Sixth Edition
Employment Law
NEW CHALLENGES IN THE BUSINESS ENVIRONMENT
John Jude Moran, J.D., MBA
Wagner College
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Library of Congress Cataloging-in-Publication Data
Moran, John Jude.
Employment law : new challenges in the business environment/John Jude Moran.—6th ed.
p. cm.
Includes index.
ISBN-13: 978-0-13-307522-9
ISBN-10: 0-13-307522-2
1. Labor laws and legislation—United States. I. Title.
KF3455.M67 2014
344.7301—dc23
2012039620
10 9 8 7 6 5 4 3 2 1
ISBN 10:
0-13-307522-2
ISBN 13: 978-0-13-307522-9
To my son, Johnny, who is 5 years old and in kindergarten.
When I asked him how much he liked school from 1 to 10, he answered
“100.” Johnny is my best buddy and being his dad and watching him grow from
a baby into a little boy is the greatest joy in my life.
To my mom, Rita, who is 78 years old and who has taught me everything I know
and reminds me of that fact every day. Mom typed the first book I wrote,
more than 1,200 pages in 1983 on a manual typewriter, and has carpal tunnel to prove it.
Mom also reminds me of that fact, but not every day. Whatever I have achieved
in life and for the person I am, I owe to her. She is the best mom in the world.
BRIEF CONTENTS
PART I Employment Relationship and Procedure 1
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Employment Relationship 1
Selection 29
Testing 64
Privacy, Theft, and Whistle-Blowing 94
Termination 121
Alternative Dispute Resolution 146
PART II Employment Discrimination 163
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Civil Rights Act 163
Affirmative Action 190
Racial Discrimination 218
Sex Discrimination 242
Sexual Harassment 265
Pregnancy Discrimination and Family and Medical Leave
Sexual Orientation 320
Religious Discrimination 337
National Origin Discrimination 358
Age Discrimination 378
Disability Discrimination 397
PART III Employment Regulation 421
Chapter 18
Chapter 19
Chapter 20
Chapter 21
Chapter 22
iv
Unions and Collective Bargaining Agreements
Wage and Hour Regulation 439
Occupational Safety and Health 459
Workers’ Compensation 479
Employee Benefits 499
421
295
CONTENTS
Preface xiii
Foreword
xvi
About the Author
xvii
PART I Employment Relationships and Procedure 1
Chapter 1 Employment Relationship
1
Introduction 1
Independent Contractor 2
Behavioral Control 3
Financial Control 3
Relationship Type 3
Elements of an Employment Contract 4
Duties of Employees and Independent Contractors 4
Duty of Loyalty 4
Duty to Act in Good Faith 5
Duty to Account 5
Employer’s Duties 6
Duty to Compensate 6
Duty to Maintain Safe Working Conditions 6
Noncompete Agreements 6
Nondisclosure Agreements 6
Sample Noncompete and Nondisclosure Agreements 7
Injunction 7
Contractual Conditions 8
Tort Liability 8
Chapter Cases 10 • Summary 23 • Human Resource
Advice 24 • Human Resource Dilemmas 24 • Employment
Scenario 24 • Employee Lessons 25 • Review
Questions 25 • Case Problems 26
Chapter 2 Selection
29
Introduction 29
Discrimination in Selection 29
Selection Process 30
Advertising and Recruiting 30
Questioning 31
Uniform Guidelines on Employee Selection Procedures 32
Selection Procedure 33
Investigation and Record Keeping 33
Samples 33
The Bottom Line 33
Discrimination in Promotions 34
Promotion Criteria 34
Nepotism and Promoting from Within 35
v
vi
Contents
Negligent Hiring 35
References 35
Workplace Violence 36
Background Checks 36
Chapter Cases
Advice 58 •
Scenario 59
Questions 60
Chapter 3 Testing
36 • Summary 58 • Human Resource
Human Resource Dilemmas 58 • Employment
• Employee Lessons 60 • Review
• Case Problems 60
64
Introduction 64
Aptitude Tests 64
Residency Requirements 65
Physical and Skills Tests 65
Personality and Integrity Tests 65
Honesty Tests 66
Psychological Tests 66
Medical Exams 66
Polygraph Tests 66
Employee Polygraph Protection Act of 1988 67
Polygraph Licensing 67
Drug Testing 67
Fourth Amendment 68
Reasonable Suspicion Drug Testing 68
Suspicionless Drug Testing 68
Drug-Free Workplace Act 69
Job Relatedness 70
Lab Testing 70
Drug-Testing Procedure 70
Drug Treatment Programs 70
Chapter Cases
Advice 88 •
Scenario 88
Questions 89
71 • Summary 88 • Human Resource
Human Resource Dilemmas 88 • Employment
• Employee Lessons 89 • Review
• Case Problems 89
Chapter 4 Privacy, Theft, and Whistle-Blowing
94
Introduction 94
Employee Privacy 95
Access to Personnel Records 95
Employee Phone Conversations 95
Employee E-mail 95
Credit Checks 96
Defamation 96
Invasion of Privacy 97
Interference with Business Relations 98
Employee Theft 98
Conversion 99
Embezzlement 99
Theft of Time 100
Contents
Surveillance 100
Security 100
Office Searches 100
Company Policy 101
Fourth Amendment 101
Whistle-Blowing 101
Whistleblower Protection Act 101
False Claims Act 101
Sarbanes-Oxley Act 101
Chapter Cases
Advice 116 •
Scenario 117
Questions 118
Chapter 5 Termination
102 • Summary 116 • Human Resource
Human Resource Dilemmas 117 • Employment
• Employee Lessons 118 • Review
• Case Problems 118
121
Introduction 121
Termination of Employment 121
Employment at Will 121
Reason for Discharge 122
Worker Adjustment and Retraining Notification Act 122
Employment Handbooks 122
Breach of Contract 122
Severance Pay 123
Model Employment Termination Act 123
Contesting the Termination 124
Public Policy Exceptions 124
Wrongful Discharge 124
Retaliatory Discharge 124
Constructive Discharge 125
Chapter Cases
Advice 141 •
Scenario 142
Questions 142
125 • Summary 141 • Human Resource
Human Resource Dilemmas 141 • Employment
• Employee Lessons 142 • Review
• Case Problems 142
Chapter 6 Alternative Dispute Resolution
146
Introduction 146
Arbitration Process 146
Federal Arbitration Act 147
Fee Splitting 148
Arbitrating Statutory Rights 148
State Law 150
Modifying an Arbitration Agreement 150
Awarding Attorney’s Fees 150
Arbitrating an EEOC Claim 150
Mediation 151
Judicial Conferences 151
Chapter Cases
Advice 160 •
Scenario 160
Questions 161
151 • Summary 160 • Human Resource
Human Resource Dilemmas 160 • Employment
• Employee Lessons 161 • Review
• Case Problems 161 • Endnotes 161
vii
viii
Contents
PART II Employment Discrimination 163
Chapter 7 Civil Rights Act
163
Introduction 163
Federal Law 164
State Law 164
Disparate Treatment 165
Disparate Impact 165
Equal Employment Opportunity Commission 165
Filing a Claim 166
Civil Rights Act of 1991 166
Compensatory and Punitive Damages 166
Business Necessity 167
Glass Ceiling 167
Veteran Discrimination 167
Military Leave 167
Exemptions 167
Bona Fide Occupational Qualification 167
Communists 168
Drug Addicts 168
Merit Pay 168
Chapter Cases
Advice 186 •
Scenario 187
Questions 187
Chapter 8 Affirmative Action
168 • Summary 186 • Human Resource
Human Resource Dilemmas 186 • Employment
• Employee Lessons 187 • Review
• Case Problems 188
190
Introduction 190
History of Affirmative Action 190
Title VII Violators 192
Voluntary Action 192
Equal Employment Opportunity Act of 1972 193
Affirmative Action Plan Guidelines for the Private Sector 194
Reverse Discrimination 195
Requirements of an Affirmative Action Plan 195
Chapter Cases
Advice 214 •
Scenario 215
Questions 215
Chapter 9 Race Discrimination
196 • Summary 214 • Human Resource
Human Resource Dilemmas 214 • Employment
• Employee Lessons 215 • Review
• Case Problems 215
218
Introduction 218
Discrimination by Association and Advocacy 219
Racial Harassment 219
Color Discrimination 220
Reconstruction Era Act 220
U.S. Constitution 221
Chapter Cases
Advice 237 •
Scenario 237
Questions 238
221 • Summary 236 • Human Resource
Human Resource Dilemmas 237 • Employment
• Employee Lessons 238 • Review
• Case Problems 238
Contents
Chapter 10 Sex Discrimination
ix
242
Introduction 242
Sex Plus Discrimination 243
Bona Fide Occupational Qualification (BFOQ) 243
Customer Preferences 244
Equal Pay 244
Comparable Worth 245
Dress and Grooming Policies 245
Chapter Cases
Advice 260 •
Scenario 261
Questions 261
Chapter 11 Sexual Harassment
246 • Summary 260 • Human Resource
Human Resource Dilemmas 260 • Employment
• Employee Lessons 261 • Review
• Case Problems 261
265
Introduction 265
Requirements 265
Tort Claims Against the Harasser 266
Vicarious Liability 267
Reasonable Person Standard 267
Damages 268
Hostile Work Environment 268
Severe and Pervasive 269
A Model Sexual Harassment Policy 270
Chapter Cases
Advice 289 •
Scenario 290
Questions 290
271 • Summary 289 • Human Resource
Human Resource Dilemmas 289 • Employment
• Employee Lessons 290 • Review
• Case Problems 290
Chapter 12 Pregnancy Discrimination and Family and Medical Leave
295
Introduction 295
Pregnancy Discrimination 295
Pregnant Women in the Workplace 296
Fetal Protection Policies 296
Family and Medical Leave 297
Eligibility 298
Defense Authorization Act of 2009 298
Airline Flight Crew and Medical Leave Act of 2009 299
Paid Leave 299
Serious Health Condition 299
Maintenance of Health Benefits 300
Chapter Cases
Advice 317 •
Scenario 317
Questions 317
Chapter 13 Sexual Orientation
300 • Summary 316 • Human Resource
Human Resource Dilemmas 317 • Employment
• Employee Lessons 317 • Review
• Case Problems 318
320
Introduction 320
Available Protection 321
Homosexual Partners 322
Federal Government Policy on Gays and Lesbians 323
x
Contents
Acceptance or Tolerance 323
Chapter Cases
Advice 334 •
Scenario 335
Questions 335
324 • Summary 334 • Human Resource
Human Resource Dilemmas 334 • Employment
• Employee Lessons 335 • Review
• Case Problems 335
Chapter 14 Religious Discrimination
337
Introduction 337
Accommodating Religious Beliefs 338
Bona Fide Occupational Qualification 339
Workplace Religious Freedom Act of 2012 339
First Amendment Protection 340
Religious Harassment 340
Chapter Cases 341 • Summary 355 • Human
Resource Advice 355 • Human Resource
Dilemmas 355 • Employment Scenario 356 • Employee
Lessons 356 • Review Questions 356 • Case
Problems 356
Chapter 15 National Origin Discrimination
358
Introduction 358
Immigration Reform and Control Act 359
Verification of Documents 360
Ethnic Harassment 360
English-Only Rule 360
Chapter Cases
Advice 374 •
Scenario 374
Questions 375
Chapter 16 Age Discrimination
360 • Summary 373 • Human Resource
Human Resource Dilemmas 374 • Employment
• Employee Lessons 375 • Review
• Case Problems 375
378
Introduction 378
Discrimination Requirements 378
Mandatory Retirement 379
Damages 379
Filing Requirements 379
Employer’s Justification for Layoffs 380
Retirement Packages 381
The Older Workers Benefit Protection Act 381
Comparative Treatment of the Elderly 381
Chapter Cases
Advice 394 •
Scenario 394
Questions 395
382 • Summary 394 • Human Resource
Human Resource Dilemmas 394 • Employment
• Employee Lessons 394 • Review
• Case Problems 395
Chapter 17 Disability Discrimination
397
Introduction 397
Reasonable Accommodations 398
Americans with Disabilities Act Amendments Act (ADAAA) 398
Disability Harassment 399
Disclosure of Disability 399
Preventative Planning 399
Contents
xi
A Model Company Policy Dealing with Disabled Employees 400
The Future for Disabled Workers 401
Chapter Cases
Advice 417 •
Scenario 417
Questions 418
401 • Summary 417 • Human Resource
Human Resource Dilemmas 417 • Employment
• Employee Lessons 418 • Review
• Case Problems 418
PART III Employment Regulation 421
Chapter 18 Unions and Collective Bargaining Agreements
421
Introduction 421
Sherman Antitrust Act 422
Clayton Act 422
Railway Labor Act 422
Norris–La Guardia Act 422
National Labor Relations Act 422
Taft–Hartley Act 423
NAFTA and GATT 423
Collective Bargaining 423
Key Terms 423
Purpose 424
Unfair Labor Practices 424
Chapter Cases
Advice 435 •
Scenario 435
Questions 436
425 • Summary 435 • Human Resource
Human Resource Dilemmas 435 • Employment
• Employee Lessons 436 • Review
• Case Problems 436
Chapter 19 Wage and Hour Regulation
439
Introduction 439
Fair Labor Standards Act 439
Exemptions 441
Child Labor 441
Relocating Jobs 442
Chapter Cases
Advice 456 •
Scenario 456
Questions 456
442 • Summary 456 • Human Resource
Human Resource Dilemmas 456 • Employment
• Employee Lessons 456 • Review
• Case Problems 457
Chapter 20 Occupational Safety and Health
459
Introduction 459
Administrative Agencies 459
Secretary of Labor 460
Permanent Standards 460
Inspections 461
Citations and Penalties 462
Emergency Standards 462
Partial and Permanent Disability 463
Ancillary Expenses 463
Employer Defenses 464
Record Keeping 464
xii
Contents
Chapter Cases
Advice 475 •
Scenario 476
Questions 476
464 • Summary 475 • Human Resource
Human Resource Dilemmas 476 • Employment
• Employee Lessons 476 • Review
• Case Problems 476
Chapter 21 Workers’ Compensation
479
Introduction 479
Purpose 479
Reporting a Claim 480
Workers’ Compensation Board 481
False Representations 481
Employer Defenses 482
Chapter Cases
Advice 495 •
Scenario 496
Questions 496
Chapter 22 Employee Benefits
482 • Summary 495 • Human Resource
Human Resource Dilemmas 495 • Employment
• Employee Lessons 496 • Review
• Case Problems 496
499
Introduction 499
Defined Benefit Plan 499
Defined Contribution Plan 499
Eligibility 500
Vesting 500
Purpose 501
Minimum Funding Requirements 501
Fiduciary Duties 502
Inflation 502
Tax Incentives 503
COBRA 503
HIPAA 503
Chapter Cases
Advice 518 •
Scenario 518
Questions 518
Glossary 521
Case Index 523
Subject Index 526
504 • Summary 517 • Human Resource
Human Resource Dilemmas 518 • Employment
• Employee Lessons 518 • Review
• Case Problems 519
PREFACE
Employment law is an area that is constantly changing. Decisions are being rendered that redefine
the parameters of selection, discrimination, privacy, and termination. Retaliation is now the area
with the largest number of complaints filed. Sexual harassment has become one of the most litigated areas of employment law. The number of cases involving disability discrimination is growing rapidly. Sexual orientation may soon be considered a protected class under federal law. Family
leave may soon be given with pay in most states. Workplace violence is on the rise and, as a result,
so are negligent hiring suits. Arbitration is becoming the primary method for dispute resolution.
Right-to-privacy advocates will continue to do battle with the proponents of drug and polygraph
testing. Debates over searches of e-mail, computers, and offices will endure. As companies continue to find ways to improve the bottom line, diminishing employee theft of goods, services,
and time will be a likely target. Surveillance will increase through the implementation of subtle
methods. A major case involving affirmative action is currently before the Supreme Court.
Employment issues used to be handled by personnel departments with a director as the
head. Now, a human resources division is often in place with countless workers and a vice president as its leader. At the other end of the spectrum, NAFTA and GATT have made inroads
against unions, labor laws, OSHA, workers’ compensation, unemployment insurance, pension
and health benefits, minimum and hourly wage laws, and child labor laws, as well as the number
of high-paying skilled and office positions through the deployment of jobs to Mexico and overseas, where these laws are not in effect. The global business environment will entice companies
to seek out the most efficient labor force per dollar of wages and the least expensive manufacturing plants and office space. Outsourcing is the latest buzzword. U.S. workers will have to work
longer, harder, more efficiently, and possibly for less compensation while continuously learning
skills to keep them competitive.
Employment issues are now high profile. The study of employment law is important because
of the impact it will have on businesses, management, and employees. The focus of Employment
Law: New Challenges in the Business Environment is on discrimination and employment regulation. As with my first book, Practical Business Law, I have presented principles of law in this book
with a step-building approach and have illustrated those principles with stimulating “Employment
Perspectives” (more than a hundred are distributed throughout this book).
NEW TO THIS EDITION
• Over 50 cases from 2010 to the present have been added to this edition. Each case is followed by case questions and commentary. This represents a change of more than 30% of
the cases in the text.
• Over 50 additions to the Case Problems section have been made. More than one half of the
case problems at the end of the chapters are now from the year 2000 to the present.
• Over 20 new “In the News” features from 2010 to the present have been added: one for
each chapter.
• Over 100 definitions are highlighted. These appear in the margin of each chapter.
• Over 20 new Human Resource Dilemmas have been added; these are at the end of each
chapter. Now each chapter has at least four human resource dilemmas.
• In Chapter 2, titled Selection, a new “Employment Perspective” explaining questions on
job interviews was added to the section on Questioning; an expansion of the section on
“Advertising and Recruitment” has been added; and additional language has been added to
the sections titled “References” and “Background Checks” for the purpose of clarity.
• In Chapter 7, titled Civil Rights Act, a new section has been added on Veterans
Discrimination.
• In Chapter 13, titled Sexual Orientation, a list of states protecting sexual orientation and
transgendered individuals has been placed in the text.
• In Chapter 14, titled Religious Discrimination, a new section, “Workplace Religious
Freedom Act,” has been added.
• In Chapter 16, titled Age Discrimination, paragraphs were added to the sections on
“Employer Justification for Layoffs” and “Retirement Packages.”
xiii
xiv
Preface
• In Chapter 17, titled Disability Discrimination, a “Model Company Policy Dealing with
the Disabled” was added. The section on disclosure and preventive planning was rewritten,
and an explanation of a key term under the ADA “substantially limited” was expanded by
a full paragraph.
• In Chapter 19, titled Wage and Hour Regulation, there is an update of the minimum wage
laws and child farm labor restrictions.
• In Chapter 20, titled Occupational Safety and Health, a new section on “Record Keeping of
Deaths and Injuries” was added.
To help students enhance their critical thinking skills to succeed in the employment arena,
Employment Law: New Challenges in the Business Environment, 6th edition:
Places the student in the role of a human resource manager, encouraging students to take
into consideration the latest employment laws to make judgments that will serve the best
interests of the employer and the employees.
Requires students to analyze employment cases that impact both employers and employees. With this knowledge, students can use their reasoning ability to determine whether the
decisions were made in an ethical manner.
Encourages students to formulate arguments on behalf of employers and employees in
order to answer the questions that accompany “Case Problems” and “Human Resource
Dilemmas.”
OTHER POINTS OF DISTINCTION
• Twenty-five “Ethical Issues” are included to allow for discussion of the implications inherent in resolving employment disputes in an ethical manner.
• “In the News” features throughout this edition highlight current topics involving employment law in the media. Corresponding questions promote discussion.
• “Chapter Checklists” are incorporated into the beginning of each chapter to highlight the
important principles students should glean from the text.
• “Human Resource Advice” features information that is critical to employers to aid them in
mitigating employment law disputes. This appears toward the end of each chapter.
• A hypothetical “Employment Scenario” involving a small business, its owners, and their
attorney continues throughout the text. In each chapter, the owners are confronted with a
legal challenge they and their attorney face involving the business’s current and prospective
employees. Students are asked to resolve the conflict.
• “Employee Lessons” located toward the culmination of each chapter speak to the issues that
employers and employees should concern themselves with to minimize potential litigation.
ORGANIZATION AND APPROACH
Employment Law: New Challenges in the Business Environment presents a simple approach to employment law, with a foundation of legal principles explained in layperson’s language. The principles, once learned, can be applied to understand the judges’ opinions in the cases presented.
The ultimate task in mastering this subject is to apply the principles of law to factual situations. This can be accomplished through having students resolve the issues in dispute. In each
chapter, the cases focus on the important principles of law to be learned. These cases are extracted from actual cases to enhance class discussions while providing the student with a pragmatic view of the reasoning behind court decisions. This makes the book timely. It also provides
the student with a text he or she can truly understand and appreciate. At the same time, the text
affords the professor the opportunity to discuss the principles more fully by introducing his or
her own examples and instances of practical experience.
Part I, Employment Relationship and Procedure, sets forth the parameters of the relationship between employer and employee and independent contractor. The distinction between
an employer and independent contractor is identified. The rights and duties of the parties are
spelled out in an employment contract along with the resulting liability should a breach occur.
The procedure for selecting and testing employees is also discussed. A considerable problem for employers is employee theft. Balancing the privacy interests of employees with the
Preface
employer’s desire to utilize testing, investigations, inspections, and surveillance is discussed.
Finally, the issues of at-will employment, termination for cause, wrongful discharge, and arbitration are explained.
Part II, Employment Discrimination, presents the Civil Rights Act, affirmative action, and
the various forms of discrimination found in employment. Hot issues include sexual harassment,
race discrimination, disability discrimination, and sexual orientation.
Part III, Employment Regulation, addresses government regulation of the workplace with
regard to unions, collective bargaining, minimum wage and maximum hours, safety, health,
compensation for injuries, and pension and health benefits.
This book was written because of the timeliness and importance of employment law and its
interface with the business curriculum. It is important that students understand the impact that
employment law has on both management and employees.
FOR INSTRUCTORS
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ACKNOWLEDGMENTS
I wish to express gratitude to my mother, Rita, and my son, Johnny, for their love and support.
For a brilliantly written foreword, I’d like to thank Lily McNair, Provost of Wagner College.
A word of special thanks to Kurt and Mary Frazier for taking the picture of my son Johnny
and me at Kohala Ranch on the Big Island of Hawaii, our favorite place.
The two copyeditors who worked on this edition are worthy of a special note of gratitude.
Heath Lynn Silberfeld earned an “A” for effort. Melanie Blake deserves a gold medal for an excellent performance, which she accomplished as fast as an Olympic sprinter.
I appreciate the tireless efforts of the following individuals from Prentice Hall, including, but not limited to, Bob Horan, Executive Editor, for his innovative ideas; Karen Kirincich
Senior Editorial Project Manager, for her professional and cordial demeanor in seeing this edition through from beginning to end; Bruce Kenselaar for designing the beautiful rainbow cover,
which has made my son and me very happy; Mohinder Singh, Project Manager at Aptara for his
superlative effort; and Clara Bartunek, Production Project Manager for a wonderful job.
I wish to thank the following professors for their reviews and thoughtful comments: George
Bernard, Seminole State College; William Crews, Central Piedmont Community College; Kenneth
Rasheed, Chattahoochee Technical College; Anne Schacherl, Madison College; Laura Sullivan,
Sam Houston State University; Elliot Lasson, University of Baltimore; and William Roden.
Regards,
J. J. Moran, J.D., MBA
xv
FOREWORD
Employment law impacts the lives of everyone in our society: employees and their dependents,
business owners, managers, and independent contractors. In fact, psychologists have long held
that the ability to love and to work is integral to healthy psychological functioning. This is why a
thorough, comprehensive understanding of employment law is essential, now more than ever, in
today’s rapidly changing global marketplace.
As a psychologist, I appreciate the impact of the legal consequences of employment law, as
well as the psychological effects of workplace interactions on both employees and the organization
as a whole. Discrimination, harassment, and invasion of privacy are but a few of the workplace
behaviors that can significantly impact employees’ health, job satisfaction, and productivity.
As a college administrator, I understand the daunting task of educating supervisors and
employees to respect the privacy and dignity of their colleagues while balancing the rights of
the employer. Effectively addressing issues related to recruiting and hiring practices, as well as
evaluation of employees’ performance, are essential in creating a workplace environment that is
conducive to supporting the rights of all employees.
I commend John Jude Moran for his diligent and comprehensive efforts in revising this
important work. His book breaks down complicated laws in an easy-to-understand format, providing guidance to both employers and employees. Students and faculty will appreciate this. In
presenting the latest cases in employment law, along with thought-provoking ethical issues and
human resource dilemmas, John has crafted an excellent and engaging text that will continue to
have a longstanding impact in the field.
Lily D. McNair, Ph.D.
Provost and Vice President of Academic Affairs
Wagner College
xvi
FP
O
ABOUT THE AUTHOR
John Jude Moran was born in Bay Ridge, Brooklyn, New York. After graduating from Xaverian
High School at the age of 16, John received his bachelor’s degree in business administration from
St. John’s University’s Notre Dame College in two years at the age of 18. John then attended
New York Law School, from which he received his Doctor of Law degree at the age of 21. John’s
first teaching experience was at the City University of New York, which he began while still in
law school. John also taught part-time at St. John’s University MBA program. After becoming a
member of the New York Bar, John worked for a law firm and then a corporation in Manhattan.
In 1982, John moved to Grasmere in Staten Island. At that time, John began writing his
first book, Practical Business Law. This book was published in 1985. It is now in its third edition
and has been used in almost a hundred colleges in the United States and six foreign countries.
John returned to St. John’s University to pursue an MBA in finance, which he received at the age
of 30.
After teaching at St. Peter’s College for one year, John became a member of Wagner
College’s faculty in 1984. He has served as chairman of the Department of Business
Administration and is currently a Professor of Business and Employment Law. In 1995, the first
edition of Employment Law: New Challenges in the Business Environment was published.
John resides on Cameron Lake in Grasmere, Staten Island, New York, with his mom, Rita;
his son, Johnny; his dog and Johnny’s best friend, Freckles; and their cat, Chubby.
xvii
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PART
I
Chapter
EMPLOYMENT
RELATIONSHIP
AND PROCEDURE
1
Employment Relationship
IN THE NEWS
Two Credit Suisse employees pled guilty to conspiring to
inflate the value of mortgage bonds in order to increase
their bonuses. This occurred during 2007 and 2008.
Credit Suisse was not implicated in the fraud.
U.S. Attorney in Manhattan Preet Bharara commented that the three perpetrators of fraud attempted to
prove to their superiors that they could turn a profit while
both the securities and housing markets were spiraling
downward during the financial crisis of 2008. Their desire
to find favor with those above resulted in their breaching
the law as well as the code of ethics.
David Higgs offered that his intention to commit
fraud was motivated by his desire to improve his standing
within the firm.
Salmaan Siddiqui justified his action by blaming his
superiors. His attorney Ira Sorkin pontificated: “What he
did was the result of his boss and his boss’s boss directing him to do it.”
A third employee charged is Kareem Serageldin.
He is currently in the United Kingdom. If he does not
return to the United States of his own free will, he will
be extradited.
This is the first successful criminal case relating to
the recent financial crisis. The difficulty in prosecuting
these cases lies in locating credible witnesses and convincing them to cooperate.
Questions
Do you believe there should have been more individuals prosecuted for criminal fraud cases growing out
of the financial crisis of 2008? If so, why has this not
happened?
Pulliam, S., Eaglesham, J., & Bray, C. (2012, February
2). “Guilty pleas in bond case hit the ‘mark.’” Wall
Street Journal. Retrieved March 21, 2012, from http://
online.wsj.com
Chapter Checklist
■ Define employment relationship.
■ Distinguish between an employee and an independent
contractor.
■ Understand the duties of the employer and the worker.
■ Appreciate the types of authority given to the worker.
■ Know the parameters of noncompete and nondisclosure
agreements and when they are enforceable.
■ Determine when an employee’s actions occurred within the
scope of employment.
■ Identify situations that could lead to potential liability involving
contract disputes and the torts of assault, battery, defamation,
and invasion of privacy.
INTRODUCTION
The employment relationship is a contractual agreement between an
employer and a worker. The worker may be either an employee or
an independent contractor. Distinguishing between the two is very
important. The distinction has an effect on compensation, benefits,
harassment, family leave, workers’ compensation, unemployment
insurance, and discrimination.
In an employment relationship, authority is conveyed by an
employer to an employee. An employee is under the direct control
of the employer. Deciding what kinds of authority and how much
authority to grant are important issues for employers to resolve.
Inherent in every employment relationship is the employee’s duties
of loyalty and good faith and the employer’s duties to compensate
and maintain a safe working environment. Violations of these duties
give rise to contractual and tort liability.
A contract is a legally enforceable agreement. A tort is a private civil wrong. Tort liability encompasses assault and battery,
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Part I • Employment Relationship and Procedure
Employment relationship A contractual
agreement between an employer and a
worker.
Contract A legally enforceable agreement.
Tort A private civil wrong.
Employment The rendering of personal
service by one person on behalf of another
in return for compensation.
Agency A contractual relationship,
involving an agent and a principal, in
which the agent is given the authority to
represent the principal in dealings with
third parties.
defamation, invasion of privacy, and negligence. The key to an employer’s responsibility is
whether the tort was committed within the scope of employment—in other words, “on the
job.” Employers may attempt to employ restrictive covenants, also known as noncompete
or nondisclosure agreements. These agreements are used to protect the employer’s business
against theft of trade secrets, stealing clients, and competing against the former employer.
Courts generally do not like to restrict people from working, but the courts will enforce these
agreements where they are voluntarily signed and designed to protect the business from unfair competition.
The word employment may be defined as the rendering of personal service by one person
on behalf of another in return for compensation. The person requesting the service is the employer. The person performing the service may be either the employee or an independent contractor. Employment law has its roots in the law of agency.
Agency is a contractual relationship, involving an agent and a principal, in which the agent
is given the authority to represent the principal in dealings with third parties. The most common
example is an employer–employee relationship wherein an agent (employee) is given the power
by a principal (employer) to act on his or her behalf. An agent may be an employee or an independent contractor. A principal is a person who employs an agent to act on his or her behalf. A
principal (employer) has full control over his or her employee. The employee must complete the
work assigned by following the instructions of the employer.
INDEPENDENT CONTRACTOR
Case 1.3
Independent contractor An individual
hired by an employer to perform a
specific task.
An independent contractor is an individual hired by an employer to perform a specific task.
The employer has no control over the methods used by the independent contractor. The
following contractors are among those who act independently of an employer in some situations: electricians, carpenters, plumbers, television repair persons, and automobile mechanics. Independent contractors can also include professional agents such as lawyers, physicians,
accountants, securities brokers, insurance brokers, real estate brokers, and investment advisors. Independent contractors may also employ others in their field who will be bound to
them as employees.
At times it may be unclear whether a worker is an employee or an independent contractor.
This occurs with workers who are salespeople, delivery and car service drivers, home workers,
and others who work for tips or commissions. Employers prefer the independent contractor
status because they do not have to provide paid vacation pay, sick time, personal leave, or any
life, health, or unemployment insurance. In addition, they do not have to pay pension benefits;
there is no basis for workers’ compensation suits; taxes do not have to be withheld; there are no
minimum wages, maximum hours, or overtime; and tort liability for the actions of the independent contractor is minimal or nil. Employers initially designate a worker as an employee or an
independent contractor. How then is the distinction made?
Courts often employ an economic realities test, which encompasses an employer’s control over the worker’s behavior. First, factors indicating behavioral control include instructing,
training, setting work hours, and designating dress codes; where, when, and how the work is to
be done; and restricting the worker from being employed by others. Second, financial control is
determined by the following: the worker does not have a significant investment in the business;
the worker cannot perform services for the public; the worker has no unrealized personal profit
or loss; the worker does not pay business expenses or provide tools; the worker is compensated
for a job on an hourly basis; and the worker files reports as required by the employer. Third, the
type of relationship is indicative of employment status, and factors include the following: the
relationship is continuous; the worker has an essential role in the business; the worker has no
power to employ others without the employer’s authorization; the worker is liable if the job is
done poorly or is not completed; and the worker may be terminated at will, not solely for breach
of contract.
Affirmative responses to these criteria would indicate that the worker is an employee.
Negative responses signify that the worker is an independent contractor. Often, indicators
are split between employee and independent contractor. Some courts have used a balanced
approach, in which the criteria supporting employee status will be counted or weighed
against the criteria supporting independent contractor status to determine the employment
relationship.
Chapter 1 • Employment Relationship
The Internal Revenue Service (“IRS”) can also weigh in on this issue if it believes employers
are not withholding taxes. In 2006, the IRS condensed its 20 Factor Test for independent contractors into three components:
Behavioral control
Financial control
Relationship type
Behavioral Control
Behavioral control is determined by who has ultimate control over performance of the following:
Assignment of the job
Where, when, and how the work is performed
The purchase of tools, equipment, and supplies
The method(s) used to complete the task
The hiring of additional help
Whether training is provided
If the employer controls these activities, then the worker is an employee. If the worker is the decision maker with regard to these factors, then the worker is an independent contractor.
Financial Control
Who has financial control is determined by a number of factors, including the following:
When the worker is paid by the job, even if it includes an hourly component such as attorney’s fees, it is indicative of independent contractor status. An employee is usually paid
a wage or salary.
Withholding of income, Social Security, and Medicare taxes and payment of unemployment insurance and workers’ compensation insurance for the worker are indications of
employee status. Nothing is withheld for independent contractors.
When a worker performs for only one employer, it is indicative of an employer–employee
relationship. An independent contractor may work for numerous employers.
Independent contractors are in business for themselves to earn a profit; employees are not.
Employee compensation is fixed with the exception of bonuses, commissions, and profit
sharing, but these are still not indicative of independent contractor status.
Workers who invest in facilities and equipment are independent contractors.
Relationship Type
Employment at will applies to workers who are employees whereas independent contractors’
employment is terminated when the task is completed. Whenever a worker is given an
employment handbook and/or provided with any of certain benefits—including pension, health,
life/disability insurance, vacation and/or sick time—he or she is an employee. An independent
contractor must provide for his or her own insurance and benefits.
ETHICAL ISSUE
The Case of One for the Road
Mary Kay Cosmetics terminated Debi Eyerman due to a drunk driving conviction, an accident that
occurred while she was inebriated, and attending a meeting while intoxicated. Alcoholism is a
protected disability under the Americans with Disabilities Act.
However, Mary Kay argued that an employer need not tolerate the use of alcohol during the
scope of employment. Furthermore, Mary Kay did not control Eyerman’s job performance and
employment opportunities due to her status as an independent contractor.
Eyerman v. Mary Kay Cosmetics, Inc., 967 F.2d 213 (6th Cir. 1992).
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Part I • Employment Relationship and Procedure
Questions
1. Is it fair for an alcoholic to expect an employer to overlook his or her disability when it affects
job performance?
2. Did Mary Kay act in the most ethical way?
3. Was Debi Eyerman’s behavior ethical?
Employment is a contractual relationship wherein the employee or independent contractor is given authority to act on behalf of the employer. All the requirements of contract law are
applicable to the creation of employment.
ELEMENTS OF AN EMPLOYMENT CONTRACT
Employment contracts are personal service contracts, in which an individual is employed on
a salary basis. Employment contracts also include contracts with independent contractors, in
which performance is compensated on an hourly or per case basis. Generally employment contracts are not required to be in writing because they are indefinite in nature.
The scope of an employee’s authority is usually determined by the employer.
ETHICAL ISSUE
The Case of the Missing Stud
The breeding rights to the stallion Imperial Guard were advertised for $50,000 each. Herb Bagley,
manager of Church Farms, was the contact person. Vern Lundberg purchased a share of the
breeding rights, executing a contract that was signed by Bagley on behalf of Church Farms. A
clause in the contract provided that Imperial Guard would remain in Illinois. Church Farms moved
Imperial Guard to Oklahoma the next year. Lundberg was unable to utilize his breeding rights.
Church Farms argued that Bagley overstepped his authority in signing the contract.
Lundberg v. Church Farms, Inc., 502 W.E. 2d 806 (Ill.App.2 Dist. 1986).
Questions
1. Did Herb Bagley act in an ethical manner?
2. Is there any justification for Church Farm’s actions in moving the horse and denying Bagley’s
authority?
3. Is the use of horses exclusively for breeding ethical?
DUTIES OF EMPLOYEES AND INDEPENDENT CONTRACTORS
Employees and independent contractors have the responsibility to be loyal to the employer, to
act in good faith in carrying out the work assigned by the employer, and to account for monies
received that belong to the employer.
Duty of Loyalty
Duty of loyalty An employee has a
duty to inform, to obey instructions, and
to protect confidential information.
The relationship between employers and employees or independent contractors is a fiduciary
one, based on trust and confidence. Inherent in this relationship is the duty of loyalty of the
employee or independent contractor. The duty of loyalty means that an employee has a duty to
inform, to obey instructions, and to protect confidential information. An employee or independent contractor has a duty to disclose all pertinent information he or she learns of that will affect
the employer, the employer’s business, or the task at hand. An employee or independent contractor must not take advantage of the employer’s prospective business opportunities or enter into
contracts on behalf of the employer for personal aggrandizement without the employer’s knowledge. An employee, and in some cases an independent contractor (lawyer, investment banker,
sports-team scout), may not work for two employers who have competing interests.
EMPLOYMENT PERSPECTIVE
Peter Stapelton works as a salesclerk and mechanic at South Shore Auto Parts and Repair Shop.
One day, Stapelton is approached by Malcolm Ripkin, owner of Ripkin’s Limousine Service, who
Chapter 1 • Employment Relationship
5
informs him that he would like South Shore to maintain his fleet of 17 limousines. Stapelton
takes Ripkin’s card, but instead of passing it along to the owners of South Shore he decides to
negotiate with Ripkin on his own behalf. Stapelton reasons that if he can get the contract for the
maintenance of the 17 limousines, it would enable him to establish his own auto repair station.
Stapelton enters into a personal service contract with Ripkin and then contracts with South Shore
to purchase all the supplies he needs at wholesale prices. Six months later, South Shore learns
of Stapelton’s disloyalty.
What recourse does the company have? South Shore may sue Stapelton for breach of contract because he violated his duty of loyalty in failing to disclose Ripkin’s offer and in taking
advantage of South Shore’s business opportunity. Stapelton also contracted on behalf of South
Shore for his own benefit without telling the company what he was doing. Stapelton will be liable
to South Shore for consequential damages—that is, the loss of profits South Shore sustained
because of Stapelton’s unauthorized contract made on behalf of South Shore with himself at
wholesale prices. South Shore will be able to recover the difference between the wholesale price
and the retail price and also may fire Stapelton for his disloyal actions.
Duty to Act in Good Faith
An employee or independent contractor has an obligation to perform all duties in good faith.
The duty to act in good faith means that the employee or independent contractor must carry out
the task assigned by using reasonable skill and care. He or she has a further duty to follow the
employer’s instructions and not to exceed the authority delegated to him or her.
Case 1.4, 1.5
Duty to act in good faith The employee
or independent contractor must carry out
the task assigned by using reasonable skill
and care.
EMPLOYMENT PERSPECTIVE
Jonathan Frye has been a legal associate for Rogers and Allen tax firm for 4 years. During his
tenure, he has made no errors. This year, he is assigned numerous tax returns to complete by
April 15. If he is unable to complete a return, he must file for an extension. Jonathan completes
all but five returns. He forgets to file the necessary extensions. The taxpayers are penalized, and
the firm must reimburse the penalized taxpayers.
Has Jonathan breached his employment duties? Yes. He has violated his duty to act in good
faith by failing to carry out his responsibilities in a negligent-free manner. His duty of loyalty is not
in question, but his duty to act in good faith has been breached due to his mistakes.
Duty to Account
An employee or independent contractor has a duty to account for all compensations received,
including kickbacks. Upon the employer’s request, the duty to account requires an employee or
independent contractor to make a full disclosure, known as an accounting, of all receipts and expenditures. The employee or independent contractor must not commingle funds but rather must
keep the employer’s funds in an account separate from his or her own. Furthermore, an employee
or independent contractor must not use the employer’s funds for his or her own purposes.
EMPLOYMENT PERSPECTIVE
Ted Murphy is a securities broker at a branch office of Pearlman & Associates, located in Silver
City, New Mexico. All of Murphy’s clients have signed an agreement appointing him as their
agent to buy and sell securities. Murphy often borrows from individual accounts in order to further his own investment opportunities. Because Silver City is not a large city, many clients make
deposits in cash. Murphy stamps a deposit slip but then deposits the cash in his own account,
expecting to repay the money at a later date. He has been doing this without telling either the
client or the company; he repays the amount borrowed at a later date.
Recently Murphy had a streak of bad luck and was unable to repay the money before the
monthly statements were sent out. The clients sue Pearlman & Associates and Ted Murphy for
conversion of the funds in their accounts. The firm is liable to its customers.
What recourse does Pearlman & Associates have against Murphy? The company may sue
Murphy for breach of contract and for reimbursement of any of the clients’ losses. By commingling clients’ funds with his own for the purpose of furthering his own investment schemes,
Murphy breached his duty of loyalty, his duty to act in good faith, and his duty to disclose fully all
deposits he received.
Duty to account Requires an employee
or independent contractor to make a full
disclosure, known as an accounting, of all
receipts and expenditures.
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Part I • Employment Relationship and Procedure
EMPLOYER’S DUTIES
When hiring employees and independent contractors, employers have the responsibility to create a work environment that is safe for them to perform the work assigned and to compensate
them for the work performed as promised.
Duty to Compensate
An employer has the duty to compensate the employee or independent contractor for the work
performed. An employee or independent contractor is entitled to the amount agreed upon in the
contract; otherwise, he or she is entitled to the reasonable value of the services rendered. Sales
representatives are usually paid according to a commission-based pay structure, which incorporates a minimum level of compensation against which the sales representatives are entitled to
draw. An employer must also reimburse an employee for the expenses incurred by the employee
during the course of conducting the employer’s business. For tax purposes, an employer has a
duty to keep a record of the compensation earned by an employee and the reimbursements made
for expenditures. Employers also are required to withhold payroll taxes from employees’ paychecks; this is not so with fees paid to independent contractors.
Duty to Maintain Safe Working Conditions
Scope of employment The various
activities that may occur in the
performance of a person’s job.
The maintenance of safe working conditions is another obligation placed on the employer. Any
tools or equipment furnished to the employee must be in proper working order; otherwise, the
employer may be liable for the harm done to the employee, as regulated by the Occupational
Safety and Health Administration (“OSHA”).
The scope of employment means the worker is on the job. If an employee is injured during
the scope of employment, then the employee will be covered by workers’ compensation.
NONCOMPETE AGREEMENTS
Case 1.1, 1.6, 1.7
Noncompete agreement A contract
wherein the employee promises not
to work for a competitor or open a
competing business of a type in which the
employer transacts business.
A noncompete agreement is a contract wherein the employer provides employment, or a severance package (in the case where the noncompete agreement is entered into upon termination), in
return for the employee’s promise not to work for a competitor or open a competing business in
which the employer transacts business for a reasonable length of time. A noncompete agreement
may be a separate document, or it may be a clause or covenant contained in an employment contract. The latter is often identified as a noncompete clause, restrictive covenant, or covenant not
to compete. Enforcement of these specifics deprives the employee of being able to work in his or
her area of expertise. Courts will restrict the employee only when the employer has established
harm to his or her business. The limitations set forth in the contract must be reasonable. The
courts will not enforce restrictions upon employees that are unduly harsh, nor will they permit
employers to derive more protection than what is necessary to guard their secrets or to protect
their business interests.
In most states, noncompete agreements are enforceable within the confines set forth in this
text. Some states place restrictions on such agreements. In California, for example, noncompete
agreements are restricted to the sale of a business and cannot be used in employment.
EMPLOYMENT PERSPECTIVE
David Williams bought a liquor store in Los Angeles. He hired Brian Jackson to manage the store
for him. A provision in the contract prohibited Jackson from opening a liquor store within the
state limits for the rest of his natural life. After learning the trade, Jackson quit and opened his
own place in downtown San Diego. Can Williams enforce the provision? No! The provision is too
broad in its geographic scope and much too unreasonable in its time restraints.
Nondisclosure agreement Restricts
an employee from the sale or use of trade
secrets, confidential information, and/or
a work in progress that has commercial
value or will result in harm to the
employer.
NONDISCLOSURE AGREEMENTS
An employee’s sale or use of trade secrets, confidential information, and/or a work in progress
that has commercial value or will result in harm to the employer may be restricted through a
nondisclosure agreement. Courts will enjoin an employee where the employer is protecting its
Chapter 1 • Employment Relationship
7
legitimate business interests. The Uniform Trade Secrets Act provides guidelines for employers
in those states that have ratified it.
Noncompete and nondisclosure agreements are often used in high-tech, product development, sales, and financial services where employees have proprietary information or access to
customer lists. Under the inevitable disclosure doctrine, employees may be restricted even when
they have not signed a noncompete and/or a nondisclosure document under the theory that it is
inevitable that employees will use the information gleaned from their employer to benefit themselves or a competitor. This doctrine is predominantly applicable to intellectual property.
EMPLOYMENT PERSPECTIVE
Taylor Moore had been working on a new cholesterol medication for Big Pharma, Inc. When
Moore was first employed, she signed a nondisclosure agreement, which prohibited her from disclosing proprietary information about any medication she was working on. She left Big Pharma’s
employ to work for Drugs R Us. Drugs R Us has no medications in the very profitable cholesterol
area. What course of action should Big Pharma pursue?
Big Pharma should get an injunction to prevent Moore from disclosing this information. If
Moore has disclosed it, Big Pharma could sue for money damages to compensate it for the
loss suffered.
ETHICAL ISSUE
The Case of a Double-Crosser
Raymond Berta was a partner in the accounting firm Decker, Berta and Co. Berta signed noncompete and nondisclosure clauses when he sold his portion of the business to Decker, Berta and Co.
Berta remained an employee for a period of time according to an agreement with the firm. Upon
expiration of the term, a new firm employed Berta, who influenced clients to switch to the new firm.
Even though Berta left the firm of Decker, Berta and Co., his name remained part of the business.
Decker, Berta and Co. claimed that Berta violated the noncompete and nondisclosure
clauses by working for a competitor and stealing clients. The firm contended that the sale of the
firm would be meaningless if the original partners left to compete in the same business. Berta
retorted that the noncompete and nondisclosure clauses were part of the employment contract,
not the sale of the business. This would subject the clauses to a stricter standard of scrutiny.
Decker, Berta and Co., Ltd. v. Berta, 587 N.E.2d 72 (Ill.App.4 Dist.1992).
Questions
1. Is there any justification for Raymond Berta’s actions?
2. What was Mr. Berta expected to do if he could not work in the accounting field for 3 years?
3. Is the use of noncompete and nondisclosure clauses always ethical?
SAMPLE NONCOMPETE AND NONDISCLOSURE AGREEMENTS
During a one-year period following the termination of employment with X Corp., an employee
agrees to refrain from the following:
•
•
•
•
Conduct business that would place employee in competition with X Corp.
Work for an employer who is in competition with X Corp.
Entice co-workers and/or customers to cease their relationship with X Corp.
Disclose to a competitor of X Corp. any confidential information belonging or pertaining
to X Corp.
Injunction
An injunction is an equitable remedy that prevents a party who breaches a contract from rendering the same performance elsewhere. An injunction is personal in nature and negative in effect
in that it precludes a person from performing certain acts. However, because the breaching party
cannot be compelled to perform a certain act, an injunction can prohibit the party from performing the same act elsewhere. An injunction acts as a restraint against the party breaching an employment contract. An injunction is the appropriate remedy to enforce a noncompete agreement.
Injunction An equitable remedy that
prevents a party who breaches a contract
from rendering the same performance
elsewhere.
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Part I • Employment Relationship and Procedure
EMPLOYMENT PERSPECTIVE
Wild Bill Cary is under a 5-year contract with the Texas Tornadoes to play quarterback for the team
for $100,000 per year. After leading his team to successive central division titles, he is offered a
4-year contract from the Hawaii Hurricanes for $500,000 per year. There are still 3 years remaining
on Cary’s contract with Texas, but Cary decides to accept Hawaii’s offer. Can Texas prevent him
from quarterbacking for Hawaii? Yes! An injunction can be granted, but Texas cannot legally force
Cary to quarterback for the team through specific performance. Cary is bound to Texas for the 3
years remaining on his contract unless management renegotiates his contract or trades him. The
terms of Cary’s original contract were designed to protect him from being cut from the team while
ensuring him a substantial yearly salary. After the contract expires, Cary will have free-agent status.
ETHICAL ISSUE
The Case of the Knockout Punch
Primo Carnera, a heavyweight boxer, entered into a 9-month contract exclusively with Madison
Square Garden (“MSG”) to fight the winner of the Schmeling–Stribling championship bout.
During the 9-month period, Carnera also entered into a contract to fight Sharkey.
MSG argued that an injunction should be issued preventing Carnera from fighting Sharkey.
MSG reasoned that if Carnera loses the match, the significance of Carnera’s bout with Schmeling
or Stribling will be greatly diminished. Carnera retorted that MSG is asking him to wait for up to 9
months for a match to be arranged when MSG is not guaranteeing that it will happen. A boxer is
in his prime for a short period of time; a 9-month wait cuts into that substantially.
Madison Square Garden Corporation v. Carnera, 52 F.2d 47 (2dCir.1931).
Questions
1. Why did Carnera enter the contract if he did not want to wait up to 9 months?
2. Are Carnera’s actions ethical?
3. Is MSG’s use of a restrictive covenant fair?
Contractual Conditions
A condition occurs when the parties’ contractual duties are contingent upon the occurrence of a
future event. Parties must expressly agree when making the contract if they are conditioning their
obligations on the occurrence of a particular event.
Sales quotas in car dealerships, insurance, brokerage, and so on are conditions that must be
continuously satisfied for the worker to retain his or her job.
Tort Liability
Case 1.2, 1.8
An employer is liable for any tort committed by his or her employee if the tort is committed within
the scope of employment—that is, if it is related to the business at hand. A tort is a private civil wrong
as opposed to a crime, which is a wrong committed against the public. However, an employer is not
liable for the torts of an independent contractor even if the torts are committed during the scope of
employment because the employer has no control over the work of an independent contractor.
ETHICAL ISSUE
The Case of Using Your Head When You Shouldn’t
Douglas Plouffe was injured when he tried to loosen a frozen hand brake on a Burlington Northern
railroad car. When he shook the connecting chain, the brake slipped and hit him on his head.
Burlington Northern argued that Plouffe was barred from recovery because he was partly at fault.
Plouffe argued that if not for the defective hand brake, he would not have been injured.
Plouffe v. Burlington Northern, Inc., 730 P.2d 1148 (Mont. 1986).
Questions
1. Why did Burlington Northern deny responsibility for its employee when it knew the equipment was defective?
2. Is there any justification for Burlington Northern’s action?
3. Since Plouffe is contributorily negligent, is he ethical in anticipating compensation?
Chapter 1 • Employment Relationship
EMPLOYMENT PERSPECTIVE
Luis Manulto is a construction worker who was hired by Valenti Construction Company.
Currently, Luis is working on the 44th floor of an office building in downtown Houston. Manulto
has his toolbox at his feet, but when someone calls him, he is surprised and accidentally knocks
the toolbox off the beam. The toolbox falls onto a pedestrian walkway that was covered by a
heavy plastic grating. Linda Anderson, who was walking through the walkway at the time, is
severely injured. Manulto is an employee because he works exclusively for Valenti and is under
Valenti’s direct control.
Who is liable for Linda’s injuries? Linda may sue both Luis Manulto (employee) and Valenti
Construction Company (employer). Manulto acted negligently in knocking over the toolbox.
Valenti Construction Company is liable for Manulto’s negligence because it occurred during his
scope of employment, and the accident was related directly to the business at hand.
Suppose that at lunchtime Manulto stops at a bar across the street to drown his sorrows
and that a patron comments, “I saw the whole episode, and it was a real stupid thing you did.”
Manulto, angered by the patron’s comments, punches him in the face, causing the patron to
suffer a fractured nose and a concussion. Is the principal liable for Manulto’s acts? No! Valenti
Construction Company is not liable for Manulto’s tort of assault and battery because it did not
occur within the scope of employment; the tort was not related to the business at hand. Manulto
will be solely liable.
An employer is also liable for the fraud or misrepresentations committed by an employee
where the principal has placed the employee in a position that leads people to believe that the
agent has the apparent authority to make certain actual representations.
EMPLOYMENT PERSPECTIVE
Keith Stewart, a representative of Super Duper Vacuum Company, calls on Thelma Williams
at her home. Although at first Williams is reluctant to make a purchase, Stewart convinces her
when he makes the false representation that, with the separate purchase of certain attachments,
this household vacuum cleaner will also clean basements and garages. He does this intentionally
to get the sale. Williams purchases the vacuum cleaner as well as the attachments.
When Williams’s husband comes home, she gives him a demonstration in the living room,
where the vacuum cleaner works perfectly. Then using the attachments, Mr. Williams attempts
to clean the garage floor. The machine breaks down. The Williamses sue Super Duper Vacuum
Company and Stewart for fraud. Super Duper never instructed Stewart to make false statements
of fact and never advertised its vacuum cleaner for anything more than household use.
Who will be responsible for the fraud? If Stewart is an employee working exclusively for
Super Duper, then both Super Duper and Stewart will be liable. Super Duper is liable for its
employee’s fraudulent representations because it placed Stewart in a position where people
would reasonably believe that he had the authority to make such a statement. Super Duper
may seek indemnification from Stewart because of his breach of duty of loyalty. Stewart
breached the duty by exceeding his authority through the making of statements that were false
and unauthorized.
EMPLOYMENT PERSPECTIVE
One day while strolling through Richmond Hill Mall, Bill Cominsky decides to browse around
Peter’s Jewelry Store. He spots what appears to be a gold necklace on sale for $49. He figures
this would be perfect for the upcoming birthday of his fiancée, Donna Upton. Cominsky goes inside and asks the clerk, Marjorie Travers, whether the necklace is made of gold. Travers excuses
herself and goes into a back room where she questions Bernard Peters, the store owner, who
replies that the necklace is 14-karat gold, knowing this to be false. Travers conveys the message
to Cominsky, ignorant of its falsehood. Cominsky, relying on the statement, makes the purchase.
On Donna’s birthday, Cominsky and Upton discover that the necklace is not 14-karat gold.
What recourse is available to Cominsky? He may sue Peters, the employer, for fraud.
Although Travers made a material misrepresentation of the fact that Cominsky justifiably relied
on to his detriment, she made this statement innocently, without an intent to defraud. Bernard
Peters is guilty of fraud because his misrepresentation was intentional.
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Part I • Employment Relationship and Procedure
Case 1.1
Boston Scientific Corporation v. Mikelle Mabey
2011 U.S. App. LEXIS 22106 (10th Circuit)
The issue in this case is whether the noncompete agreement was unenforceable due to a lack of consideration.
LUCERO, CIRCUIT JUDGE.
Boston Scientific filed suit to enforce a non-compete agreement against Mikelle Mabey, a former
employee, and St. Jude Medical Neuromodulation Division (“St. Jude”), her current employer.
The district court held in favor of Mabey and St. Jude, and Boston Scientific appealed. Exercising
jurisdiction, we reverse and remand.
Mabey began working for Boston Scientific as an at-will employee in 2006. Throughout
her tenure with the medical device manufacturer, she earned variable compensation through a
bonus program in addition to her base salary. Boston Scientific’s 2008 bonus program guaranteed Mabey a minimum bonus of 12 percent of her base salary unless she failed to meet certain
compliance requirements.
In 2009, after Mabey had worked for Boston Scientific for three years, the company asked
her to sign a non-compete agreement. If she signed, she would remain eligible for her quarterly
bonus under a program substantially identical to the 2008 program. If she did not sign, Boston
Scientific would reduce her bonus eligibility by $1,000 for each of the final three quarters of 2009;
however, she would remain employed at-will and would continue to receive the same base salary.
Mabey signed the agreement on March 2, 2009. As a result, she earned $3,000 more in bonus pay
than if she had not signed the agreement.
In May 2010, Mabey left Boston Scientific to work for its competitor, St. Jude. Boston
Scientific filed suit in Utah federal district court to enforce the non-compete agreement.
The district court held in favor of Mabey and St. Jude. It concluded that the non-compete
was unenforceable due to a lack of consideration because Boston Scientific “merely kept Mabey’s
compensation the same” in exchange for her signing the agreement.
For a non-compete agreement to be enforceable under Massachusetts law, it must be supported by consideration. An employer must provide the employee some “clear additional benefit.” The court concluded that “merely continuing compensation at the same level, in exchange
for the Non-Compete Agreement, no more constituted a ‘clear additional benefit’ than continuing a person’s employment does in an at-will employment situation.” Although Boston Scientific
had the “authority” as an at-will employer “to change Mabey’s compensation from year-to-year,”
it could not provide sufficient consideration for a restrictive covenant simply by agreeing not to
reduce her compensation.
Massachusetts courts have been less than clear on the issue of consideration for non-compete
agreements formed post-employment. Although the Massachusetts Supreme Court has not
addressed this issue for several decades, its most recent relevant decision held that a non-compete
agreement supported only by continued employment was “not void for lack of consideration.”
Because we discern no binding Massachusetts precedent holding that continued at-will
employment is insufficient consideration for a post-employment agreement, we reject the district court’s extension of this principle to covenants supported by an employer’s agreement to
continue compensation at the same level.
Having resolved this threshold issue, we now turn to whether Boston Scientific provided
adequate consideration to support its non-compete agreement with Mabey. We hold that it did.
Because Mabey was an at-will employee, Boston Scientific was free to reduce her future
compensation at any time. It had no preexisting legal obligation to pay Mabey the $3,000 she
received in exchange for signing the non-compete agreement. This payment, accordingly, constitutes sufficient consideration under Massachusetts law.
Mabey and St. Jude nevertheless argue that there was a failure of consideration because
Boston Scientific incurred no additional expense. Consideration is sufficient, however, “if there
is either a benefit to the promisor or a detriment to the promisee.” In exchange for signing the
non-compete, Mabey received a benefit to which, as an at-will employee, she had no legal right.
This was sufficient to form a valid agreement.
The judgment of the district court is REVERSED and the case REMANDED for reconsideration consistent with this order and judgment.
Judgment for Boston Scientific.
Chapter 1 • Employment Relationship
Case Commentary
The 10th Circuit ruled that the compensation given to the employee for signing the non-compete
agreement was valuable consideration.
Case Questions
1. Do you agree with the court’s decision?
2. How can a dollar amount be placed on the value of signing a non-compete agreement?
3. Is there an ethical resolution to this case?
Case 1.2
Dawn Renae Diaz v. Jose Carcamo
253 P.3d 535 (Cal. 2011)
The issue is whether an employer is liable for injuries sustained by another as a result of the negligent driving
of its employee.
KENNARD, J.
A person injured by someone driving a car in the course of employment may sue not only the
driver but that driver’s employer. The employer can be sued on two legal theories based on tort
principles: respondeat superior and negligent entrustment.
Respondeat superior, a form of vicarious liability, makes an employer liable, irrespective of
fault, for negligent driving by its employee in the scope of employment. The theory of negligent
entrustment makes an employer liable for its own negligence in choosing an employee to drive
a vehicle.
We disagree with the Court of Appeal. We therefore reverse that court’s judgment and
remand for a new trial.
Plaintiff Dawn Renae Diaz was driving south on U.S. Highway 101 near Camarillo,
Ventura County. Defendant Jose Carcamo, a truck driver for defendant Sugar Transport of the
Northwest, LLC, was driving north in the center of three lanes. Defendant Karen Tagliaferri,
driving in the center lane behind Carcamo, moved to the left lane to pass him.
As Tagliaferri, without signaling, pulled back into the center lane, her vehicle hit
Carcamo’s truck, spun, flew over the divider, and hit plaintiff’s SUV. Plaintiff sustained severe,
permanent injuries.
Plaintiff sued Tagliaferri, Carcamo, and Sugar Transport. She alleged that Carcamo and
Tagliaferri had driven negligently and that Sugar Transport was both vicariously liable for employee Carcamo’s negligent driving and directly liable for its own negligence in hiring and retaining him. In their answer, Carcamo and Sugar Transport denied any negligence.
At trial, plaintiff’s expert witness testified that Carcamo should have been in the right lane,
should have monitored his mirrors better, and should have averted a collision by slowing or steering away as Tagliaferri entered his lane. Plaintiff’s counsel argued that Carcamo sped up to keep
Tagliaferri from passing, noting Sugar Transport’s failure to produce the chart from the truck’s tachograph, which would have recorded Carcamo’s speed, acceleration, and braking. But another driver,
who was the only nonparty witness to the collision between Carcamo and Tagliaferri, testified that
Carcamo had not accelerated. With respect to defendant Tagliaferri, her counsel conceded that she
was partly at fault; defendants Sugar Transport and Carcamo contended that she alone was at fault.
Defendant-employer Sugar Transport offered to admit vicarious liability if its employee
Carcamo was found negligent. That admission, Sugar Transport argued, would bar plaintiff from
further pursuing her claims for negligent entrustment, hiring, and retention.
Over defendant-employer Sugar Transport’s objection, the trial court here admitted evidence of Carcamo’s driving and employment history, as offered by plaintiff in support of her
negligent hiring claim. The evidence showed two prior accidents involving Carcamo: one in
which he was at fault and was sued, the other occurring only 16 days before the accident here.
Other evidence showed that Carcamo was in this country illegally and had used a “phony” Social
Security number to obtain employment, that he had been fired from or quit without good reason
three of his last four driving jobs, that he had lied in his application to work for Sugar Transport,
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Part I • Employment Relationship and Procedure
and that, when Sugar Transport had sought information from Carcamo’s prior employers, the
lone response gave him a very negative evaluation.
Sugar Transport opposed instructing the jury on plaintiff’s negligent retention and hiring
claims, arguing that its offer to admit vicarious liability barred such instructions. It also sought
a mistrial, claiming the prior-accident evidence had been highly prejudicial. Its efforts failed.
Before closing arguments, Sugar Transport stipulated with plaintiff to vicarious liability for
employee-driver Carcamo’s negligence, if any.
The jury found that defendants Tagliaferri and Carcamo had driven negligently, that defendant Sugar Transport had been negligent in hiring and retaining Carcamo as a driver, and that the
retention was a cause of plaintiff’s injuries. The jury allocated fault for the accident among all three
defendants: 45 percent to Tagliaferri, 35 percent to Sugar Transport, and 20 percent to Carcamo. It
awarded plaintiff over $17.5 million in economic damages and $5 million in noneconomic damages.
The trial court entered a judgment in the form required by the Fair Responsibility Act of 1986,
enacting Civil Code sections §§ 1431.1–1431.5 and amending section 1431 (Proposition 51). Under
the judgment, Tagliaferri and Sugar Transport were each jointly liable for all of plaintiff’s economic
damages but only severally liable for part of her noneconomic damages—Tagliaferri for 45 percent
and Sugar Transport for 55 percent (its 35 percent plus its employee Carcamo’s 20 percent).
The Court of Appeal affirmed.
The respondeat superior doctrine makes an employer liable, irrespective of fault, for an
employee’s tortious conduct in the scope of employment.
It logically follows that the jury can hold an employer responsible for two shares of fault:
one based on the employee’s negligent driving in the scope of employment, for which the employer is liable vicariously, and one based on the employer’s own negligence in choosing a driver,
for which the employer is liable “directly.” To exclude the employer’s independent fault for its
negligence in hiring and retention, plaintiff argues, would distort the process of allocating fault
by removing a party who is at fault from the universe of tortfeasors. We disagree.
We can conceive of instances in which the employer may be liable for negligence independent of its employee, for example, when the employer provides the driver with a defective
vehicle. Here, however, plaintiff’s theory of employer Sugar Transport’s separate liability was
based solely on the theory of employer negligence in hiring and retaining Carcamo as a driver.
No matter how negligent an employer was in entrusting a vehicle to an employee, however,
it is only if the employee then drove negligently that the employer can be liable for negligent entrustment, hiring, or retention. If the employee did not drive negligently, and thus is zero percent
at fault, then the employer’s share of fault is zero percent.
That is true even if the employer entrusted its vehicle to an employee whom it knew, or
should have known, to be a habitually careless driver with a history of accidents. To show that
Sugar Transport’s driver, Carcamo, was prone to drive negligently (which was relevant to plaintiff’s negligent hiring and retention claims against Sugar Transport), plaintiff offered evidence of
his past accidents, including one in which he was at fault and another that had occurred just 16
days before the accident here. To further support her negligent hiring claim, plaintiff offered evidence of Carcamo’s poor employment record: As a person illegally in this country, he had used a
false Social Security number to get hired; he had been fired from (or quit without good reason)
three of his last four driving jobs; and he had lied in his application to work for Sugar Transport.
In addition, plaintiff presented extensive testimony about Sugar Transport’s inadequate hiring
practices, thereby making the company appear indifferent to the need to screen or train drivers
for safety. That testimony showed, for example, that when Sugar Transport hired Carcamo, it did
not make adequate efforts to get evaluations of him from his past employers and it ignored the
one evaluation it did receive, which was very negative.
All of that evidence should have been excluded after Sugar Transport offered to admit
vicarious liability. Had that evidence been excluded, and had the special verdict form not
listed defendant-employer Sugar Transport as a separate tortfeasor from defendant-employee
Carcamo, it is reasonably probable that the jury would have reached results more favorable to
one or both defendants on two issues, as explained below.
The first issue on which the jury would probably have reached a different result is whether
employee Carcamo drove negligently in this case. Evidence of an employee’s past accidents (admitted here to support the negligent hiring claim against employer Sugar Transport) is highly
prejudicial to the defense of a negligent driving claim against the employee. Such evidence creates
a prejudicial risk that the jury will find that the employee drove negligently based not on evidence
Chapter 1 • Employment Relationship
about the accident at issue, but instead on an inference, drawn from the employee’s past accidents,
that negligence is a trait of his character. Accordingly, had the trial court not made the errors
noted above, it is reasonably probable that the jury would have reached a result more favorable to
both Carcamo and Sugar Transport on the question of whether Carcamo drove negligently.
The second issue on which the jury would probably have reached a different result but for
the trial court’s error is its allocation of fault. As to this issue, however, the trial court’s error prejudiced only Sugar Transport, not Carcamo. The jury assigned defendant Tagliaferri 45 percent of
the fault, employee-driver Carcamo 20 percent, and employer Sugar Transport 35 percent. That
allocation made Sugar Transport liable (directly or vicariously) for 55 percent of the fault. Had
the trial court correctly listed only the drivers (that is, Carcamo and Tagliaferri) on the verdict
form as tortfeasors to whom the jury could assign shares of fault, employer Sugar Transport’s
only source of liability would have been its vicarious liability, under the doctrine of respondeat
superior, for the share of fault assigned to employee Carcamo. In that case, the jury might well
have assigned to Carcamo alone less than the 55 percent share of fault that it assigned to both
him and Sugar Transport together, thereby reducing Sugar Transport’s total liability. In other
words, being responsible for only one out of two shares of fault (rather than two out of three
shares of fault) would probably have worked in Sugar Transport’s favor.
This conclusion is supported by several facts. First, defendant Tagliaferri’s counsel admitted that his client was at fault in the accident. Second, both Carcamo and the only nonparty
witness to the accident testified that Tagliaferri pulled into Carcamo’s lane without signaling,
and that Carcamo never changed speed. (Tagliaferri’s injuries left her with no recollection of the
accident.) Third, the jury’s allocation of fault shows that it considered Tagliaferri to be more at
fault than Carcamo. Indeed, the jury assigned to Tagliaferri over twice the fault (45 percent) that
it assigned to Carcamo (20 percent).
We therefore perceive a reasonable probability that, had the trial court excluded the prejudicial evidence and arguments presented by plaintiff’s counsel, and instructed the jury to divide
fault between Carcamo and Tagliaferri alone—rather than including Carcamo’s employer, Sugar
Transport, among the tortfeasors to whom it could allocate fault—the jury would have assigned
to Carcamo alone less than the 55 percent share of fault that it assigned to both him and Sugar
Transport together. Although Sugar Transport would still have been responsible for the share of
fault assigned to Carcamo, the result would have been more favorable to Sugar Transport, because Sugar Transport would have had no additional, independent liability.
We reverse the judgment of the Court of Appeal and direct that court to reverse the trial
court’s judgment and remand the case for a complete retrial.
Judgment for Carcamo.
Case Commentary
The California Supreme Court ruled that an employer will be liable for injuries sustained by individuals that occur because of the negligent driving of one of its employees.
Case Questions
1. Are you in agreement with the Court’s decision?
2. Is the past driving record of the employee relevant?
3. Is there an ethical resolution to this case?
Douglas Schultz v. Capital International Security, Incorporated
460 F.3d 595 (4th Cir. 2006); 2006 U.S. App. LEXIS 21976
The issue is whether the bodyguards were considered to be employees or independent contractors for the
purpose of the Fair Labor Standards Act.
MICHAEL, CIRCUIT JUDGE.
Prince Faisal bin Turki bin Nasser Al-Saud (the Prince) is a diplomat and a member of the Saudi
royal family. The Prince, who has a residence in McLean, Virginia, engaged Capital International
Security, Inc. (CIS) to provide a personal security detail. Five of the agents who worked on the
Case 1.3
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Part I • Employment Relationship and Procedure
Prince’s detail sued CIS and its president, Sammy Hebri, asserting claims for unpaid overtime
under the Fair Labor Standards Act.
The plaintiffs, Douglas Schultz, Anthony Phiniezy, Melissa Lopes, Steven Rowe, and Jared
Baker, were “personal protection specialists” (PPS agents) licensed by the Virginia Department
of Criminal Justice Services (VDCJS). Licensed PPS agents “engage in the duties of providing
close protection from bodily harm to any person.” A PPS agent may operate his own security
business in Virginia if he obtains a private security business license from the VDCJS. Although
all five plaintiffs had at some point obtained individual PPS licenses, none of them had the additional license required to operate a security business.
The plaintiff-agents provided security services for the Prince and his family at the Prince’s
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 the
Prince’s family were safe when departing and arriving, sorted mail, and performed various tasks
upon request of the Prince’s family. Although the nature of the work the agents performed for
the Prince remained more or less the same throughout their employment, certain facts bearing
on whether they were employees or independent contractors changed over time.
(T)he Prince’s long-time driver and travel agent, Sammy Hebri, formed a company called
Capital International Security, Inc. (CIS). Abushalback negotiated an oral contract with Hebri for
CIS to administer the detail. CIS had virtually no involvement in the detail’s day-to-day operations. In fact, when CIS took over the detail, neither CIS nor Hebri was given a copy of the detail’s
SOP (Standard Operating Procedure). Parham, who was the detail leader throughout the transition period, reported to Abushalback. With Parham’s input, Abushalback decided each agent’s
work assignments. Parham did, however, send CIS approximately seventeen status reports on
detail operations and issues between July 2002 and the filing of this lawsuit in March 2004.
CIS was involved to a degree in the detail’s personnel matters. CIS helped recruit new
agents by placing advertisements in newspapers and screening resumes for applicants with PPS
licenses. CIS forwarded screened resumes to Parham, but it did not interview applicants or otherwise participate in hiring decisions.
CIS and the Prince both provided equipment to the detail. Although most detail members
carried their own personal handguns, CIS provided handguns for those agents who did not carry
their own. CIS also provided the agents with radios, holsters, first aid kits, business cards, and
lapel pins, while the Prince provided cars, cameras, cell phones, and office supplies.
Hebri sent a memo (dated July 24, 2002) to the agents directing them to obtain their own
private security business licenses from the VDCJS and individual liability insurance so they could
be classified as independent contractors. The memo explained, “If the agent does not have these
licenses [he] would have to be hired as an employee. . . . Employees would come under the liability coverage and business license of [CIS].” In follow-up letters to the agents on July 25, Hebri
added that detail members must secure the licenses and liability insurance (in other words, “have
independent contractor status”) by September 1, 2002, or “be relieved of duty” from the detail.
Schultz, who had allowed his PPS license to expire, brought these communications to Abushalback
because he was concerned about losing his job. Abushalback told Schultz that he had nothing
to worry about because Hebri was just “trying to cover his butt.” Schultz disregarded the warnings. CIS did not enforce the licensing and insurance requirements for the next fourteen months,
though Hebri asked Parham periodically whether the agents were taking steps to comply.
In January 2004 the VDCJS audited CIS’s operations. In the face of the audit, Hebri again
informed the agents that those without individual business licenses and liability insurance would
be reclassified as employees and paid an hourly rate. Hebri also said that those not meeting the
requirements would have to sign employee agreements setting forth new hourly rates or be
removed from the detail. Plaintiffs Lopes and Rowe had resigned months earlier, but Schultz,
Phiniezy, and Baker were still working on the detail and had not obtained the business licenses
or insurance. Phiniezy and Baker signed employee agreements that decreased their rate of pay,
though their duties did not change. Schultz, who lacked a current PPS license, was reclassified
as an “alarm responder” and his pay was decreased. The latter three agents all resigned within a
short time.
On March 29, 2004, the five plaintiffs sued CIS and Hebri for unpaid overtime under
the FLSA.
Chapter 1 • Employment Relationship
The defendants’ sole defense at trial was that the agents were not covered by the FLSA
because they were independent contractors, not employees as defined by the Act. After a threeday bench trial, the district court ruled against the plaintiffs, holding that they were independent
contractors, and entered judgment in favor of CIS and Hebri. This appeal followed.
The FLSA, in addition to mandating a minimum wage for covered employees, requires the
payment of overtime for each hour worked in excess of forty per work week.
The emphasis on economic reality has led courts to develop and apply a six-factor test to
determine whether a worker is an employee or an independent contractor. The factors are (1)
the degree of control that the putative employer has over the manner in which the work is performed; (2) the worker’s opportunities for profit or loss dependent on his managerial skill; (3)
the worker’s investment in equipment or material, or his employment of other workers; (4) the
degree of skill required for the work; (5) the permanence of the working relationship; and (6)
the degree to which the services rendered are an integral part of the putative employer’s business. These factors are often called the “Silk factors” in reference to the Supreme Court case from
which they derive. No single factor is dispositive; again, the test is designed to capture the economic realities of the relationship between the worker and the putative employer.
The undisputed facts in this case show that CIS and the Prince were joint employers of the
agents. The agents performed work “which simultaneously benefit[ted]” both CIS and the Prince.
Because CIS and the Prince were joint employers of the agents, the employment arrangement must be viewed as “one employment” for purposes of determining whether the agents were
employees or independent contractors under the FLSA.
1. The first Silk factor is the degree of control that the putative employer has over the manner
in which the work is performed. When the employment arrangement here is considered as
one employment by the Prince (acting through Abushalback) and CIS, the joint employers
exercised nearly complete control over how the agents did their jobs. While there were no
doubt occasions when the agents were required to exercise independent judgment (such
as determining whether a particular visitor appeared suspicious), as a general rule they did
not control the manner in which they provided security.
2. The second Silk factor is whether the worker has opportunities for profit or loss dependent
on his managerial skill.
There is no evidence the agents could exercise or hone their managerial skill to increase their pay. CIS paid the agents a set rate for each shift worked. The Prince’s schedule
and security needs dictated the number of shifts available and the hours worked. There
was no way an agent could finish a shift more efficiently or quickly in order to perform
additional paid work. The agents’ security work was, by its very nature, time oriented, not
project oriented. The second Silk factor weighs in favor of employee status for the agents.
3. The third factor is the worker’s investment in equipment or materials required for the task,
or his employment of other workers. This factor weighs heavily against a conclusion that the
agents were independent contractors. CIS and the Prince supplied almost every piece of equipment the agents used: radios, holsters, cell phones, cars, cameras, first aid kits, business cards,
and lapel pins. Although some agents chose to use their own firearms, CIS supplied firearms
to those who wanted them. The agents were thus not required to invest in any equipment or
materials. In addition, the agents could not hire other workers to help them do their work.
Although the agents arguably had an investment in their individual PPS licenses, this
investment is immaterial for our purposes. Licensing is required of all persons working
as personal protection specialists in Virginia regardless of whether they are employees or
independent contractors. More telling is the licensing and insurance that the five plaintiffagents did not obtain, despite CIS’s flaccid requests: the individual business licenses and
individual liability insurance. Because the agents were never compelled to obtain these credentials while they worked on the Prince’s security detail, they continued to operate under
the authority of CIS’s license and the protection of the company’s liability insurance.
4. The fourth Silk factor is the degree of skill required for the work. (T)his factor weighed
against employee status. Of course, a licensed PPS agent can be expected to offer more
specialized services than the average private security guard, and providing security for a
diplomat and members of a royal family surely presents special challenges. Although these
points could weigh in favor of concluding that the agents were independent contractors,
there are important countervailing factors. The agents’ tasks were, for the most part, carefully
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Part I • Employment Relationship and Procedure
scripted by the SOP. Moreover, many of their tasks required little skill, for example, sorting
the mail, making wake up calls, moving furniture, providing newspapers for the Prince,
and checking the Dallas Morning News website for updates about the Dallas Cowboys.
Although we are mindful of the district court’s observation about the need for special skills,
we do not see the skill factor as tipping significantly one way or the other.
5. The fifth factor is the degree of permanency of the working relationship. The more permanent the relationship, the more likely the worker is to be an employee. Indeed, when
the Prince is viewed as one of the joint employers, this factor weighs heavily in favor of
a conclusion that the agents were employees. When CIS took over the detail, it hired the
agents who were already working on the Prince’s detail. The Prince clearly wanted security
agents who would be with him over the long term, and CIS worked to oblige the Prince in
this regard.
6. The sixth (and last) Silk factor is the extent to which the service rendered by the worker
is an integral part of the putative employer’s business. CIS was formed specifically for the
purpose of supplying the Prince’s security detail, which appears to have been CIS’s only
business function during the period relevant to this case. The agents were thus an integral
part of CIS’s business. Insofar as the “business” of the Prince’s residence can be characterized as general housekeeping, the agents’ service was likewise integral. The agents ensured the safety of the Prince and his family and guests and performed administrative and
personal tasks that no doubt helped the household run smoothly. The undisputed facts
establish that CIS and the Prince were joint employers: the agents performed work that
simultaneously benefitted CIS and the Prince, who shared control over the agents’ work.
When the Silk factors are applied to the joint employment circumstance, it becomes apparent that the agents were not in business for themselves. The agents were thus employees,
not independent contractors.
The five plaintiff-agents were employees under the FLSA. Because defendant CIS was one
of their joint employers along with the Prince, CIS is jointly and severally liable for the payment
of any overtime required by the FLSA during the agents’ employment. Accordingly, we vacate the
judgment entered in favor of CIS and remand the case for further proceedings consistent with
this opinion.
Case Commentary
The Fourth Circuit applied the Silk test to determine the employment status of the Prince’s bodyguards. It reasoned that most of the factors pointed to the conclusion that the bodyguards were
not acting independently but, rather, were employees entitled to the protection of the FLSA.
Case Questions
1. Do you agree with the court’s assessment of the employee/independent contactor criteria?
2. Why is a simple majority among the Silk factors enough to draw a conclusion of employee
or independent contractor?
3. Is the result ethical?
4. Why do some businesses prefer the independent contractor designation for their employees?
Case 1.4
Carco Group, Inc. v. Drew Maconachy
644 F. Supp. 2d 218; 2009 U.S. Dist. LEXIS 33585 (NY Eastern District)
The issue is whether Maconachy breached his contract with Carco along with his duty of loyalty and duty
to act in good faith.
LINDSAY, MAGISTRATE JUDGE.
Maconachy and John Murphy (“Murphy”) are longtime friends who are both former FBI agents
with investigative experience. Murphy and Maconachy co-founded Murphy & Maconachy, Inc.
(“MMI”), a security consulting firm that offered investigation and litigation support services.
MMI was in business for approximately fifteen years prior to its acquisition by Carco. MMI
Chapter 1 • Employment Relationship
had offices in both California, known as “MMI West,” and Virginia, known as “MMI East.”
Maconachy was in charge of the MMI West operation and served as MMI’s President.
Peter O’Neill (“O’Neill”) is also a former FBI agent and is Carco’s majority owner and
Chairman. Carco was in the business of providing research and background check services. . . .
O’Neill’s decision to acquire...
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