A good employee handbook …

• saves an employer money by reducing employee claims and supporting the employer’s defense against claims.
• enables managers and supervisors to apply policies consistently to all employees (reducing discrimination claims).
• addresses compliance with the laws that apply to the company (and not those that don’t).
• addresses the company’s particular employment issues.
• is well understood and used by managers and supervisors.
• helps a company roll out and implement its best practices and policies.
• assures employees of the employer’s expectations.
• can be used to promote special benefits and incentives offered to employees.

A bad employee handbook …

• establishes inappropriate policies (e.g., requires a progressive discipline policy when the company does not use one).
• inadvertently creates a term or guarantee of employment (e.g., “You will be employed for a 90-day probationary period”).
• contains illegal policies (e.g., offers “comp time” to employees of private companies).
• is not understood by managers and supervisors (because, e.g., it’s too long, poorly written, inappropriate, outdated, or poorly rolled-out).
• is not followed by managers and supervisors (and therefore can’t protect the company against employee claims).

A good employee handbook serves a company like a reliable piece of equipment. When you want to use it, it works, and then you don’t have to worry about it until next time. It also serves well during disputes with employees, by providing objective evidence of the company’s policies outside the he-said-she-said atmosphere of employment disputes.

Like a reliable piece of equipment, a good employee handbook will also operate more effectively if you take it in for a tune-up once in a while. Your handbook could use some adjustments if you have not updated it to reflect changes in the law that have taken effect in the past two years. Your handbook will also warrant a tune-up when your company takes on more employees, or when your company changes its policies or adds new ones.

If your handbook is running a little rough, contact your trusty mechanic employment lawyer for a consultation.

I enjoy talking with business owners about their companies, because it’s interesting to hear how they approach different issues, and how they put their ideas into practice.  I like hearing about the way they handle their employees, too, and I like to help businesses comply with various employment-related laws.  Wage and hour is one of my favorite areas.  It’s called a “wage-and-hour audit,” and helps employers make sure they’re paying their employees properly. 

I think it’s a great service.  It helps employers identify and minimize the significant penalties that the law can impose on their mistakes.  The law is counterintuitive, and is loaded with special industry-specific rules.  For instance, did you know that you can hire people to do work for you in their own homes, except if you want them to make women’s apparel? 

My problem is, the wage and hour audit is a hard sell to employers who have never had to deal with wage and hour violations.  It’s hardest with good employers who try to do the best they can for their workers.  They say, we’ve always done it like this and have never had any problems.  Why should they pay me to conduct the audit, when their only reward will be that they get to change their payroll practices, quantify potential liability to current and former employees, and, possibly, increase payroll?  Why should they pay me to identify potential costs that they have never had to worry about?

One a basic level, prophylactic compliance is a matter of understanding the long-term cost of doing business when you have employees.  Any employer will eventually have friction with its workers.  By identifying and working on small compliance issues as early as they can, prepared businesses minimize the potential disruptions that come with having workers.

Chess players have an axiom:  the stronger player is always lucky.  The employer who is prepared will always be luckier than one who is unprepared when an employee relationship turns adversarial.

For companies that make use of independent contractors in the ordinary course of business, now is a good time to review those arrangements.  The general issue is to determine whether those contractors should be treated as employees.  The current risk of government scrutiny is particularly high. In 2011 the IRS and Department of Labor will be continuing their initiatives in regard to misclassification issues. The Department of Labor initiative encompasses OSHA and state enforcement efforts. Not to be outdone by the feds, Pennsylvania recently instituted criminal penalties for construction industry employers who misclassify employees under state workers comp and unemployment laws.

The first question for employers is, how can you tell if a worker is an independent contractor or not?  The first problem for employers is, each agency uses a slightly different standard. The IRS uses a “20-part test” (unhelpfully condensed into a 3-category test); the Tax Court, which reviews IRS decisions, uses a 7-part test; and the DOL uses a 5-part test.

Because the risk of IRS enforcement is probably greater, employers should generally start with the 7-part Tax Court test, which is easier to understand than the IRS test and slightly less vague than the DOL test. Here is a summary of the points:

1. If the company has a strong degree of control over the work performed, it is more likely the worker is an employee.
2. If the company has made the investment in the work facilities, it is more likely the worker is an employee.
3. If the worker does not share in the profit or loss of the business, it is more likely the worker is an employee.
4. If the work performed is a part of the company’s regular business, it is more likely the worker is an employee.
5. If the company has the right to fire the worker, it is more likely the worker is an employee.
6. If the term of engagement is open-ended or long-term, it is more likely the worker is an employee.
7. If the company and the worker intend to create an independent contractor relationship (i.e., enter into an independent contractor agreement), it is more likely that the worker is an independent contractor.

If workers are clearly employees under this test, the company should simply treat them as employees. If it seems like a close call, the company should next review the IRS test.  If that’s inconclusive, the company should talk to its employment lawyer, and consider making changes that will make it more likely those workers would be classified as contractors.

A practical point to keep in mind is that misclassification investigations are often triggered by disgruntled former employees who report the employer business practices to the IRS.

Again, if your business makes broad use of “independent contractors,” now is a good time to review those relationships, to see if any workers should be properly treated as employees.

Sometimes the secret to success is just to master the obvious. In the world of employment law, part of the success is to document the obvious.

Some business owners keep their employee records up-to-date, but all the data is stored “right here” (I’m pointing to my head). They operate as fairly and as carefully as they can, on a gut-feeling level. They would say it’s obvious that they are doing the best they can for their workers. If they don’t have the time to keep records of everything, it’s just because they’ve got to keep the business running, and time is money.

Then one day, after taking a hard look at some chronic cash flow problems, it becomes obvious that that the company has to lay off a worker, or some workers. Maybe the owner’s been looking to cull the herd for a few years anyway, and it’s obvious that the weakest worker is Mr. Baloney. Yes, Mr. Baloney – the worker who never really seemed engaged on the job, the worker who never picked up the ball, the worker with chronic attendance problems. So the owner calls Mr. Baloney into her office on a Friday afternoon, and fires him.

Then Mr. Baloney’s discrimination complaint arrives. The owner is upset and astounded that Mr. Baloney didn’t see things the way she saw them. To Mr. Baloney, he was doing fine; and he was fired because he was the company’s only member of a certain protected class. Mr. Baloney’s lawyer, or the EEOC, wants to see the company’s policies, handbook, and records. The owner gathers her records – a few pieces of yellowing paper (including the employee’s last performance review, which was eight years ago, and says he’s doing fine) – and thinks to herself, this just doesn’t tell the whole story. She ends up trying to tell the story herself, but by then it’s too late, and the case disintegrates into he-said/she-said, with a bitter settlement to Mr. Baloney and astounding fees to the company’s outside counsel.

At some point in a discrimination claim, it is likely that the employer will have the burden to show that it had a legitimate, nondiscriminatory reason for taking action against an employee. When the employer takes the time over the years to build a paper trail, bit by bit, for each employee, good or bad, to explain why decisions are made, and when, the documents will tell the story by themselves.