enjoined enforcement of the new regulation. In

August 2017 the same court issued a final ruling that the new regulation is invalid.

As a result, the existing $455-per-week salary requirement continues in effect. The

current administration has solicited public comment on the matter but, as of this

writing, has not proposed any changes to the existing regulation.

An executive is an employee whose primary duty is management
of the enterprise in which he or she is employed (or a customar-
ily recognized department or subdivision thereof). An executive
customarily and regularly directs the work of two or more other
employees and has the authority to hire or fire other employees
(or whose suggestions and recommendations as to the hiring,
firing, advancement, promotion, or any other change of status of
other employees are given particular weight).

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The SHRM Essential Guide to Employment Law100

A business owner falls under the executive exemption if he or she
owns at least a 20 percent bona fide equity interest in the enterprise
in which he or she is employed and qualifies as an executive for over-
time exemption purposes, even if he or she does not satisfy the salary
test of $455 per week.

An administrator is an employee whose primary duty is the
performance of office or nonmanual work directly related to the
management or general business operations of the employer or the
employer’s customers. His or her primary duty must include the
exercise of discretion and independent judgment with respect to
matters of significance.

A professional is an employee whose primary duty is the perfor-
mance of work requiring either of the following:

• knowledge of an advanced type in a field of science or learning
customarily acquired by a prolonged course of specialized intel-
lectual instruction, such as an accountant, nurse, medical technol-
ogist, dental hygienist, or chef (a learned professional)

• invention, imagination, originality, or talent in a recognized field
of artistic or creative endeavor (a creative professional)

Employees who are licensed to practice law or medicine qualify
as exempt professionals whether or not they meet the $455-per-
week salary requirements. (For these purposes, medical practitioners
include not only physicians but also osteopaths, podiatrists, dentists,
optometrists, and veterinarians.) Teachers also qualify as exempt
professionals whether or not they meet the $455-per-week salary
requirement.

Computer programmers and others with highly specialized knowl-
edge of computers qualify as professionals so long as they are paid
either on a salary basis of at least $455 per week or on an hourly
basis of at least $27.63 per hour.

Highly compensated employees—employees who earn at least
$100,000 per year—are exempt so long as at least some of their
duties (but not necessarily their primary duties) are executive,

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Wage and Hour Requirements 101

administrative, or professional. In addition to the $100,000-per-
year requirement, they must also be compensated on a salary basis
of at least $455 per week. (The $100,000 amount was raised to
$134,004 under DOL regulations due to be effective December 1,
2016, but a Texas federal court has since ruled the new regulations
invalid.)

Executives, administrators, and professionals will not lose their
exemption by being temporarily assigned to nonexempt work,
even for assignments lasting several weeks, so long as their prima-
ry duties fall within the definitions of executive, administrative, or
professional.

An outside salesperson is an employee whose primary duty is
making sales or obtaining orders and who is customarily and regu-
larly engaged away from the employer’s place of business (in other
words, out in the field at the customers’ places of business or homes).
A person who works from his or her own home does not qualify as
an outside salesperson. Since outside salespersons are typically paid
by commission, the salary basis requirement does not apply.

DOL regulations say that the determination of an employee’s pri-
mary duty

must be based on all the facts in a particular case, with the
major emphasis on the character of the employee’s job as a
whole. Factors to consider when determining the primary
duty of an employee include, but are not limited to, the
relative importance of the exempt duties as compared with
other types of duties; the amount of time spent performing
exempt work; the employee’s relative freedom from direct
supervision; and the relationship between the employee’s
salary and the wages paid to other employees for the kind
of nonexempt work performed by the employee.

Salary Basis
As previously stated, for an executive, administrator, or professional
to be exempt, he or she must generally be paid on a salary basis of at

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The SHRM Essential Guide to Employment Law102

least $455 per week. DOL regulations provide that an employee will
be considered as paid on a salary basis if he or she “regularly receives
each pay period on a weekly, or less frequent basis, a predetermined
amount constituting all, or part, of his or her compensation, which
amount is not subject to reduction because of variations in the qual-
ity or quantity of the work performed.”

Under this definition, an employee must generally be paid a full
week’s compensation for any workweek in which he or she performs
any work, without regard to the number of days or hours worked.
In other words, so long as the employee is ready, willing, and able to
work a full workweek, the employer cannot reduce the compensa-
tion for the week just because the employer does not have any work
available.

An employee will not qualify as salaried under DOL regulations
if the employer docks wages for jury duty, temporary military leave,
or attendance as a witness in court lasting less than a full work-
week. However, the employer may reduce an employee’s salary by
the amount the employee is paid as a juror or witness or for military
service.

If an employee fails to report to work for a day or more for per-
sonal reasons (other than sickness or accident), the employer may
dock his or her salary for each full day (but not for a partial day) the
employee is absent without affecting the employee’s exempt status.
(Deductions for absences of a day or more relating to sickness or
accident are also permitted if the employer has a plan, policy, or
practice of providing alternative compensation under those circum-
stances.) But if the employee is absent for less than a day, no deduc-
tion is allowed. In short, if an employer treats exempt employees as
if they were hourly instead of salaried, they will cease being exempt.

DOL regulations provide a few additional exceptions to the
general rule that an exempt employee must be paid a full week’s
compensation for any week in which he or she performs any work.
When a new employee works less than a full week on initial hire or
a departing employee works less than a full week on termination, he

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Wage and Hour Requirements 103

or she need to be paid only for the days actually worked. In addition,
an employer may penalize employees by making deductions from
pay in good faith for infractions of safety rules of major significance
(such as smoking in an explosives plant) and may suspend employees
without pay for one or more full days for infractions of written, gen-
erally applicable workplace conduct rules (such as rules prohibiting
sexual harassment).

The DOL’s definition of salary basis says that all or part of an
employee’s compensation must be predetermined. This means that
an employee will be considered salaried even if some portion of his
or her compensation is paid in the form of commissions or bonuses
that vary depending on productivity or other factors. However, the
predetermined amount must satisfy the minimum salary require-
ments—$455 per week as of this writing—for most white-collar
exemptions.

ALERT!
Some employers mistakenly think that all salaried employees are automatically exempt.

To the contrary, while being salaried is one of the requirements for most white-collar

exemptions, the employee must also satisfy the duties test—that is, qualify as an exec-

utive, administrator, or professional as defined in DOL regulations.

Although the FLSA does not regulate an employer’s vacation
policies, those policies can sometimes trigger FLSA concerns. Say,
for example, that an employer advances four hours of paid vacation
time to an exempt employee who has used all his or her accrued
leave. If the employee quits before earning back the four hours, and
the employer then deducts the four hours from the employee’s final
pay, the employer has in effect docked the employee for a partial
day of personal leave, contrary to the salary basis requirement.

Improper Deductions
Improper deductions from an otherwise exempt employee’s salary
will convert that employee, and other employees in the same job

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The SHRM Essential Guide to Employment Law104

classification who work under the manager who made the improper
deduction, to nonexempt status. Any overtime worked while the
improper deductions were being made will then have to be paid at
time-and-a-half.

Under the window of correction rule, isolated or inadvertent
deductions will not cause loss of exemption. However, the employ-
er must have a policy in place that prohibits improper pay deduc-
tions and includes a mechanism for employees to complain about a
deduction. (See Figure 5.1 for an example of such a policy.) Once
an improper deduction is brought to the employer’s attention, the
employer must reimburse the employee and must make a commit-
ment to comply in the future.

FIGURE 5.1: WINDOW-OF-CORRECTION POLICY

The following policy will help ensure that inadvertent deductions from a salaried exempt
employee do not convert the employee to nonexempt:

The company prohibits deductions from the compensation of exempt employees that
could result in loss of exempt status. Any exempt employee who believes an improper
deduction has been made from his or her compensation is encouraged to submit
a complaint, preferably in writing, to the company’s payroll officer. The company will
promptly investigate the complaint. If the company determines that the deduction
was improper, the company will promptly refund the deduction to the employee. The
company commits itself to compliance with applicable wage and hour laws, including
those governing exemptions from overtime pay.

Other Exemptions
Other exemptions may be significant for some employers. Unlike
executives, administrators, and professionals, a few exemptions do
not require payment of a fixed salary. In addition to outside sales-
persons, these include drivers, drivers’ helpers, loaders, and mechanics
for motor carriers whose duties affect safe operation of commercial
motor vehicles in interstate commerce and who are subject to regu-
lation by the U.S. Department of Transportation.

Employees of a seasonal establishment that is an amusement or rec-
reational establishment, organized camp, or religious or nonprofit

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Wage and Hour Requirements 105

educational conference center are exempt in either of the following
situations:

• the establishment does not operate for more than seven months
in any calendar year

• during the preceding calendar year, the establishment’s average
receipts for any six months of such year were not more than 33
and one-third of its average receipts for the other six months of
such year

Even if an employee is not entitled to premium overtime pay
under the FLSA, he or she may be entitled to premium pay under
state law. While state law is similar to the FLSA, states often have dif-
ferent exemptions from overtime. Different exemptions also apply
to work performed under government contracts. (See Chapter 22
for more on government contractors.)

SETTLING FLSA WAGE DISPUTES
When an employer underpays an employee in violation of the FLSA,
the employee may recover not only the balance of wages owed but
also additional liquidated damages equal to the unpaid amount,
and the attorneys’ fees incurred in pursuing the claim. In cases of
underpayment, the employer and employee generally cannot enter a
binding settlement agreement in which the employer agrees to pay
something less than the full amount due.

A 1945 Supreme Court decision invalidated a settlement agree-
ment between an employer and an employee that did not provide
for payment of liquidated damages to the employee. The court
reasoned that the FLSA affords statutory rights that simply cannot
be waived. A year later the court ruled that even when there was
a bona fide dispute between the parties as to the employer’s over-
time obligation, a settlement agreement would not be enforceable.
However, in that case the dispute involved a legal issue of wheth-
er the employer was engaged in interstate commerce and, there-

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The SHRM Essential Guide to Employment Law106

fore, whether the FLSA applied. The court left open the question
whether a bona fide dispute over a factual issue, such as how many
hours of overtime the employee actually worked, might support a
settlement agreement in which an employee agrees to compromise
his or her FLSA claim.

The question left open by the court in 1946 remains unanswered
today. So, as a practical matter, an employer should not enter into
a private settlement of a wage and hour dispute under the FLSA,
because the employee’s release of his or her claims in exchange for
a cash payment is likely to be invalid and unenforceable. To resolve
such disputes, the employer should request the DOL to participate
in and supervise a settlement or, alternatively, file a law suit in court
and ask the court to approve a proposed settlement.

OTHER WAGE REGULATIONS
The states regulate many other aspects of wage and hour require-
ments. Typical requirements are that employers do the following:

• establish regular pay periods
• pay hourly workers at least twice a month and pay salaried employ-
ees at least monthly

• pay in U.S. currency
• pay terminated employees within a specified time period after
termination

If bonuses and commissions are part of an employee’s regular
compensation package, they must be paid just like other wages.

ALERT!
Most states prohibit employers from including Social Security numbers on employee

paychecks.

Direct Deposit
As an alternative to issuing paper paychecks, direct deposit of employ-
ee compensation into their bank accounts is a great convenience

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Wage and Hour Requirements 107

to employer and employee alike. Recognizing that some employees
may not have, or qualify for, a bank account, many states require
individual employee consent before paying via direct deposit.

Payroll Cards
Payroll cards are another alternative to paper checks. A payroll card
is a reloadable, prepaid card that can be used for purchases and at
participating ATMs, much like a debit card. Under a payroll card
program, funds are delivered electronically and are quickly available
to employees. This avoids the delay of depositing a paper check and
waiting for it to clear or cashing a paper check at a check-cashing
store and paying the associated fee. But like a debit card, the payroll
card can be lost or stolen.

Payroll cards are also subject to Regulation E of the Consum-
er Financial Protection Bureau. Under that regulation, card issuers
(employers) must disclose any fees associated with use of the card,
any liability limitations to which the card is subject, and the types
of transactions that may be made with the card. Further, employers
must make account history available and must respond to reports of
errors regarding the cards. Cards may also be subject to regulation
under state law.

Deductions
All employers are required to deduct taxes and related items
from employee paychecks and amounts subject to garnishment.
(Chapters 6 and 7 give more details regarding deductions from
an employee’s paycheck.) Employers may deduct other amounts
agreed to by the employee, such as voluntary contributions to a
retirement plan and the employee’s contributory portion of health
insurance premiums. Employers are generally prohibited from
deducting amounts on account of workers’ compensation bene-
fits, unemployment insurance, or other amounts claimed due from
the employee, like reimbursement for breakage or for mistakes on
customer accounts.

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The SHRM Essential Guide to Employment Law108

Record-Keeping Requirements
Federal and state laws also impose certain record-keeping
requirements. In general, employers must keep records for at
least three years showing the name, address, Social Security
number, and occupation of each employee; the employee’s rate
of pay; the amount actually paid each pay period; and, for non-
exempt employees, the hours worked each day and each work-
week. The records are subject to onsite inspection by wage and
hour officials.

Nursing Mothers
Although the FLSA does not generally impose leave or break-
time requirements, it does require employers with 50 or more
employees to provide reasonable break times for a nursing mother
to express breast milk for up to one year after the child’s birth. In
addition, the employer must provide a place, other than a bath-
room, that is shielded from view and free from intrusion from
co-workers and the public. The break time is not compensable
unless the employee uses a paid break period to express milk.
Employers with fewer than 50 employees are also subject to these
requirements unless the requirements would impose an undue
hardship.

ALERT!
The Patient Protection and Affordable Care Act (PPACA), discussed in Chapter 10, added

a provision to the FLSA prohibiting employers from discriminating against an employee

because he or she received a premium tax credit under the PPACA.

Scheduling Protection Laws
A number of local jurisdictions have adopted, or are considering,
ordinances that prohibit on-call scheduling—calling an employee
to work a shift on only a few hours’ advance notice. Particularly
in the retail industries, this practice can be extremely disruptive
to, say, a single parent with child-care responsibilities who must

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Wage and Hour Requirements 109

on short notice make costly coverage arrangements or risk losing
his or her job. As of this writing, San Francisco and Seattle have
laws requiring more reasonable notice, and New York City and
Washington, D.C., are considering similar laws. State attorneys
general have also co-signed letters to major retailers asking them
to halt the practice.

CHILD LABOR
Both federal and state laws regulate child labor. On the federal
side, the FLSA prohibits oppressive child labor, which is defined as
employment of any child who is under the age of 16, regardless
of the occupation, and employment of a child who is between the
ages of 16 and 18 in mining, manufacturing, or any other indus-
try the secretary of labor finds particularly hazardous.

Excluded from the definition are the following:
• employment in a family business, so long as the employment is
not in mining, manufacturing, or other particularly hazardous
industries

• agricultural employment (with parental consent if the child is
under 14 and only when school is not in session if the child is
under 16)

• employment as an actor or performer in movies, the theater,
and radio and television productions

• delivering newspapers to consumers
• making wreaths at home and harvesting forest products to be
used in wreath-making

QUICK TIP
Specific work, such as serving alcoholic beverages or driving commercial vehicles,

may be subject to additional age restrictions under state law. For a child working in

the entertainment industry, some states require that a portion of his or her pay be

set aside for the child’s later benefit.

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The SHRM Essential Guide to Employment Law110

State regulation of child labor differs from jurisdiction to jurisdic-
tion. The definition of minor may vary, for example. Each state also
has its own list of exclusions reflective of prominent local industries
or regional customs.

Minors need a work permit, typically issued through the school
system, before being able to work. Employers must keep permits
on file and available for inspection. Even when a minor is properly
permitted to work, additional restrictions may apply, such as when
and how many hours a minor may work. These time restrictions vary
depending on whether school is in session.

The illegal employment of minors exposes the employer to sub-
stantial criminal and civil penalties.

PRIORITY OF WAGES AND BENEFITS IN BANKRUPTCY
At any given time, an employer usually owes wages to employees.
Depending on the frequency of pay periods and the lag between
the end of a pay period and the date checks are issued, nonex-
empt employees could be owed as little as a few days’ pay or as
much as a few weeks’ pay. Exempt employees and employees who
are due commissions may be owed substantially more. Similarly,
at any particular time employers with pension or other benefit
plans usually have an unfunded obligation to those plans.

When an employer’s assets are being administered in bankruptcy
court, the U.S. Bankruptcy Code specifies an order of priority for
payment of claims against the employer. High on the priority list are
amounts due to employees and to employee benefit plans. Under the
Bankruptcy Code, the items that come before claims of the employer’s
other unsecured creditors include wages, salaries, and commissions
(including vacation, severance, and sick leave pay) earned during the
180-day period before the filing of the bankruptcy petition, capped
at $12,850 per employee as of this writing, and contributions due to
employee benefit plans arising from services rendered during the 180-
day period before the filing of the bankruptcy petition, also capped at
$12,850 per employee as of this writing.

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Wage and Hour Requirements 111

In a 2017 case called Czyzewski v. Jevic Holding Corp., the
Supreme Court confirmed that bankruptcy courts cannot dis-
regard the priority of wages and benefits without the consent of
the employees involved, regardless of how the bankruptcy court
disposes of the case.

ANTI-TRUST CONSIDERATIONS
Federal anti-trust laws generally prohibit contracts, combina-
tions, and conspiracies in restraint of trade. It would be illegal,
for example, for a group of service station operators in a par-
ticular region to fix prices by reaching agreement among them-
selves not to sell gasoline below $3.40 a gallon.

Likewise, employers may not engage in wage-fixing agree-
ments. Suppose a particular industry faces a labor shortage so
that employers in that industry are unable to attract all the
employees they need. Rather than engage in a bidding war (that
the employers perceive as just running up everyone’s labor
costs without solving the problem), they decide to impose a
cap on wages by mutual agreement. This is illegal.

It is perfectly legal for employees, whether unionized or
not, to conspire among themselves in an effort to better their
wages, benefits, and working conditions. However, they lose
this ability when they conspire with employers outside the
scope of legitimate employee objectives. The Supreme Court
ruled, for example, that an agreement between a coal min-
er’s union and one set of mine owners—that the union would
insist on specified wage standards in its negotiations with other
mine owners—violated the anti-trust laws. (Chapter 24 covers
unions and labor relations.)

Predatory Hiring
Wholly apart from contracts, combinations, and conspiracies,
an employer might well have liability under the anti-trust laws
if, without regard to its own business needs, it targets a com-

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The SHRM Essential Guide to Employment Law112

petitor’s employees (called predatory hiring) to harm the com-
petitor’s business. The risks here can be reduced if the new
employer can demonstrate a genuine business need for the
employees and if it can show that a particular competitor was
not targeted, but that qualified employees were sought from a
range of sources.

No-Poaching Agreements
Some years ago, a number of high-tech Silicon Valley companies
entered into no-poaching agreements with each other, agreeing not
to cold-call the other’s employees. The U.S. Department of Justice
(DOJ) filed civil enforcement actions against the companies, result-
ing in consent judgments.

More recently, in October 2016 the DOJ and the Federal Trade
Commission—the two federal agencies charged with enforcing fed-
eral anti-trust laws—issued their Antitrust Guidance for Human
Resource Professionals in which they make clear that such no-poach-
ing agreements, as well as other agreements among competitors to
fix wages or other terms of compensation, are illegal and will result
in criminal prosecutions and civil suits. The guidance cautions that
companies should take care not to communicate their labor policies
to other companies competing for the same types of employees, nor
ask other companies to go along with those labor policies.

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Age Discrimination

• Covered Employers

• Exceptions

• Benefit Plans

• Proving Age Discrimination

• Release of ADEA Claims

• Remedies under the ADEA

CHAPTER 16

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Book: The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals, Managers, Businesses, and
Organizations Author: Charles Fleischer Date: 2017

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The SHRM Essential Guide to Employment Law306

The purpose of the federal Age Discrimination in Employment Act
(ADEA) is to promote employment of older persons based on their
ability rather than age by prohibiting age-based discrimination
against employees and job applicants. Consistent with that purpose,
the ADEA applies only to persons 40 years of age or older, so that an
age-based decision affecting only persons under 40 does not violate
the ADEA.

ALERT!
Many states and local jurisdictions have their own age discrimination laws that apply to

all employees, not just those 40 years of age or older.

Hiring or promoting a 35-year-old employee instead of a 45-year-
old for reasons other than age is perfectly legal. However, the
employer should identify the objective, job-related, nondiscrimi-
natory criteria used in making the decision. In making personnel
decisions, employers should avoid using terms such as dead wood,
fresh faces, new blood, or more energy. These terms are often viewed
as evidence of discriminatory intent and will hurt the employer in
defending an age discrimination claim.

Harassment with respect to age can constitute age discrimination,
just as harassment with respect to race or sex can violate Title VII.
Employers should not tolerate workplace jokes or teasing aimed at
older employees, their medical conditions, or other factors common
to age.

There has been some doubt just how the ADEA works in certain
circumstances. For example, is favoring a 45-year-old over a 60-year-
old illegal, even though both workers are within the protected, over-
40 class? Alternatively, may an employer favor a 60-year-old over a
worker age 45?

In 1996 the Supreme Court answered the first question, ruling
that when an older worker is replaced by someone younger because
of age, it does not matter that the younger worker is also in the
40-and-older protected class. A case of age discrimination can be

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Age Discrimination 307

based just on a significant age difference even though both workers
are over 40, said the court.

The Supreme Court later answered the second question as well.
The court ruled that an employer practice that favors older workers
is permitted under the ADEA, even though it discriminates against
younger workers who are in the 40-and-over protected class. In the
court’s words, the ADEA does not look both ways.

COVERED EMPLOYERS
The ADEA covers most employers with 20 or more employees.
Specifically, it covers employers engaged in an industry affecting
commerce that have 20 or more employees for each working day
in each of 20 or more calendar weeks in the current or preceding
calendar year. The coverage provisions track Title VII, except that
the employee threshold for Title VII is 15 employees instead of
the 20-employee threshold of the ADEA. (See Chapter 14 for the
meaning of industry affecting commerce and the methodology for
counting employees.)

EXCEPTIONS
As with Title VII, there is an exception in the ADEA for a bona fide
occupational qualification (BFOQ); however, the exception has been
narrowly applied by the courts. For example, an airline had a rule
that its flight engineers must retire at age 60 on the theory that many
persons over that age have limitations that preclude safe operation of
aircraft. The airline argued that it would be impractical, if not impos-
sible, to examine all flight engineers and identify those with limita-
tions. A jury found the rule illegal under the ADEA and awarded
damages. The Supreme Court let the jury verdict stand, saying that
it was not enough for the airline to have a rational basis for its policy.
Instead, the airline had to prove that its policy was reasonably nec-
essary to the normal operation or essence of the particular business.
(Ironically, the Federal Aviation Administration long had a rule that
pilots must retire at age 60; Congress has raised that age to 65.)

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The SHRM Essential Guide to Employment Law308

The ADEA also permits an employer to have a bona fide senior-
ity system provided it is not intended to evade the purposes of the
ADEA. A seniority system cannot be used to justify involuntary
retirements.

The ADEA has other exceptions that make the act unique among
federal nondiscrimination laws. For one, the ADEA does not apply
to persons under age 40, so age discrimination against persons
younger than 40 is not illegal under the ADEA. (As pointed out
above, it may be illegal under state or local laws.)

Although the act generally prohibits compulsory retirements
based on age, bona fide executives or high policymakers may be
forced to retire. A bona fide executive is a person who exercis-
es substantial managerial authority over a significant number of
employees and a large volume of business. A high policymaker
is an employee other than a bona fide executive who plays a sig-
nificant role in developing and implementing corporate policy.
The act allows forced retirement of a bona fide executive or high
policymaker if the person held the position for two years preced-
ing retirement, is at least 65 years old, and is entitled to annual
retirement benefits of at least $44,000 based solely on employer
contributions.

QUICK TIP
The definition of a bona fide executive for ADEA purposes is different from the Fair Labor

Standards Act’s definition in connection with exemption from overtime requirements.

(Chapter 5 addresses overtime requirements.)

State and local governments are also permitted to establish man-
datory retirement ages for firefighters and law enforcement officers.

BENEFIT PLANS
Almost all retirement plans make age-based distinctions. Plans stat-
ing that employees who have attained a specified age (such as 65)
may retire and begin receiving benefits are lawful. However, employ-

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Age Discrimination 309

ers must take caution when changing the terms of plans to ensure
that benefits are not being taken from a class of persons protected
by the ADEA.

For example, when an employer converts from a defined bene-
fit plan to a cash balance plan (discussed in Chapter 9), employees
lose the back-loaded boost they had anticipated from their defined
benefit plan. Since this loss is borne most heavily by older workers
who are near retirement, some have argued that such conversions
amount to age discrimination.

PROVING AGE DISCRIMINATION
Although an older worker may be the victim of age discrimination,
the worker still has to prove that the adverse employment decision
was age-based. It is often difficult to find such direct evidence of
discriminatory motive. In the more usual case, the boss’s motive is
unclear (or at least unexpressed), and circumstantial evidence is all
that is available.

One type of circumstantial evidence is a significant age differen-
tial between the fired person and his or her replacement. Courts
have come up with a variety of answers as to what is significant,
ranging from 3 years to 10 years. Five to seven years seems to be
emerging as a standard, so that an age differential of less than that
should not provide circumstantial evidence of age discrimination.
But even when the age difference is less than five years, an employ-
ee could still prevail in court if he or she has other evidence of age
discrimination.

Employers should be alert to code words that often stand for age,
such as describing an employee as tired or inflexible, or seeking to
hire new blood or a digital native.

Salary may also be seen as a proxy for age, since older, more senior
workers are generally paid more than younger, more junior workers.
Is it alright to discriminate on the basis of salary, such as by choosing
more highly paid employees for termination during a reduction in
force? The courts have generally said yes.

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The SHRM Essential Guide to Employment Law310

RELEASE OF ADEA CLAIMS
A release is a type of contract by which one party gives up a legal right
or claim in exchange for valuable consideration—usually money. In
general, no special form of contract is required to release most types
of claims, including discrimination claims.

ADEA cases are different. Unlike other employment-related dis-
putes, the release of an ADEA claim will be ineffective unless the
employer follows very specific procedures spelled out in the law. For
example, the employee must be advised in writing to consult with
an attorney before signing the release. Then, the employee must be
given at least 21 days to consider the release before signing it. Also,
the employer must give the employee an additional seven-day rescis-
sion period after the signing date to change his or her mind.

The law does not require the employee to actually wait 21 days
before signing the release. The employee can sign earlier, so long as
his or her right to take a full 21 days is not restricted. However, the
seven-day rescission period after signing cannot be shortened.

The Supreme Court has ruled that when a release did not comply
with ADEA requirements, an employee who received severance pay
in exchange for a release of her ADEA claim was entitled to keep
the severance pay and still sue her employer for age discrimination.
Therefore, an employer that has required a release of all claims in
exchange for a severance package should not begin making sever-
ance payments to its age 40-plus former employee until the sev-
en-day rescission period has expired.

If a release of ADEA claims is requested in connection with an
exit incentive or other employment termination program offered
to a group or class of employees, the 21-day period increases to 45
days. In addition, the employer must provide all persons in the class
or group with a description of the class or group. The employer
must also inform them of the job titles and ages of all employees
eligible or selected for the program. The ages of all employees in the
same job classification or organizational unit who are not eligible or
selected for the program must also be disclosed.

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Age Discrimination 311

REMEDIES UNDER THE ADEA
The remedies available to an individual who has suffered age dis-
crimination in employment are similar to those under the Fair Labor
Standards Act (discussed in Chapter 5) and unlike those available
under Title VII (discussed in Chapter 14).

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Persons with
Disabilities

• Definition of Disability

• Duty of Reasonable Accommodation

• Medical Examinations and Inquiries

• Other Prohibited Conduct

• Wellness Programs

• Direct-Threat Defense

CHAPTER 17

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The SHRM Essential Guide to Employment Law314

The Americans with Disabilities Act (ADA) is intended to be a
clear and comprehensive national mandate for the elimination of
discrimination against individuals with disabilities.

In the employment context, the ADA applies to employers that
have 15 or more employees. It prohibits discrimination against
a qualified individual with a disability with respect to application
procedures, hiring, promotion, discharge, compensation, train-
ing, and other terms, conditions, and privileges of employment. A
qualified individual is a person who, with or without reasonable
accommodation, can perform the essential functions of the job he
or she holds or is applying for.

ALERT!
An employee who applies for or receives benefits under the Social Security Disability

Insurance (SSDI) program may still be a qualified individual entitled to reasonable

accommodation under the ADA.

DEFINITION OF DISABILITY
As used in the ADA, disability means a physical or mental
impairment that substantially limits one or more major life
activities. Major life activities include caring for oneself, per-
forming manual tasks, seeing, hearing, eating, sleeping, walk-
ing, standing, lifting, bending, speaking, breathing, learning,
reading, concentrating, thinking, communicating, and work-
ing. They also include major bodily functions, such as functions
of the immune system, normal cell growth, digestive, bowel,
bladder, neurological, brain, respiratory, circulatory, endocrine,
and reproductive functions. An impairment that is episodic or
in remission is a disability if it would substantially limit a major
life activity when active.

The physical and mental impairments that can give rise to a dis-
ability would fill a medical encyclopedia. Generally speaking, any
condition that can be diagnosed by a health care provider is an
impairment within the meaning of the ADA. If the impairment

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Persons with Disabilities 315

does not substantially limit one or more major life activities, how-
ever, it is not a disability for ADA purposes.

By statute, the following are not considered impairments for ADA
purposes:

• homosexuality and bisexuality
• transvestism and transsexualism
• pedophilia, exhibitionism, and voyeurism
• gender identity disorders not resulting from physical impairment
• other sexual behavior disorders
• compulsive gambling
• kleptomania
• pyromania
• psychoactive substance abuse disorders resulting from current
illegal use of drugs

Diagnoses that are generally unaccepted in the medical commu-
nity will not trigger ADA obligations. For example, several courts
have held that multiple chemical sensitivity syndrome falls in this
category.

The existence of even a significant impairment does not necessari-
ly render a person disabled. There is no such thing as a disability per
se under the ADA since each impairment, no matter how serious,
must still be shown as substantially limiting a major life activity. An
individualized, case-by-case inquiry is required to determine wheth-
er, as a result of the impairment, a particular employee is in fact
substantially limited in one or more major life activities.

ALERT!
Employees who suffer temporary illnesses and injuries, even though they are not dis-

abled under the ADA, may be entitled to workers’ compensation benefits (covered in

Chapter 11) and leave under the Family and Medical Leave Act (discussed in Chapter 8).

Special rules apply to substance abuse. Addiction to drugs or
alcohol is an impairment that may trigger ADA coverage, depend-

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The SHRM Essential Guide to Employment Law316

ing on the particular individual’s circumstances. However, employ-
ers may discriminate against current, illegal drug users and persons
who traffic in drugs at the workplace, whether or not they are
addicted. Employers may also prohibit intoxication or use of alco-
hol at the workplace and may impose discipline for poor perfor-
mance or absenteeism related to alcohol use, even if the employee
is an alcoholic.

In general, determining whether an impairment substantially
limits a major life activity must be made without regard to the
ameliorative effects of mitigating measures, such as medication,
medical equipment or appliances, prosthetics, and hearing aids.
In other words, a person will be considered as having a disability
even though, through use of mitigating measures, he or she is not
substantially limited in any major life activity. Ordinary eyeglasses
and contact lenses, however, may be considered in determining
whether there is a substantial limitation in the major life activity
of seeing.

Obesity
When the Equal Employment Opportunity Commission (EEOC)
amended its regulations after 2008 statutory changes to the ADA,
it removed a regulatory provision saying obesity was not an impair-
ment. The EEOC currently takes the view that severe obesity, with-
out more, is an impairment that can support a claim of disability.

Although a few courts have agreed with the EEOC, most courts—
including, significantly, three federal appellate courts as of this writ-
ing—have concluded that weight is simply a physical characteristic,
like hair color or left-handedness. As one appellate court said, weight
“qualifies as a physical impairment only if it falls outside the normal
range and it occurs as a result of a physiological disorder. [Emphasis
in original.] Both requirements must be met. In other words, even
weight outside the normal range—no matter how far outside that
range—must be the result of an underlying physiological disorder to
qualify as a physical impairment under the ADA.”

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Persons with Disabilities 317

DUTY OF REASONABLE ACCOMMODATION
Included within the ADA’s definition of employment discrimination
is failing to make reasonable accommodations to the known physical
or mental disability of an otherwise-qualified applicant or employ-
ee. Otherwise qualified means a person with a disability who, with
or without reasonable accommodation, can perform the essential
functions of the particular position he or she holds or is applying for.

The key concept here is essential. The employee has to be able to
perform at least the essential functions of the job for ADA protec-
tions to apply. In determining what is essential and what is merely
marginal, the employer’s judgment is given substantial weight.

CASE STUDY:
ESSENTIAL JOB FUNCTIONS
Rite Aid, like other large pharmacy chains, requires its pharmacists
to perform immunizations. Rite Aid’s job description for pharmacists
lists immunizations as an essential job function, and Rite Aid requires
its pharmacists to hold a valid immunization certificate. When Rite
Aid first began imposing this requirement, a pharmacist (who had been
with Rite Aid and its predecessor pharmacies for 34 years) asked for
an accommodation because he suffers from trypanophobia—a fear of
needles. According to the pharmacist, his condition causes him to become
lightheaded, pale, and feeling like he is going to faint. The U.S. Court
of Appeals for the 2nd Circuit agreed that giving immunizations was
an essential job function, and it upheld the pharmacist’s termination.

QUICK TIP
An employer should determine the essential functions of a particular position and include

them in a written job description before advertising or interviewing for the position. A

determination of essential functions after a disabled applicant has been rejected carries

less weight.

To discriminate means to fail to make reasonable accommodations
for the known physical or mental limitations of an otherwise-qualified

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The SHRM Essential Guide to Employment Law318

applicant or employee. Under this definition, the employee has the
burden of identifying his or her disability and requesting the accom-
modation, unless the need is obvious. The employer does not have
an obligation to inquire about a nonobvious disability and, in fact, is
prohibited from doing so. The employer may, however, make gen-
eral inquiries as to the ability of an applicant or employee to perform
job-related functions.

ALERT!
When an employer suspects a psychological impairment that manifests as, for exam-

ple, moodiness, rudeness, or a short temper, the employer should address only the

unacceptable behavior and leave it to the employee to raise the matter of any underlying

disability.

Reasonableness of Requested Accommodation
If an employee informs the employer of a disability and requests
the employer to accommodate, the employer must do so unless the
accommodation would impose an undue hardship—that is, if the
accommodation would be significantly burdensome or expensive.

It is often difficult to know whether a requested accommoda-
tion is reasonable or is an undue hardship. The ADA gives some
examples of what is reasonable. For one, the employer’s facilities
must be readily accessible and usable. Wheelchair ramps may have
to be installed, and doorways and restroom facilities may need to be
enlarged. Other examples include the following:

• restructuring jobs
• modifying work schedules
• relaxing workplace rules
• making reassignments to vacant positions
• modifying or replacing existing equipment
• providing qualified readers or interpreters

The list of what is reasonable goes on, but it is not limitless. The
courts have ruled, for example, that an employer has no duty to

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Persons with Disabilities 319

grant indefinite leave, since the ADA protects people who can per-
form the essential functions of their job presently or in the imme-
diate future. Nor is an employer required to create a new position
tailored to an employee’s abilities.

What employers need to remember is that when a disabled
employee or applicant for employment requests an accommodation,
the employer must engage in a good-faith interactive process with
the employee to identify accommodations that might enable him or
her to perform the essential functions of the job. It could be that no
accommodation will actually work, or that while a particular accom-
modation might work, it is unreasonable or imposes an undue hard-
ship on the employer. Should that be the case, the employer is free
to terminate the employee or reject the applicant. However, if the
employer fails to engage in an interactive process or delays doing so,
the employer will almost certainly lose any ADA claim that follows.

CASE STUDY:
PROVIDING AN INTERPRETER
A nurse applied for clinical position with Johns Hopkins Hospital
for which she was otherwise well qualified, except that she was deaf.
Although she could read lips, she communicated more effectively using
American Sign Language (ASL). As part of her application, she
requested the hospital to provide her with an ASL interpreter at an
estimated annual cost of $120,000 (against an annual hospital budget
of $1.7 billion). The hospital declined to hire her, claiming that the cost
was an undue hardship. A federal district court in Maryland ruled
that the hospital violated the ADA by failing to provide the requested
interpreter, because the cost was not an undue hardship.

Teleworking
The courts have ruled that, generally, an employer is not required to
accommodate a disability by allowing a disabled employee to tele-
work. The reason is that most jobs require the kind of teamwork,
personal interaction, and supervision that simply cannot be per-

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The SHRM Essential Guide to Employment Law320

formed at home without compromising the quality of the employ-
ee’s performance. But in situations in which an employee with a
disability could in fact perform all essential job functions from home,
teleworking might well be a reasonable accommodation. (Telework-
ing is discussed in Chapter 20.)

Assignment to Vacant Position
One form of reasonable accommodation involves assignment of
an employee with a disability from a job he or she cannot perform
to a vacant position he or she can perform. However, seniority
systems normally prevail over a disabled employee’s interest in
being assigned to a particular position. It is unreasonable, said the
Supreme Court, to require an employer to violate a seniority system
to accommodate a disability. Seniority systems, whether imposed
under a collective bargaining agreement or unilaterally imposed
by management, provide important employee benefits by creating
and fulfilling employee expectations of fair and uniform treatment,
job security, and predictable advancement based on objective stan-
dards, said the court. However, in special circumstances the ADA
rights of the person with a disability trump a seniority system. If
an employee could show, for example, that the employer made fre-
quent exceptions to its seniority system, then one more departure
to accommodate a disabled employee might well be reasonable.

A related question is whether an employer may refuse to accom-
modate a disabled employee who is qualified for a vacant posi-
tion by selecting a more qualified person for the position. In other
words, does the ADA require an employer to assign a disabled but
otherwise qualified employee to a vacant position, or does it merely
require the employer to allow the disabled employee to compete for
the position? The EEOC takes the view that the employee should
simply receive the job without having to complete, but the courts
have generally disagreed with the EEOC and ruled that in most
circumstances the disabled employee is only allowed to compete
for the position.

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Persons with Disabilities 321

QUICK TIP
The seniority problem is further complicated when a union asks for copies of the

disabled employee’s medical records to determine whether a company’s decision to

override normal seniority rules is justified. Both the EEOC and the National Labor Rela-

tions Board take the position that disclosure of the records is a matter for good-faith

collective bargaining.

Service Animals
The U.S. Department of Justice defines service animals for pur-
poses of the public accommodation provisions of the ADA as dogs
that are individually trained to do work or perform tasks for people
with disabilities, such as guiding people who are blind, alerting
people who are deaf, pulling a wheelchair, alerting and protecting
a person who is having a seizure, reminding a person with mental
illness to take prescribed medications, and calming a person with
post-traumatic stress disorder (PTSD) during an anxiety attack.
Although EEOC regulations do not specifically address service ani-
mals as an accommodation in the employment context, the EEOC
has filed suit against a trucking company that refused to allow one
of its drivers, who had PTSD, to travel with an emotional support
dog prescribed by the driver’s treating psychiatrist.

One further point about accommodation: the accommodation
must relate to the disability such that, if granted, it would enable
the applicant or employee to perform essential job functions that
he or she would otherwise be unable to perform. Employers have
no obligation under the ADA to offer an accommodation that
might make some nonwork-related aspect of a disabled worker’s
life more convenient.

MEDICAL EXAMINATIONS AND INQUIRIES
The ADA has special rules for medical examinations. Before actu-
ally offering employment, an employer may never require an appli-
cant to undergo a medical exam. While testing for illegal drugs is
not considered a medical exam and is permitted before making a

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The SHRM Essential Guide to Employment Law322

job offer, just about every other form of pre-offer medical test is
illegal.

When the employer actually offers employment, the offer may
be conditioned on the results of a medical exam if the following
apply:

• All entering employees in the job category are subject to
examination.

• The exam requirement can be shown to be job-related and con-
sistent with business necessity.

• The resulting medical information is separately maintained and
treated as confidential.

• The results are not used to discriminate against persons with
disabilities.

If the results of the exam show that the candidate would be
unable to perform the essential functions of the job with or with-
out reasonable accommodation, or that the candidate would pose
a direct threat (discussed below), then the offer may be withdrawn.

ALERT!
The pre-employment medical exam may be conducted when passing the exam is

the only condition to an otherwise firm offer of employment. If any other conditions

remain, such as checking references, the exam will be illegal.

The EEOC defines medical examination as a procedure or test
that seeks information about an individual’s physical or mental
impairments or health. In determining whether a test is medical or
nonmedical, the EEOC looks to the following factors:

• Is it administered by a health care professional or someone
trained by a health care professional?

• Are the results interpreted by a health care professional or some-
one trained by a health care professional?

• Is it designed to reveal an impairment or physical or mental
health?

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Persons with Disabilities 323

• Is the employer trying to determine the candidate’s physical or
mental health or impairments?

• Is it invasive (for example, does it require the drawing of blood
or testing urine or breath)?

• Does it measure a candidate’s performance of a task (permitted),
or does it measure the candidate’s physiological responses to
performing the task? (not permitted).

• Is it normally given in a medical setting (for example, a health
care professional’s office)?

• Is medical equipment used?

According to the EEOC, a psychological test that is designed
to identify a mental disorder or impairment is medical, whereas
a psychological test that measures only personality traits such as
honesty, preferences, and habits is not.

Once an employee is on the job, the employer may require a
medical exam but only if it is job-related and consistent with busi-
ness necessity. Specifically, if an employer has a reasonable belief,
based on objective evidence, that the employee’s ability to perform
essential job functions will be impaired by a medical condition, or
that a medical condition may pose a direct threat to the employee
or others, the employer may require a medical exam.

Closely related to medical examinations are disability-related
inquiries. In general, an employer may not ask an applicant or
employee about a disability and may not ask questions designed
to elicit information about a disability. An employer may, how-
ever, ask whether an applicant or employee can perform job
functions, ask about current illegal drug use, and ask whether an
employee has been drinking.

CASE STUDY:
SICK LEAVE POLICY VIOLATED ADA
The prohibition against disability-related inquiries invalidated
one employer’s sick leave policy. The policy required employees who

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The SHRM Essential Guide to Employment Law324

were absent on sick leave to furnish a medical certification that
included a general diagnosis of the condition that gave rise to the
absence. The court ruled that since some diagnoses are bound to
reveal underlying disabilities, the policy violated the ADA.

Of course, once an applicant or employee discloses information
about a disability and requests an accommodation, the employer
not only may make disability-related inquiries; the employer is
required to do so.

QUICK TIP
The EEOC has ruled that an employer may inquire about a worker’s disability in

connection with disaster planning, so that the employee’s need for special assis-

tance can be identified in advance. However, it is up to the worker to decide whether

assistance is necessary.

OTHER PROHIBITED CONDUCT
The ADA also prohibits employment discrimination against indi-
viduals who have a record of having a disability (whether or not
they are currently disabled) or who are regarded as having a dis-
ability (even if they are not in fact disabled). But even if an indi-
vidual has a record of, or is regarded as, being disabled, if he or
she is not actually disabled, then the duty of reasonable accom-
modation cannot, as a logical matter, apply.

Another form of discrimination prohibited by the ADA arises
when an applicant or employee is known to be in a relationship or
be associated with someone else who has a disability. Suppose an
employer knows that a job applicant’s spouse or child has a chronic
condition that, the employer fears, may distract the applicant or
require extra time off. A refusal to hire for that reason violates the
ADA. As noted above, however, excessive absenteeism does not
need to be tolerated. Nor is an employee entitled to reasonable
accommodation under the ADA when it is not the employee, but
someone with whom he or she is associated, who is disabled.

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Persons with Disabilities 325

ALERT!
Other laws may, of course, apply in the so-called associational disability situations, such

as the Family and Medical Leave Act or state or local mandatory leave laws. (The FMLA

is covered in Chapter 8.)

Many states and local governments have their own disability dis-
crimination laws that may be similar (but not identical) to the ADA.
California, for example, defines disability as an impairment that
limits one or more major life activities as contrasted with the ADA’s
substantially limits. State and local laws often have thresholds lower
than the ADA’s 15-employee requirement.

WELLNESS PROGRAMS
A wellness program is an employer-sponsored plan to improve
employee health. Wellness programs might encourage employees to
exercise, lose weight, or quit smoking. Biometric and health screen-
ings might be included in the program. Some programs offer finan-
cial incentives to employees to participate, such as reduced health
insurance premiums, gift cards, or cash. Employers see wellness pro-
grams as a way to reduce absenteeism, lower health care costs, and
generally improve workplace morale and productivity.

A potential problem with wellness programs is that they often
involve disability-related inquiries and medical exams prohibited by
the ADA, or they involve requests for genetic information in viola-
tion of the Genetic Information Nondiscrimination Act (GINA).
Under regulations issued by the EEOC in 2016, wellness programs
are permitted as an exception to the ADA and GINA, but they must
meet the following strict criteria:

• The program must be reasonably designed to promote health or
prevent disease.

• Employee participation must be voluntary.
• Employer-offered financial and in-kind incentives to encour-
age participation are generally limited to 30 percent of self-only
health insurance coverage. (The AARP has challenged in court

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The SHRM Essential Guide to Employment Law326

the allowance of incentives up to 30 percent, claiming that such a
large incentive effectively makes the program involuntary.)

• Employees with disabilities who cannot participate in the program
must be reasonably accommodated by being offered alternative
means of participating and earning any financial incentives.

• Employees from whom medical information will be obtained must
be provided with a notice describing the medical information to
be obtained, the purposes for which it will be used, and restric-
tions on disclosure of the information. (The EEOC has devel-
oped a sample form of notice, available on the EEOC’s website.)

Other laws potentially affecting wellness programs are the
Employee Retirement Income Security Act (ERISA), discussed in
Chapter 9, and the Patient Protection and Affordable Care Act
(PPACA), discussed in Chapter 10.

Employers are well advised to consult appropriate professionals
for help in designing an effective and lawful wellness program.

DIRECT-THREAT DEFENSE
The ADA allows employers to exclude persons who pose a direct
threat to the health or safety of the disabled person or to others
in the workplace when the threat cannot be eliminated by reason-
able accommodation.

The food industry, for example, may exclude persons from
food handling who have infectious or communicable diseases
that are transmitted to others through the handling of food if
those persons cannot otherwise be reasonably accommodated.
The ADA also permits enforcement of state and local laws deal-
ing with food handling by persons with infectious or communi-
cable diseases. The secretary of the U.S. Department of Health
and Human Services is required to publish a list of such diseases
and the manner in which they are transmitted.

Other situations in which the direct-threat defense applies
include a worker with diabetes and hypertension who is at risk

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Persons with Disabilities 327

for coma and stroke and who seeks employment as a bus driver
or a restaurant employee with epilepsy who is at risk for seizures
and seeks a promotion to cook, a position in which he or she
would be working with dangerous appliances and equipment.
In both these situations, the employer may rely on the ADA’s
direct-threat defense and refuse to place the worker in the posi-
tion sought.

QUICK TIP
The direct-threat defense is unique to the ADA and does not spill over to other areas of

discrimination law.

The conclusion that a direct threat exists cannot be based on igno-
rance or irrational fear. When AIDS first came to public attention,
but before the means of transmission were well understood, some
employers simply fired or refused to hire infected individuals. The
courts held that practice to be illegal under the ADA.

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Discrimination
in General

• Title VII of the Civil Rights Act

• Covered Employers and Employees

• Religious Discrimination under Title VII

• Genetics

• Retaliation

• Anatomy of a Title VII Case

• Other Nondiscrimination Laws

• State and Local Prohibitions

• Professional Codes of Ethics

• Record-Keeping

• Employment Practices Liability Insurance

CHAPTER 14

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Organizations Author: Charles Fleischer Date: 2017
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The SHRM Essential Guide to Employment Law262

The Civil War made clear that slavery would no longer be toler-
ated in the United States, but it did little to remedy rampant dis-
crimination. It was not until 1964, through the efforts of Presidents
Kennedy and Johnson and after bitter congressional debate, that
the first significant nondiscrimination laws were passed. Since then,
numerous protections have been added, not only at the federal level,
but also at state and local levels.

This chapter addresses employment discrimination in general,
including religious and genetic discrimination. Subsequent chapters
deal with discrimination on account of gender, age, and disability.

TITLE VII OF THE CIVIL RIGHTS ACT
The Civil Rights Act of 1964 is the first modern piece of federal leg-
islation to address discrimination generally. The act deals not only
with discrimination in employment but also with discrimination in
public accommodations. The act was amended in 1991 to clarify and
strengthen certain provisions and to expand the range of available
remedies to include compensatory and punitive damages in cases of
intentional discrimination.

Title VII of the act addresses employment discrimination. It
applies to all employers that have 15 or more employees and to
employment agencies and labor unions. The Equal Employment
Opportunity Commission (EEOC), created by Title VII, together
with cooperating state and local agencies, enforces Title VII at the
administrative level by investigating charges, recommending reme-
dies, and conciliating disputes between employers and employees.
The EEOC can also bring suit in its own name against employers in
federal court. EEOC guidelines interpreting Title VII are a useful
resource.

At the heart of Title VII is the following provision:
It shall be an unlawful employment practice for an
employer:

(1) to fail or refuse to hire or to discharge any individ-
ual, or otherwise to discriminate against any individual

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Discrimination in General 263

with respect to his compensation, terms, conditions, or
privileges of employment, because of such individual’s
race, color, religion, sex, or national origin; or

(2) to limit, segregate, or classify his employees or appli-
cants for employment in any way which would deprive or
tend to deprive any individual of employment opportuni-
ties or otherwise adversely affect his status as an employee,
because of such individual’s race, color, religion, sex, or
national origin.

Those two paragraphs have generated whole libraries of commen-
tary and many thousands of court decisions. Many of the Supreme
Court’s landmark cases during the last 50 years have involved Title
VII. It would be impossible to digest that body of material here.
What follows is a brief overview of Title VII principles and a discus-
sion of some of the more important issues employers are likely to
face.

Title VII is not limited to traditional minorities. Everyone—
whites as well as blacks, males as well as females, Christians as well
as Jews—is protected. In other words, Title VII does not pro-
tect special groups from adverse employment decisions. Rather,
it prohibits an employer from using certain criteria when making
decisions. So, for example, a more qualified white male who is
passed over for promotion in favor of a less qualified black female
has a good Title VII claim if the employer was motivated by race
or gender.

Reverse Discrimination
The discrimination that a nonminority member suffers when an
employer discriminates in favor of a minority member is some-
times called reverse discrimination. Although the Supreme Court
has made clear that such favoritism is plain and simple discrimina-
tion, the court’s current views on this topic are not entirely clear.
In a pair of widely publicized decisions involving the University

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The SHRM Essential Guide to Employment Law264

of Michigan, the court ruled that the university’s law school may
consider race as a plus factor in evaluating individual applicants to
the law school. According to the court, the law school had a legit-
imate educational interest in assembling a diverse student body.

In 2016, the Supreme Court considered a case involving the
admissions policy of the University of Texas at Austin. Under the
policy, the school admitted all applicants who graduated from
a Texas high school in the top 10 percent of his or her class (a
requirement of state law), and it filled the remainder of its incom-
ing freshman class by combining an applicant’s “academic index”
(SAT scores and high school academic performance) with the appli-
cant’s “personal achievement index,” which the court described as
a holistic review containing numerous factors, including race. The
court upheld UT’s admissions policy despite the inclusion of race
as a consideration.

Since employers, too, have a legitimate interest in a diverse
workforce, the court’s reasoning would seem to apply to employ-
ment as well as higher education. It remains to be seen, however,
just how these decisions might transfer to the workplace.

Disparate Treatment and Disparate Impact
Discrimination under Title VII is sometimes classified as either
disparate treatment discrimination or disparate impact discrim-
ination. The first category includes what immediately comes to
mind—intentionally making a personnel decision, such as refusing
to hire or promote a particular individual because of race, color,
gender, or other characteristic. That type of discrimination is pro-
hibited by Title VII. So too is an employer practice of grouping
employees by race, color, gender, or other prohibited factors and
treating the groups differently. Employment ads that indicate a
preference for or against a particular race, color, or sex are also
illegal, whether or not any actual discrimination is shown.

Disparate impact discrimination is more subtle. Suppose an
employer adopts a policy that on its face seems neutral but that

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Discrimination in General 265

turns out to have an adverse impact on a particular ethnic group
or gender. Take, for example, a private security company that has
a minimum height and weight requirement for its patrol officers,
the net effect of which is to exclude most females, but almost no
males.

Other practices that could give rise to disparate impact claims
include minimum education or experience requirements that do
not serve a legitimate business purpose, use of tests scores in hiring
or promoting if the test is culturally biased or is not related to
job performance, or blanket exclusion of applicants with criminal
records or whose wages have been garnished.

Terms, Conditions, and Privileges of Employment
Title VII prohibits discrimination in hiring, firing, compensation,
and other terms, conditions, and privileges of employment. Ready
examples of what is meant by terms, conditions, and privileges
of employment include shift assignments; fringe benefits such as
vacation, sick leave, or insurance programs; and access to facilities
such as the cafeteria and fitness center. Courts have ruled that the
intangible work environment is covered by Title VII as well. Under
those rulings, an employer that promotes or tolerates a workplace
environment filled with demeaning racial or sexual slurs can be
sued by the target of those slurs and by others who find the envi-
ronment offensive if the slurs are severe and pervasive and a reason-
able person would find the environment offensive.

Trivial or inconsequential workplace actions by the employer
will not support a Title VII discrimination action. The Supreme
Court has said that a job action must amount to a significant
change in employment status. The action must also be objectively
detrimental, not just something a particular employee dislikes. As
one court put it, not everything that makes an employee unhappy
is an actionable adverse action, nor are changes that make a job
less appealing but that do not affect a term, condition, or benefit
of employment.

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The SHRM Essential Guide to Employment Law266

QUICK TIP
A less-than-favorable evaluation, minor change in duties, or a change in title, with no

effect on pay or status, even for allegedly discriminatory reasons, is not illegal. But if the

evaluation leads to a loss of bonus or a demotion and the employee can show discrimi-

natory motive, a good Title VII claim will result.

Bona Fide Occupational Qualification
An employer charged with discrimination on the grounds of sex,
religion, or national origin (but not discrimination on the grounds
of race) may, in theory, raise a defense of bona fide occupational
qualification (BFOQ). However, the defense is narrowly interpret-
ed and as a practical matter is rarely available. In the airline indus-
try, for example, a carrier that fails to hire male applicants as flight
attendants under the belief that passengers expect females in that
role does not have a good BFOQ defense. On the other hand, an
employer may rely on the BFOQ exception in hiring actors for male
roles and actresses for female roles.

Testers
Private organizations and even the EEOC sometimes use testers to
obtain evidence of discrimination in the workplace.

EXAMPLE: Suppose an employer that is suspected of having
racially discriminatory hiring practices advertises a job opening.
Two testers—one white, one black—apply for the job and give
fake credentials that are substantially the same. The employer
interviews the black candidate first but says he needs to check
references before making any offer. He then interviews the white
candidate and makes an offer on the spot. If this pattern is repeat-
ed several times, the employer will have a difficult time explain-
ing its actions in the discrimination suit that is sure to follow.

Claims of discrimination by testers, and by the organizations
that employ them, do not always fare well in court, since the testers

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Discrimination in General 267

are not really candidates and they cannot really claim to have been
denied a job.

QUICK TIP
The term employee as used in Title VII includes former employees. Therefore, it is illegal,

for example, for a company to give a bad reference to a former employee in retaliation

for the former employee’s filing a charge of race discrimination after he or she was fired.

Training
It is not enough for a company to include nondiscrimination provi-
sions in its employee handbook. To have an effective nondiscrimina-
tion policy, companies must periodically train their employees as to
what constitutes discrimination and how to complain about discrim-
ination. As part of the training, employees must be assured that their
complaints will not result in retaliation.

Training, as part of an effective nondiscrimination policy, is par-
ticularly important with regard to sexual and other types of harass-
ment. Absent an effective policy, the employer will be unable to
defend a claim that a supervisor harassed a subordinate employee.
(See Chapter 15 for more on harassment.)

COVERED EMPLOYERS AND EMPLOYEES
Title VII defines employer as a person or organization engaged in
an industry affecting commerce that has 15 or more employees for
each working day in each of 20 or more calendar weeks in the cur-
rent or preceding calendar year.

The term industry affecting commerce means any activity, busi-
ness, or industry in commerce in which a labor dispute would
hinder or obstruct commerce or the free flow of commerce—in
other words, just about any activity in which an employer might
engage. (Title VII is tied to the Commerce Clause of the U.S.
Constitution because all federal legislation must be based on one
or another of the powers granted the federal government by the
Constitution.)

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The SHRM Essential Guide to Employment Law268

Although failure to meet the 15-employee threshold does not
affect a court’s power to hear a Title VII case (that is, it does not
deprive the court of jurisdiction), an employee bringing a Title
VII case must prove that the 15-employee threshold is satisfied
as part of his or her case. Failure to do so could result in the case
being dismissed. Determining who are employees is therefore crit-
ical to a Title VII claim. And, of course, the person making the
claim must be an employee (or an applicant for employment or a
former employee) to invoke federal nondiscrimination laws in the
first place.

The discrimination laws themselves are not at all helpful in
answering the question of who are employees. They typically define
employee as an individual employed by an employer. In the Supreme
Court’s words, that is a mere nominal definition that is completely
circular and explains nothing.

One issue is how to deal with individuals who are carried on the
employer’s books as employees, but who are not physically at work
for a full 20 weeks. In a 1997 Supreme Court case, the employ-
er had between 15 and 17 employees on its payroll for at least 20
weeks, but during 11 of those weeks, it was not actually compen-
sating 15 or more employees. The difference resulted from the fact
that two of its employees were part time who worked fewer than five
days per week.

The court ruled that the employer was subject to Title VII,
adopting what has become known as the payroll method for count-
ing employees. Under that method, if an employee appears on the
employer’s payroll records, he or she is counted whether or not he
or she is actually being compensated on a particular day. In short,
part-time employees, full-time employees, and presumably persons
on leave all count.

QUICK TIP
The employee-counting question is broadly applicable to a wide range of federal employ-

ment-related laws, even though they may have different numerical thresholds.

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Discrimination in General 269

Professional Corporations
Yet another issue involves shareholder-directors of profession-
al corporations, such as doctors and lawyers. While they may be
classified as employees for federal tax and pension plan purpos-
es, they also manage the professional corporation. (Professional
corporations and other types of business entities are discussed in
Chapter 1.)

CASE STUDY:
SHAREHOLDER-DIRECTORS AS EMPLOYEES
In a Supreme Court case called Clackamas Gastroenterology
Associates, P.C. v. Wells, an Oregon medical clinic was sued for
discrimination by the clinic’s bookkeeper. The bookkeeper argued that
the clinic met the 15-employee threshold so long as four of its physician-
shareholders were counted. The bookkeeper pointed out, for example,
that the physician-shareholders had employment contracts, they were
salaried, and they were treated as employees for tax purposes. The clinic
claimed otherwise—that the physician-shareholders were really more
like partners in a partnership and should therefore not be counted.
Citing EEOC regulations, the Court in Clackamas listed the following
six factors to be considered in determining whether a shareholder-
director of a professional corporation is an employee for discrimination
purposes:

• whether the organization can hire or fire the individual or set the
rules and regulations of the individual’s work

• whether, and if so, to what extent, the organization supervises the
individual’s work

• whether the individual reports to someone higher in the organization
• whether, and if so, to what extent, the individual is able to influence
the organization

• whether the parties intended that the individual be an employee, as
expressed in written contracts

• whether the individual shares in the profits, losses, and liabilities of
the organization.

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The SHRM Essential Guide to Employment Law270

Whatever the merits of the Clackamas decision, the six factors the
Supreme Court listed are highly fact-specific. Having to deal with
these additional factors adds further uncertainty to discrimination
claims and increases associated costs and delays.

Contingent Workers
In general, independent contractors are not covered by the
employment provisions of the nondiscrimination laws because
they are not employees. However, the misclassification of a true
employee as an independent contractor is as disastrous for non-
discrimination law purposes as it is for tax and benefits entitle-
ment purposes. (Independent contractors are discussed in more
detail in Chapters 1 and 7.)

All other categories of contingent workers—such as part-tim-
ers, job-sharers, teleworkers, and day laborers—are fully pro-
tected by the nondiscrimination laws. For example, a company
whose staff includes temporary workers (temps) furnished by an
agency cannot direct the agency to furnish (or not furnish) temps
of a particular race or gender. Nor can the company accept temps
from an agency when the company knows that the agency itself
discriminates in selecting persons to be temps.

For certain categories of contingent workers, such as leased
or joint employees, it is not always clear who the actual employ-
er is—the staffing firm, the company that controls the actual
worksite, or both. The EEOC has developed elaborate guide-
lines to determine the identity of the employer for purposes of
applying the federal nondiscrimination laws. The guidelines turn
on such factors as who does the hiring and firing, who handles
payroll, and who controls the employee’s day-to-day work envi-
ronment. While it may be possible in any particular circumstance
for either the staffing firm or the worksite owner to avoid being
tagged as the employer, any company that tolerates or commits
discrimination against a member of its workforce is exposed to
substantial risk.

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Discrimination in General 271

Extraterritorial Application
Activities by employers outside the U.S. could certainly affect com-
merce within the U.S. But the Supreme Court has held that Title
VII does not have extraterritorial application, so that U.S. citizens
employed abroad, even U.S. citizens employed by U.S. employ-
ers, have no Title VII protection. Title VII itself exempts aliens
employed outside the U.S., and it permits employers operating in a
foreign country to comply with that country’s law even if compli-
ance amounts to a violation of Title VII.

RELIGIOUS DISCRIMINATION UNDER TITLE VII
Title VII makes it illegal for an employer to discriminate against
an employee on the basis of his or her religion. Religion includes
all aspects of religious observance, practice, and belief. This means,
for example, that an employer cannot refuse to hire an applicant
because the applicant is a member of a particular religious sect any
more than the employer can refuse to hire an applicant on the basis
of the applicant’s race or gender. Harassment based on religious
beliefs or practices also violates Title VII.

But special rules apply to religious discrimination. The First
Amendment to the U.S. Constitution says that “Congress shall
make no law respecting the establishment of religion, or prohibit-
ing the free exercise thereof.” Based on the First Amendment, the
courts have developed the so-called ministerial exception to Title
VII, under which religious organizations may discriminate in con-
nection with the selection and employment of their own clergy.

The term clergy has been broadly defined by the courts to include
lay employees whose primary duties consist of teaching, spreading
the faith, church governance, supervision of religious orders, or par-
ticipating in religious ritual and worship. So, for example, a nun who
was an assistant professor of canon law at Catholic University could
not sue for sex discrimination when she was denied tenure. And a
lay music teacher at a Catholic elementary school who directed a
church choir also could not complain of sex discrimination because,

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The SHRM Essential Guide to Employment Law272

as the court recognized, music is important in the spiritual and pas-
toral mission of the church and plays in integral role in religious tra-
dition. Even for nonclergy, religious organizations may discriminate
against employees on religious grounds. (See Chapter 23 for more
on religious organizations.)

Title VII also requires employers to reasonably accommodate their
employees’ religious observances and practices. In this respect it is
similar to the Americans with Disabilities Act (ADA) (discussed in
Chapter 17), which requires reasonable accommodation of employ-
ees with disabilities. As with the ADA, the burden is on the employ-
ee to ask for a reasonable religious accommodation.

One difference between disability accommodation under the
ADA and religious accommodation under Title VII is that under the
ADA the employer must, in effect, conduct an interactive dialogue
with a disabled employee to arrive at what is reasonable. Under Title
VII, the employer can offer any reasonable accommodation in satis-
faction of its obligation.

The employer is excused from accommodating a religious prac-
tice if the accommodation would impose an undue hardship. While
anything more than a minimal cost to the employer will qualify as an
undue hardship, the hardship must be real and not merely specula-
tive or hypothetical.

Following are cases in which employees or applicants claimed that
the employer failed to accommodate their religious observances or
practices.

Sabbath Day
A number of cases have involved work on a Sunday or other Sab-
bath day. The courts have ruled that an employer must attempt to
accommodate a good-faith belief prohibiting work on Sabbath, such
as by allowing the employee to switch with another employee or by
having a flexible leave policy that allows the employee to choose the
Sabbath as a leave day. However, the employer does not have an
absolute duty to accommodate such religious beliefs. If, due to the

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Discrimination in General 273

employer’s workload, weekend work is necessary, and if excusing
some employees completely from all weekend work would create
disruption within the workplace, or would violate established senior-
ity rules or a union contract, the employer may insist that employees
participate in weekend work schedules despite their religious scru-
ples to the contrary.

Religious Garb
If there is a good business reason, such as interference with job
performance or safety concerns, an employer may prohibit employ-
ees from wearing religious garb, such as crucifixes, yarmulkes, or
chadors. Otherwise, the employer is likely obligated to accommo-
date the practice. One way to accommodate might be to transfer
the employee to a position that does not involve safety issues. (Dress
codes are discussed in Chapters 2 and 15.)

In a case involving Abercrombie & Fitch, a practicing Muslim
applicant wore a head scarf at her initial job interview. The scarf
would have violated the store’s dress code, and she was not hired.
The Supreme Court ruled that the applicant stated a good claim
of failure to accommodate her religious practice, even though the
applicant’s religion was never discussed during the interview and the
applicant never requested an accommodation.

Abortion and Birth Control
Cases in this area provide a good illustration of what is, and what is
not, required of an employer. In one case an anti-abortion activist
took a religious vow always to wear a particular button depicting
a fetus and containing anti-abortion slogans. The button was dis-
turbing to many of her co-workers for reasons unrelated to religious
beliefs. Her employer offered her the option of covering the button
while at work, wearing a different button that contained the slogans
but not the fetus, or removing the button when she left her imme-
diate work area. She refused all of these options and was fired. In
her Title VII suit for religious discrimination, the court held that the

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The SHRM Essential Guide to Employment Law274

employer had offered a reasonable accommodation and was justified
in firing her when she rejected the accommodation.

In another case, an orthodox Jewish pharmacist, who was unwill-
ing to sell condoms on religious grounds, applied for a job at a
drugstore. The drugstore refused to consider his application and
was sued for discrimination. The court agreed with the pharmacist,
noting that the drugstore made no effort whatever at accommoda-
tion and that the drugstore’s claim of undue hardship, had it tried
to accommodate, was merely speculative.

The Patient Protection and Affordable Care Act (PPACA), dis-
cussed in Chapter 10, requires employer group health plans to
provide preventive care and screenings to women without any
additional cost to the female patients. Regulations adopted under
the PPACA identify some 20 contraceptive methods (including
four that prevent a fertilized egg from attaching to the uterus)
that are included within the PPACA’s preventive care requirement.
However, consistent with another federal law—the Religious Free-
dom Restoration Act—the regulations exempt churches and reli-
gious nonprofit organizations from the contraceptive mandate.
The question before the Supreme Court in Burwell v. Hobby Lobby
Stores, Inc. was whether for-profit companies, whose owners held
the religious belief that life begins at conception, had to comply
with the contraceptive mandate. The court ruled that the compa-
nies did not have to comply.

Praying and Preaching
To what extent may an employee actively promote his or her reli-
gious beliefs to fellow employees? In one case a management-lev-
el employee, who had become an evangelical Christian, wrote a
letter to her supervisor stating that because of certain unidentified
actions the supervisor had taken, he needed to “get right with
God.” The supervisor’s wife saw the letter and took it to mean
that her husband was having an affair. The same employee wrote a
second letter to a subordinate of hers, suggesting that the subor-

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Discrimination in General 275

dinate’s illness was punishment for premarital sex. The employee’s
firing over the letter-writing was justified, said the court, because
the employer had no obligation to accommodate such inappro-
priate behavior by an employee with management responsibilities,
even if the behavior was religiously motivated.

In another case, a born-again Christian occasionally prayed in his
office with other employees, and he made isolated references to his
Christian beliefs. The court ruled that tolerating these trifling inci-
dents imposed no hardship on the employer and could not justify
termination.

Refusal to Comply with Tax Laws
When an applicant for employment refused, on religious grounds,
to provide his Social Security number, the prospective employer
was justified in rejecting his application. The court held that the
employer was not required to accommodate the applicant by vio-
lating Internal Revenue Service (IRS) regulations or by seeking a
waiver from the IRS.

Mandatory Flu Vaccinations
May a hospital or other health care provider require its employees
to be vaccinated against seasonal flu? Although the EEOC has no
formal rule on the subject, in a 2009 technical assistance document
and in a 2012 informal discussion of the matter, the EEOC basi-
cally said yes, provided the employer allow exemptions for persons
who have sincerely held religious beliefs against the practice, or who
cannot be vaccinated for medical reasons.

GENETICS
By use of genetic testing, it is possible to calculate the probability
that a person who is now symptom-free will develop a disabling or
fatal disorder. Biomedical research continues to increase the number
of conditions known to be genetically linked. While some genetic
markers increase only slightly the statistical risk that an associated

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The SHRM Essential Guide to Employment Law276

disease will become manifest, other genetic markers are virtual guar-
anties of eventual sickness or death.

Title II of the Genetic Information Nondiscrimination Act (GINA)
generally prohibits the use of genetic information in employment,
including discrimination on the basis of genetics and the requiring,
requesting, or purchasing of genetic information about employees
and applicants. The law defines genetic information as the following:

• genetic tests of an individual or his or her family member
• the manifestation of a disease or disorder in family members of
such individual

• genetic services provided to an individual or any family member,
or the individual’s or family member’s participation in clinical
research that includes genetic services

A genetic test means analysis of human DNA, RNA, chromosomes,
proteins, or metabolites that detects genotypes, mutations, or chro-
mosomal changes. A family member is an individual’s dependent or
anyone within the fourth degree of relationship.

The problem is, employers routinely acquire medical information
about employees that might just include genetic information. For
example, an employee applies for leave under the Family and Medi-
cal Leave Act (FMLA), and the supporting report from his physician
discloses that the employee suffers from a genetic disorder. Does
receipt of that report amount to a violation of GINA?

Under regulations adopted by the EEOC, the general prohibi-
tion against acquiring genetic information does not apply when an
employee is asking for leave under the FMLA (or other leave pol-
icies established by the employer) to care for an ill family member
and is required to provide medical certification in support of the
leave request. There is also no GINA violation when an employ-
er inadvertently acquires the information. Inadvertent acquisition
may occur, for example, when an employee just happens to mention
his or her own genetic condition or that of a fellow employee—the
so-called water-cooler problem.

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Discrimination in General 277

Acquisition of genetic information will also be considered inad-
vertent if the employer uses language such as shown in Figure 14.1
in any request for medical information.

FIGURE 14.1: GINA DISCLAIMER

The Genetic Information Nondiscrimination Act of 2008 (GINA) prohibits employers and
other entities covered by GINA Title II from requesting or requiring genetic information
of an individual or family member of the individual, except as specifically allowed by this
law. To comply with this law, we are asking that you not provide any genetic information
when responding to this request for medical information. “Genetic information,” as
defined by GINA, includes an individual’s family medical history, the results of an
individual’s or family member’s genetic tests, the fact that an individual or an individual’s
family member sought or received genetic services, and genetic information of a fetus
carried by an individual or an individual’s family member or an embryo lawfully held by
an individual or family member receiving assistive reproductive services.

RETALIATION
Title VII also prohibits retaliation against an employee who has
complained about discrimination or who has assisted another com-
plainant, such as by testifying on his or her behalf.

Whenever a discrimination charge is pending—even an informal
one that is still at the internal investigation stage—employers should
exercise extraordinary caution in making personnel decisions that
affect the complaining employee or others involved in the matter.
Any adverse action taken after the initial charge has been made is
likely to generate a further charge of retaliation. A weak discrimina-
tion claim that would likely fail if pursued before the EEOC or in
the courts is all too frequently converted into a successful retaliation
claim after the complaining employee suffers an adverse action at
the employer’s hands. (According to the EEOC’s Performance and
Accountability Report: Fiscal Year 2016, retaliation led the list of
charges filed with the EEOC that year.)

The Supreme Court has made clear that to constitute retaliation,
the retaliatory acts must be material and adverse. However, unlike
discrimination itself, the retaliation need not affect the terms or con-

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The SHRM Essential Guide to Employment Law278

ditions of employment. Under this ruling, an act can qualify as retal-
iatory even if it is unrelated to the job, so long as it would dissuade
a reasonable employee from filing a discrimination charge.

In a 2017 federal court case from New York, the trial court dis-
missed a claim of disability discrimination, but it allowed a retal-
iation claim to go forward to trial. The employee’s evidence in
support of retaliation was that, after the employee made a claim
of disability discrimination, his supervisors stopped saying good
morning to him, they spoke to him without a warm welcome and
as if he were a criminal, they closely monitored his work, and they
asked about two instances of unapproved overtime. While this evi-
dence would seem to fall short of the material-and-adverse stan-
dard, it illustrates the care an employer must take in the face of a
discrimination claim.

ANATOMY OF A TITLE VII CASE
Employers are well-advised to develop in advance procedures for
handling a claim of discrimination, whether the claim is simply an
internal complaint or a formal charge filed with the EEOC. Missteps
at this critical juncture can convert an otherwise straightforward,
easily handled matter into costly and disruptive litigation. Compe-
tent legal guidance in developing the plan and responding to the
claim is essential.

Investigation
Internal complaints must be investigated promptly, thoroughly, and
objectively, and appropriate discipline must be imposed when war-
ranted. If the complaint involves, say, only a single inappropriate
comment of a sexual nature, perhaps it would be sufficient to have
a trained manager or an HR representative conduct the investiga-
tion. In most cases, however, an outside, independent investigator
is needed. Hiring an independent investigator excludes the lawyers
who regularly represent the company, both because they will not be
perceived as independent and objective and because the company

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Discrimination in General 279

risks losing the protection of the attorney-client privilege as to other
matters on which the lawyers advised the company.

While investigations should be conducted as confidentially as
reasonably possible (since unnecessary dissemination of informa-
tion about the matter could be seen as retaliatory), investigators
should not promise confidentiality to the parties or witnesses
involved. Further, employers should not impose a blanket prohibi-
tion on participants’ discussing the matter, because (according to
the National Labor Relations Board), doing so could amount to
interference with employees’ right to engage in concerted activ-
ity. Figure 14.2 is a suggested handbook provision addressing
investigations.

FIGURE 14.2: COMPANY INVESTIGATIONS

Following receipt of a complaint of discrimination or receipt of other evidence of
suspected misconduct, the company will normally conduct an investigation, either by
company personnel or by outside professionals. When requested to do so, employees
must cooperate with the company and its agents in any such investigation by providing
accurate and complete information.

The company has a compelling interest in protecting the integrity of its investigations.
In every investigation, the company has a strong desire to protect witnesses from
harassment, intimidation, and retaliation; to keep evidence from being destroyed; to
ensure that testimony is not fabricated; and to prevent a cover-up. The company may
decide in some circumstances that in order to achieve these objectives, the investigation
must be conducted in strict confidence. If the company reasonably imposes such a
confidentiality requirement and an employee does not maintain confidentiality, the
employee may be subject to disciplinary action up to and including termination.

Notice of Charge
Often the first time an employer learns of a discrimination complaint
is when it receives notice from the EEOC (or a state or local fair
employment practice agency, or FEPA) that a formal charge has been
filed. Sometimes the EEOC notice advises the employer that no
action is currently needed. More likely, the notice includes a lengthy
request for company information and records and gives the com-
pany a deadline for filing a position statement in response to the

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The SHRM Essential Guide to Employment Law280

charge. The notice will also be accompanied by information regard-
ing the EEOC’s voluntary mediation process that, if agreed to by the
employee and the company, eliminates the need to provide informa-
tion, records, and a position statement.

If the parties do not agree to mediation, or if mediation is unsuc-
cessful, then the company must comply with the EEOC’s informa-
tion requests and provide a position statement. The EEOC may also
ask to interview company personnel who have knowledge pertinent
to the discrimination charge.

QUICK TIP
Under EEOC rules announced in 2017, an employer’s position statement will be shared

with the complaining party, but the complaining party’s response to the position state-

ment will not be shared with the employer. It is not clear why the EEOC has unleveled the

playing field this way.

Probable Cause
When the EEOC completes its investigation, it usually issues a writ-
ten finding either that there is probable cause to believe discrimi-
nation occurred or that there is no probable cause. Or it may just
dismiss the charge without any finding. In the event of a probable
cause finding, the EEOC then invites the parties to conciliate—a
step the EEOC is legally required to take. Conciliation is different
from mediation, because at the mediation stage the parties can gen-
erally resolve the charge on any terms they deem appropriate. At
the conciliation stage, however, the EEOC is effectively a party to
the negotiations and will insist that remedial measures be included
in any final agreement, such as that the company agree to monitor
its employment practices and that it post a notice in the workplace
concerning the discrimination.

If conciliation is unsuccessful, or if the EEOC finds no probable
cause or dismisses the case without any finding, then the EEOC
issues a right-to-sue letter authorizing the complaining party to file
suit in court within 90 days. Receipt of such a letter is a prerequisite

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Discrimination in General 281

for going to court on any discrimination or retaliation claim over
which the EEOC has jurisdiction.

If the parties reach agreement, either during mediation or after
conciliation, the agreement will be binding on them just like any
other contract. But absent agreement, the EEOC has no author-
ity to decide discrimination charges or impose enforceable rem-
edies on employers in the private sector. So an employer may be
tempted simply to ignore the EEOC charge. This is usually a
mistake.

Ignoring the EEOC means missing the opportunity to convince
the EEOC that the charge is groundless. If the EEOC finds no
probable cause, the complaining employee may well be discouraged
from pursuing the matter in court or may have difficulty finding a
lawyer to take his or her case. Even if the charge is not groundless,
ignoring the EEOC means missing the opportunity to mediate or
conciliate the charge and avoid costly litigation. Finally, the EEOC
itself can file suit and may decide to do so when faced with a recal-
citrant employer.

Remedies
A successful plaintiff in a Title VII discrimination case can be award-
ed a variety of remedies by the court. In a failure-to-hire or wrong-
ful termination case, for example, the remedies might include the
following:

• back pay—pay and benefits the plaintiff would have received from
the time of the discrimination to the time of the court judgment

• reinstatement—an order that the employer hire or reinstate the
plaintiff

• front pay—if hiring or reinstatement is not feasible, pay and ben-
efits the plaintiff would have received from the date of the court
judgment until he or she can reasonably be expected to obtain
comparable employment

• compensatory damages—money damages for humiliation and
embarrassment the plaintiff suffered in connection with the dis-

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The SHRM Essential Guide to Employment Law282

crimination, capped as follows: for employers with between 15 and
100 employees, $50,000; for employers with between 101 and
200 employees, $100,000; for employers with between 201 and
500 employees, $200,000; and for employers with more than 500
employees, $300,000

• punitive damages—damages to punish the employer acting with
malice or reckless indifference to the employee’s federally protect-
ed rights

• attorney’s fees and costs—fees of the plaintiff’s attorney and
court costs incurred in the litigation (in addition, of course, to
the fees and costs the company has to pay its own attorney to
defend the case)

After-Acquired Evidence
When faced with a formal, EEOC charge of discrimination, the
employer, usually through its attorneys, undertakes its own inves-
tigation to determine whether the charge has merit and whether
any defenses are available. Sometimes an investigation turns up
evidence about the complaining employee, such as false resume
statements, that would have justified firing the employee or not
hiring him or her in the first place. Such after-acquired evidence
is not a complete defense to a discrimination claim, but it does
limit the remedies available to the aggrieved employee. As the
Supreme Court said in such a case, it makes no sense to compel
an employer that fired an employee for discriminatory reasons to
rehire the employee, and then turn around and fire the employee
again based on resume fraud. But it does make sense to allow
a back-pay award for the period before the resume fraud was
discovered.

OTHER NONDISCRIMINATION LAWS
Although Title VII is by far the broadest and most significant fed-
eral nondiscrimination law, it is not the only one. Other federal laws
apply in more limited circumstances.

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Discrimination in General 283

Section 1981
A Reconstruction-era statute guarantees to all persons within the
United States “the same right … to make and enforce contracts
… as is enjoyed by white citizens.” (Lawsuits brought under this
statute are known as §1981 actions because the statute is codified at
Title 42 §1981 of the United States Code.) Congress has amended
the statute to cover not only the formation and enforcement of con-
tracts but also the making, performance, modification, and termina-
tion of contracts, and the enjoyment of all benefits, privileges, terms,
and conditions of the contractual relationship. And the courts have
interpreted the statute to cover ethnicity as well as race.

Section 1981 is an important statute. Even though Title VII
also prohibits racial and ethnic discrimination, Title VII is limited
to employers with 15 or more employers. Section 1981 has no
such limitation, and it protects independent contractors as well as
employees. In addition, claims under §1981 are not subject to the
abbreviated time limits set by Title VII, they can be filed in court
without first going through the administrative procedures applica-
ble to Title VII claims, and they are not subject to the compensa-
tory damage caps applicable to Title VII.

Immigration
When Congress passed the Immigration Reform and Control Act
in 1986 making it illegal for employers knowingly to hire persons
who are not eligible to work in the U.S., Congress included a provi-
sion prohibiting discrimination on the basis of citizenship or nation-
al origin. The prohibition applies to employers with four or more
employees. Title VII, in contrast, prohibits national origin discrim-
ination by employers with 15 or more employees, and it does not
address citizenship status at all.

Military Service
Federal law prohibits any employer from discriminating against
employees and applicants for employment on account of their mil-

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The SHRM Essential Guide to Employment Law284

itary service. Persons who are members of the uniformed services,
who have applied to become members, or who have obligations to
one of the uniformed services are protected against discrimination
in hiring, retention, re-employment, promotion, or the granting of
any employment benefit.

QUICK TIP
Nondiscrimination clauses are frequently contained in construction and other contracts

with government agencies. (See Chapter 22 for specifics.)

Financial Discrimination
Federal law prohibits an employer from discharging an employee
whose earnings have been subject to garnishment for any one
debt, regardless of the number of levies made or proceedings
brought to collect it. Discrimination against a person who has
filed for bankruptcy is also prohibited.

STATE AND LOCAL PROHIBITIONS
Most states and many local governments have their own laws
prohibiting discrimination on grounds of race, color, and so on.
These laws are not just duplications of federal law, since they
often prohibit additional forms of discrimination not specifically
covered by federal law, such as ancestry, marital status, sexual
orientation, and transgender individuals. These laws also reach
smaller employers not covered by Title VII, and they typically do
not cap compensatory damage awards. (Gender discrimination,
including sexual orientation and gender identity, is covered in
Chapter 15.)

When a FEPA provides procedures similar to those available
under federal law, the EEOC may enter into a work-sharing
agreement with the agency. When such a work-sharing agree-
ment is in place, a charge of discrimination filed with either the
EEOC or the FEPA is considered dual-filed with both agen-
cies. Work-sharing agreements normally provide that the FEPA

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Discrimination in General 285

will initially handle the charge, subject to final review by the
EEOC.

PROFESSIONAL CODES OF ETHICS
The codes of ethics of some professional groups contain nondiscrimi-
nation clauses. A professional who discriminates in employment may
become subjected to disciplinary proceedings before his or her state
licensing board and may suffer suspension or revocation of his or her
license to practice.

RECORD-KEEPING
Under EEOC regulations, private employers with 100 or more
employees and U.S. government contractors with 50 or more
employees are required to file an Employer Information Report
EEO-1 (also called Standard Form 100) each year. The EEO-1
report calls for data about employees’ ethnicity, race and sex by job
category. A proposal to add a summary of pay and hours worked
was scrapped by the Office of Management and Budget under Pres-
ident Trump.

EEO-1 reports are due by March 31 of each year based on data
from any pay period during the last quarter of the previous year.
The EEOC does not prescribe any particular records that must be
kept to support the information contained in an EEO-1 report,
but whatever records are prepared must be kept for a least a year.
Records relating to a pending charge of discrimination must be kept
until the charge is finally resolved.

EEOC regulations permit employers to collect information
on race and national origin for affirmative action compliance and
EEO-1 reporting purposes (unless prohibited by state law), but the
EEOC recommends that any such records be kept separate from
other personnel data, such as evaluations.

The statutes of limitations—the time period within which an
employee or enforcement agency can bring a claim—should also be
considered in establishing record retention policies. Those statutes

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The SHRM Essential Guide to Employment Law286

differ from state to state, and they may even vary for different types
of claims. Although charges of Title VII discrimination must be ini-
tiated within a relatively brief time period (180 days or 300 days,
depending on the particular federal, state, or local agency that has
jurisdiction), other types of claims may be filed as late as three or
more years after the events take place. A five-year retention policy—
that is, a policy of retaining all employment-related documents and
information for five years after an employee terminates or an appli-
cant is rejected—may seem a bit excessive, but can prove helpful.

The retention policy should apply not only to documents and
information that relate to individual applicants and employees but
also to items such as employee handbooks and policy directives that
have become out-of-date or superseded. That way, the employer can
show what the rules were at a particular time, even if the rules have
since changed.

EMPLOYMENT PRACTICES LIABILITY INSURANCE
Most standard premises liability insurance policies and comprehen-
sive general liability (CGL) insurance policies exclude claims arising
out of employment matters. This means that if you are sued for abu-
sive discharge, for race or sex discrimination, or for employment-re-
lated defamation, your insurance carrier will not provide a defense
attorney, and it will not pay any judgment against you. Unless, that
is, you have employment practices liability insurance (EPLI).

A number of companies offer coverage that picks up where the
usual exclusion leaves off. While the coverage may be expensive, it
is probably a good idea at least to discuss EPLI with your insurance
broker and find out whether it is available and at what cost. Some
carriers offer loss control services as part of their coverage, such as
reviewing employment application forms and handbooks and coun-
seling on compliance issues.

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• Equal Pay Act

• Pregnancy

• Harassment in General

• Employer Liability for Harassment

• Sexual Orientation and Gender Identity

• Other Issues

CHAPTER 15

Gender Discrimination

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Account: s4264928.main.eds

Book: The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals, Managers, Businesses, and
Organizations Author: Charles Fleischer Date: 2017

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The SHRM Essential Guide to Employment Law288

Sex discrimination in employment, along with discrimination
based on race, color, religion, or national origin, is covered by
Title VII of the Civil Rights Act. It is just as illegal for an employ-
er to reject an applicant on gender grounds as it is to reject the
applicant on racial or religious grounds. Establishment of a glass
ceiling, which limits promotion opportunities for women but not
for men, is also illegal under Title VII. In other words, all the Title
VII principles that apply to discrimination based on race, color,
religion, and national origin generally also apply to gender-based
discrimination.

But sex discrimination has some unique features. For one thing,
sex discrimination is covered by two additional federal laws—the
Equal Pay Act and the Pregnancy Discrimination Act—which do
not apply to other forms of discrimination. For another, while
the inherent differences between persons of varying races, reli-
gions, or national origins are superficial at best, there are real
biological differences between men and women. Finally, while
the term sex as used in Title VII was probably intended to mean
gender, the term can also refer to activity that has nothing to do
with discrimination.

The special aspects of sex discrimination are discussed in the fol-
lowing sections of this chapter.

EQUAL PAY ACT
In addition to its minimum wage and overtime pay provisions, the
federal Fair Labor Standards Act (FLSA) as amended by the Equal
Pay Act prohibits employers from paying males and females at dif-
ferent rates for the same work, unless the differential is based on
a factor other than sex. And while executives, administrators, and
professionals, among others, are exempt from the overtime pay
requirements of the FLSA, they are not exempt from its equal pay
requirements. So an employer that pays males more than females for
equal work violates the Equal Pay Act and, if the discrimination is
intentional, also violates Title VII.

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Gender Discrimination 289

As noted in Chapter 2, some local jurisdictions, such as New York
City, have enacted laws prohibiting employers from asking candi-
dates about their compensation history, on the theory that using
such information to set salaries just perpetuates gender discrimina-
tion. In the absences of such a law, may an employer base its salary
offer on the candidate’s compensation history? The Equal Employ-
ment Opportunity Commission (EEOC) says no; the few courts
that have considered the question are split.

PREGNANCY
In 1978, Congress enacted an amendment to Title VII known as
the Pregnancy Discrimination Act (PDA). As a result of the PDA,
Title VII now defines because of sex as including “because of or on
account of pregnancy, childbirth, or related medical conditions;
women affected by pregnancy, childbirth, or related medical condi-
tions shall be treated the same for all employment-related purpos-
es, including receipt of benefits under fringe benefit programs, as
other persons not so affected but similar in their ability or inability
to work.”

In other words, discrimination because of pregnancy, childbirth,
or a related medical condition is sex discrimination, so that an
employer cannot refuse to hire a pregnant woman or a woman of
childbearing age because of her pregnancy or because of the possi-
bility she may become pregnant.

Nor may an employer have special rules for pregnant women. For
example, sick leave must be available to pregnant women on the
same basis as it is to others. Similarly, employers that have health
or disability insurance plans must cover pregnancy-related expenses
and disabilities the same as other medical expenses or disabilities.

Title VII does not require an employer to cover abortions in its
group health insurance policies, except when the mother’s life would
be endangered if the fetus were carried to term and except when
medical complications have arisen from an abortion. However, Title
VII permits a plan to cover abortions.

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The SHRM Essential Guide to Employment Law290

QUICK TIP
The federal Newborns’ and Mothers’ Health Protection Act prohibits group health plans

from cutting off benefits for a mother or her newborn child after less than 48 hours of

hospitalization following a normal vaginal delivery or after less than 96 hours of hos-

pitalization following a Cesarean section. (See Chapter 10 for more on group health

insurance.)

ALERT!
For employers with 50 or more employees, extended leave without pay for complications

of pregnancy and childbirth, and to care for newborn children, may be required by the

Family and Medical Leave Act (FMLA). (Chapter 8 discusses the FMLA.)

Forced Leave
Generally an employer may not require pregnant women to take
leave at a specified point in their pregnancies unless the employ-
er can demonstrate a business necessity or bona fide occupational
qualification (BFOQ) for the rule. Compulsory leave policies for
school teachers have routinely been held to violate Title VII. On
the other hand, several cases involving the airline industry have held
that mandatory maternity leave for flight attendants was justified by
passenger safety considerations.

Job Reassignment
An important Supreme Court case involved the use of lead in battery
manufacturing. Lead poses substantial health risks, including risks to
the fetus of a pregnant woman who is exposed to the substance.
When a manufacturing company discovered high lead levels in the
blood of its pregnant employees, the company adopted a policy bar-
ring all women of childbearing age from jobs involving exposure to
lead unless they could document that they were incapable of having
children.

The Supreme Court held that the policy amounted to sex dis-
crimination despite the company’s benign motives. The court said
that the policy could not be justified as a BFOQ, since there was no

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Gender Discrimination 291

evidence that pregnant women were less able than others to man-
ufacture batteries. The court concluded that the question of fetal
safety should be for the mother, not the company, to decide, and it
dismissed as only a remote possibility the company’s fear of suit by
children with birth defects attributed to fetal lead exposure.

Maternity Leave and Reinstatement
The EEOC takes the position that since pregnancy and childbirth
are conditions unique to women, refusal to grant special leave to
a pregnant employee may amount to sex discrimination. In other
words, according to the EEOC, the employer had better grant leave
(assuming it is medically justified) and hold the job open when the
mother is ready to return, unless the employer can show that the job
cannot remain vacant and it cannot be filled by a temporary replace-
ment. It remains to be seen whether the EEOC’s position will be
upheld in the courts.

Paternity Leave
Unless the FMLA or a state or local mandatory leave law applies,
employers are not legally required to grant paternity leave. Howev-
er, if the employer offers maternity leave unrelated to the mother’s
medical needs, failure to offer equivalent paternity leave would be
discriminatory.

HARASSMENT IN GENERAL
When the authors of Title VII added the word sex to the list of char-
acteristics that an employer could not consider in making personnel
decisions, they probably intended the term to be synonymous with
gender. In other words, employers cannot consider gender when
establishing pay rates or deciding whether to hire, promote, or fire,
just as they cannot consider other characteristics, such as race or
color, deemed irrelevant to job performance.

But the courts and the EEOC have ruled that sexual harassment is
also a form of discrimination prohibited by Title VII. According to

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The SHRM Essential Guide to Employment Law292

the EEOC, unwelcome sexual advances, requests for sexual favors,
and other verbal or physical conduct of a sexual nature constitute
sexual harassment when any of the following occurs:

• Submission to such conduct is made either expressly or implicitly
a term or condition of employment.

• Submission to or rejection of such conduct by an individual is used
as the basis for employment decisions affecting the individual.

• Such conduct has the purpose or effect of unreasonably interfer-
ing with an individual’s work performance or creating an intimi-
dating, hostile, or offensive working environment.

The illegality of some forms of sexual harassment can probably be
explained by traditional Title VII analysis. Take, for example, a male
company supervisor who requests a female subordinate to sleep with
him, promising her a promotion if she does and threatening to fire
her if she does not. This type of sexual blackmail is discriminatory
because the supervisor does not make the same request of any male
subordinate. In other words, the supervisor has imposed on a female
employee, because of her sex, a term or condition of employment
that he has not imposed on a similarly situated male. Sex discrimina-
tion of this type has sometimes been called quid pro quo harassment.

Hostile Environment
The courts and the EEOC have gone beyond quid pro quo harass-
ment, ruling that Title VII is violated by a hostile environment as
well. To illustrate, suppose the branch manager of a bank requests
sex from a teller who works for him, he touches her sexually, and
he makes sexual jokes and comments directed to her or in her pres-
ence, but he never promises any tangible job benefit, nor threatens
to take any away. The courts have held that the mere creation of
an intimidating, hostile, or offensive work environment is a form
of sex discrimination because, in effect, the employee must tolerate
the hostile environment to keep her job. (If the employee finds the
environment so hostile that she actually quits, she may have been

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Gender Discrimination 293

constructively discharged and have a claim of quid pro quo harass-
ment as well. See Chapter 4.)

The above example involves a male seeking sex from a female.
But make no mistake—a male who is threatened with dismissal or
harassed by a female supervisor has just as good a claim. The EEOC
even takes the position (not well supported in the case law) that
when an employee of either sex is promoted because he or she sleeps
with the boss, other employees who do not get the promotion suffer
sex discrimination.

CASE STUDY:
TOO HOT TO WORK
An Iowa dentist hired a dental assistant just after the assistant
received her community college degree. The dentist acknowledged
that she was a good assistant during her 10-plus years in his employ,
and the assistant herself said that the dentist treated her with respect
and was a person of high integrity. The problem was that the dentist
developed a strong attraction to his assistant that troubled and
distracted him. The two started texting each other on both work and
personal matters, although the texts were apparently innocuous and
not sexual in nature. At one point, the assistant made a statement
about the infrequency of her sex life, and the dentist responded,
“That’s like having a Lamborghini in the garage and never driving
it.” So far as the court case discloses, however, the dentist never took the
Lamborghini for a ride himself.

When the dentist’s wife (who also worked in the dental office) found
out about the texting, she demanded that the assistant be fired. After
consulting with his pastor, the dentist did exactly that. The assistant
then sued, claiming sex discrimination. The Iowa Supreme Court
rejected her claim, saying that the civil rights laws are not general
fairness statutes. In response to the assistant’s argument that but for her
gender she would not have been fired, the court recognized a distinction
between an employment decision based on a personal relationship (as
this one was) and a decision based on gender itself.

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The SHRM Essential Guide to Employment Law294

It should be noted that other courts have held a termination
under these circumstances to be sex discrimination.

QUICK TIP
Although harassment is most often associated with sex discrimination, harassment

based on any discriminatory factor—race, color, religion, national origin, age, or dis-

ability—is also illegal if it is sufficiently severe to create a hostile work environment.

Same-sex harassment is also illegal under Title VII. In a case
involving a male roustabout on an oil rig who was repeated-
ly subjected to sex-related, humiliating actions against him by
other male members of the crew—including physical assaults and
threats of rape—the Supreme Court ruled that sexual harassment
of any kind is prohibited.

An offensive environment must be severe and pervasive, but it
need not be so intolerable as to force the employee to quit or to
cause the employee to suffer psychological injury. It is an envi-
ronment that the complaining employee finds offensive and that
a reasonable person would find objectionable as well. (In other
words, the environment must be both subjectively and objective-
ly offensive to support a Title VII claim.)

A super-sensitive employee, for example, who takes offense at
the retelling of an off-color TV episode, does not have a good
claim. But note that the offended employee need not be the spe-
cific target of the harassment in order for the environment to be
considered hostile. The routine exchange of pornographic email
among a willing group of employees may create a hostile work
environment for another employee who is not involved in the
exchange but who is simply exposed to the material.

Workplace Civility Code
A number of courts have ruled that Title VII is not intended as a
code of workplace civility. For example, there should be no Title
VII violation when the work environment is equally offensive to

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both male and female employees. This occurred in a strange case
involving a supervisor who sought sexual favors from two subor-
dinates who happened to be husband and wife. The court found
no violation of Title VII because Title VII is premised on elimi-
nating discrimination; inappropriate conduct that is inflicted on
both sexes or is inflicted regardless of sex is outside the statute’s
ambit.

ALERT!
When workplace incivility becomes extreme, the employee-victim may have a claim

for intentional infliction of emotional distress (discussed in Chapter 4) whether or

not the incivility amounts to discriminatory conduct.

CASE STUDY:
DETERMINING DISCRIMINATORY SEXUAL HARASSMENT
A security guard supervisor working under contract at the
Environmental Protection Agency disciplined two other guards at
the worksite. The two guards, apparently infuriated by the discipline,
launched a retaliatory campaign against the supervisor that began
by repeated slashing of his tires. Later they taunted him in a sexual
manner that included lewd gestures and comments.

In response to the supervisor’s Title VII claim, the court ruled that
the harassment he complained about, although tinged with offensive
sexual connotations, was not based on his sex. The supervisor did not
claim, for example, that the two guards were homosexual or that they
were seriously proposing to have sex with him. Nor did the supervisor
show that the guards were motivated by general hostility to males
in the workplace. Instead, according to the court, the guards were
motivated by a workplace grudge having nothing to do with sex.

On the other hand, the U.S. Court of Appeals for the 9th
Circuit ruled in effect that even equal opportunity harassment
could result in employer liability. In that case, a senior official
with an office of the National Education Association was rude,

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The SHRM Essential Guide to Employment Law296

overbearing, obnoxious, loud, vulgar, and generally unpleas-
ant. Significantly, none of the official’s conduct was of a sexual
nature.

The 9th Circuit said that even if male and female employees
were being treated the same, a reasonable woman may well have a
more negative reaction than her male counterpart to the official’s
conduct. In other words, according to the court, because women
by nature may feel more intimidated or threatened than men
by a supervisor’s obnoxious behavior, even when that behavior
is directed equally at all employees, women enjoy less desirable
working conditions, and they therefore suffer sex discrimination.
(Some would argue that this decision promotes the very gender
stereotypes that Title VII was intended to abolish.)

How can an employer possibly distinguish between sexual
harassment that is discriminatory and sexual harassment that is
not? The short answer is there is no safe way to make the distinc-
tion. And despite pronouncements that Title VII was not intend-
ed as a workplace civility code, that is exactly what it may have
become. At the risk of incurring substantial liability, employers
have little choice but to prohibit all teasing, horseplay, banter,
and other conduct with sexual overtones for fear that a court may
view the conduct as discriminatory harassment.

EMPLOYER LIABILITY FOR HARASSMENT
Employer liability for sexual harassment has been a controver-
sial issue in the courts. The controversy was heightened by the
1991 amendment to Title VII, which added compensatory and
punitive damages as available remedies in cases of intentional
discrimination.

The Supreme Court has ruled that an employer is always liable
for a hostile work environment created by a supervisor when the
discrimination takes the form of a tangible employment action—
defined as a significant change in employment status. Usually,
but not always, a tangible employment action results in economic

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Gender Discrimination 297

injury because it relates to matters such as hiring, firing, failing
to promote, reassignment with significantly different responsibil-
ities, or a significant change in benefits. The theory is that when
a supervisor takes a tangible employment action with respect to
a subordinate, he or she is exercising authority delegated by the
employer company, and the company is automatically responsible
for how that authority is exercised.

In a hostile environment case involving no tangible job action,
the employer is only presumed liable for a supervisor’s harass-
ment. The employer may have an affirmative defense against
such a claim, and avoid liability, if the employer can show that it
had and enforced a policy against sexual harassment and that the
complaining employee unreasonably failed to take advantage of
preventive or corrective opportunities provided by the employer.

To evoke this affirmative defense, the employer must have and
enforce a policy against sexual harassment. It is not enough simply
to adopt a written policy. Many courts have recognized that
employers must educate their workforce about the policy, such as
by conducting periodic training for both managers and rank-and-
file employees. And employers must promptly and objectively
investigate complaints of harassment and take appropriate action
if the complaint is found to be justified.

Nonsupervisor Conduct
Workplace sexual misconduct is not limited to a supervisor’s
mistreatment of subordinates. The employer can also be liable
for tolerating a hostile work environment created by an employ-
ee’s fellow employees and even nonemployees, such as custom-
ers, if the employer knows (or should know) about the offensive
work environment but fails to take appropriate remedial action.
In effect, the law requires employers to make reasonable efforts
to provide a working environment free from hostile or offensive
harassment; the law does not necessarily care who is doing the
harassing.

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The SHRM Essential Guide to Employment Law298

Protective Policies
Employers have tried different techniques to protect themselves
from claims. Some employers require that employees who are
involved in an office romance, particularly if the romance is
between a higher-level supervisor and a lower-level employee, sign
a love contract setting out the ground rules for the relationship.
The contract might have the parties acknowledge, for example,
that the relationship is consensual and that it can be terminated
by either party at any time. Love contracts seem extreme, how-
ever, and may expose the employer to liability for invasion of
privacy (discussed in Chapter 18).

While no list of do’s and don’ts can completely protect employ-
ers from sexual harassment claims, the following suggestions
should go a long way:

• Establish a written nondiscrimination policy, including a spe-
cific policy against sexual (and all other forms of) harassment.
The policy should define sexual harassment. It should be pub-
lished in the employee handbook and posted conspicuously at
the workplace. In the absence of a written policy, an employ-
er has no chance at all of defending against a claim of hos-
tile-environment sexual harassment by a supervisor against a
subordinate.

• Include in the policy various means by which an employee
can complain about sexual harassment. The complaint route
should not be limited to the employee’s immediate supervisor,
since he or she may be the harasser.

• Consider installing an anonymous hotline or an interactive
website for employees to report harassment and other types of
workplace problems.

• Conduct regular training seminars on sexual harassment, atten-
dance at which should be mandatory.

• Keep careful records of who attended each training session and
what material was presented.

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Gender Discrimination 299

• Plan in advance who will be in charge of investigating com-
plaints of sexual harassment and how the investigation will be
conducted. (Making those determinations after a complaint is
received will cause delay and could result in the harassment
policy being ruled unreasonable or ineffective.)

• On receipt of a complaint of sexual harassment, review your
employment practices liability insurance policy and give notice
of the complaint to your insurance carrier.

• If the complaint involves sexual assaults or other criminal con-
duct, suggest that the complaining party make a police report.

• Investigate all complaints of sexual harassment promptly, thor-
oughly, and objectively. Consider hiring experienced employ-
ment counsel to conduct the investigation or a company that
specializes in such investigations.

• Include an interview with the complaining party in the investi-
gation. Gather as much detail from him or her as possible about
what happened, when and where it happened, and who else
saw or knows about the harassment. Also, ask the complainant
how he or she would like the matter to be resolved (without
making any promises about what action will be taken).

• Treat as confidential all information developed during the
investigation. However, do not promise confidentiality, since
complete confidentiality is probably not possible. Be careful
about prohibiting your workforce from discussing the matter,
since that may constitute an unfair labor practice.

• Make a contemporaneous, detailed written record of the
investigation.

• If the investigation shows that the complaint is justified, take
immediate and appropriate corrective action against the harass-
er. Inform the complaining party about the action taken and
ask whether there is anything further he or she wishes to bring
to the employer’s attention.

• For serious, ongoing incidents, consider temporarily reassign-
ing the alleged harasser or complaining party, or placing one

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The SHRM Essential Guide to Employment Law300

or both of them on temporary leave with pay, to prevent addi-
tional incidents pending your investigation. (This step involves
some risk, since the reassignment or leave could be construed
as retaliation against the complainant or defamation of the
alleged harasser.)

• If the investigation shows the complaint to be unfounded,
inform the complaining party and the accused harasser and
close the investigation.

• Do not take disciplinary action against the complainant unless
it is clear that he or she intentionally lied about the matter.
(Retaliation against an employee for exercising rights protect-
ed by law, such as the right to complain about harassment,
itself constitutes illegal discrimination.)

Sometimes an employee may complain about harassment but
then ask management not to take any action, perhaps out of fear
that the workplace environment will be further poisoned by an
investigation. While it may be tempting to honor this no-action
request, once management is on notice of harassment, it has no
choice but to address it appropriately.

QUICK TIP
The complainant’s own conduct is relevant when investigating a claim of sexual

harassment, such as whether the complainant willingly participated in the activity

that he or she now claims was offensive. However, an investigation that focuses

primarily on the complainant’s own conduct may be viewed as retaliatory and may

subject the employer to additional claims of discrimination.

SEXUAL ORIENTATION AND GENDER IDENTITY
Title VII does not explicitly outlaw discrimination because of
sexual orientation so, historically, the courts rejected sexual ori-
entation as covered by Title VII. In effect, the courts said that
sex (meaning gender) and sexual orientation are two distinct
concepts.

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Gender Discrimination 301

An early case involved a homosexual male nurse who worked
for a hospital in Indianapolis. The nurse complained that one of
his physician supervisors made fun of his homosexuality, yelled at
him during telephone conversations, and otherwise treated him
poorly, all of which were based on his sexual orientation. The
court ruled that Congress used the term sex in Title VII to mean
a biological male or biological female and not one’s sexuality or
sexual orientation. Therefore, according to the court, harassment
based solely on a person’s sexual preference or orientation (and
not on one’s sex) is not an unlawful employment practice under
Title VII.

Since then, however, both the judicial meaning of the term sex
and the country’s attitude toward acceptable sexual conduct have
undergone dramatic changes. Consider, for example, the follow-
ing line of Supreme Court cases:

• Sexual harassment is a form of sex discrimination (Meritor Sav-
ings Bank v. Vinson, 1986).

• Discrimination against a female because she does not conform
to stereotypical female behavior violates Title VII (Price Water-
house v. Hopkins, 1989).

• Male-on-male sexual harassment is sex discrimination (Oncale
v. Sundowner Offshore Services, 1998).

• A Texas statute outlawing consensual sex between two adults
of the same sex is unconstitutional (Lawrence v. Texas, 2003).

• The Defense of Marriage Act’s definition of spouse as excluding
same-sex partners is unconstitutional (U.S. v. Windsor, 2013).

• Gays have a constitutional right to marry (Obergefell v. Hodges,
2015).

In 2015 the EEOC announced its position that Title VII’s
prohibition on sex discrimination encompasses discrimination on
the basis of sexual orientation. The EEOC has since filed several
lawsuits against employers accused of discriminating against gay
and lesbian employees.

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The SHRM Essential Guide to Employment Law302

The weight of current authority at the federal appeals court
level still excludes sexual orientation as discriminatory under
Title VII. However, a federal trial court in Pennsylvania recently
concluded that Title VII flatly prohibits discrimination on the
basis of sexual orientation. The court said: “There can be no
more obvious form of sex stereotyping than making a determina-
tion that a person should conform to heterosexuality.”

Even more recently, in Hively v. Ivy Tech Community College,
the U.S. Court of Appeals for the 7th Circuit (headquartered
in Chicago), upheld a claim of sexual orientation discrimination
under Title VII, saying that “it is actually impossible to discrim-
inate on the basis of sexual orientation without discriminating
on the basis of sex.” The case is particularly important because it
was an en banc decision, meaning that the entire court, not just a
three-judge panel of the court, participated. (Eight judges were
in favor of the decision, and three dissented.)

Although the EEOC’s position is that Title VII covers sexual
orientation discrimination, the U.S. Department of Justice
(DOJ) under the Trump administration takes the opposite view.
In July 2017, DOJ filed a friend of the court brief in Zarda v.
Altitude Express, Inc., pending before the U.S. Court of Appeals
for the 2nd Circuit, arguing that sexual orientation is excluded
from Title VII protection. Recognizing that the EEOC also filed
a brief in Zarda, DOJ said, “the EEOC is not speaking for the
United States and its position about the scope of Title VII is enti-
tled to no deference beyond its power to persuade.”

Transgender discrimination has been the subject of fewer cases,
although the EEOC’s current position is that transgender dis-
crimination is covered by Title VII. The EEOC has filed lawsuits
to promote that view as well.

Ultimately, the Supreme Court will need to determine wheth-
er Title VII protects gays, lesbians, and other members of the
LGBTQ community. Given the court’s 2015 ruling in Obergefell
v. Hodges that gay marriage is a constitutional right, it would not

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Gender Discrimination 303

be surprising for the Court to side with those lower court deci-
sions that read Title VII as broadly protective of LGBTQ indi-
viduals. And regardless of whether Title VII applies, many states
and local jurisdictions do explicitly protect LGBTQ individuals
from discrimination.

QUICK TIP
A Guide to Restroom Access for Transgender Workers from the Occupational Safety and

Health Administration (OSHA) offers as a “core principle” and “best practice” that all

employees, including transgender employees, should have access to restrooms that cor-

respond to their gender identity. OSHA’s suggested alternative options include providing

single-occupancy, gender-neutral (unisex) facilities or multiple-occupant, gender-neutral

facilities with lockable single-occupant stalls.

OTHER ISSUES
Title VII’s prohibition of sex discrimination gives rise to addi-
tional workplace issues from time to time, discussed below.

Dress Codes
A few federal court cases have ruled that employers have a certain
amount of latitude in adopting dress and grooming standards that
are not entirely gender neutral and that minor differences in person-
al appearance regulations do not constitute sex discrimination under
Title VII. As a caveat, however, the dress codes must be enforced
evenhandedly between men and women.

Many of the dress code cases have involved hair length. A few have
involved earrings. The issue typically arises when a male employee is
disciplined for violating policies that prohibit long hair for men but
not for women or that prohibit earrings on males but not females.
The courts have said that while long hair and earrings on men may
be fashionable in some circles, an employer may legitimately wish to
present a more conservative image and need not tolerate the outer
bounds of current fashion. But if the business justification for a gen-
der-specific dress code is to present a more conservative image, appli-

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The SHRM Essential Guide to Employment Law304

cation of the dress code to employees who do not interact with the
public would be difficult to justify.

ALERT!
A dress code policy that prohibits clothing or accessories associated with particular

religious beliefs or practices may constitute religious discrimination under Title VII.

(See Chapter 14 for more on religious discrimination.)

Retirement Plans
An employer cannot provide smaller monthly retirement payments
to women just because women, on average, live longer than men
and collect benefits for a longer time.

Physique
A number of cases have involved size and strength differences
between men and women. If an employer sets minimum height and
weight standards that tend to exclude most female applicants but
few male applicants, the standards will be deemed discriminatory
unless the employer can show a business necessity for the standards.

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