As a follow-up to my recent presentation to the talented entrepreneurs at Assets Lancaster about employment and business law issues, I wanted to create a resource that outlines some of the myths we hear associated with employment and the law.
This is by no means an exhaustive list, and if you have more questions or are wondering about a particular issue that you’ve encountered, feel free to contact us!
Myth 1: Paying employees under the table is permitted under the law.
Payment of employees under the table and failure to withhold Pennsylvania personal income tax on wages, tips or other forms of taxable compensation is illegal and considered tax evasion. The Pennsylvania Department of Revenue investigates tax fraud claims and such claims can be submitted here.
Similarly, the IRS also investigates claims for tax evasion for failure to withhold federal employment taxes. Each year, the IRS assesses billions of dollars in penalties to employers who fail to pay employment taxes and accurately report employee income.
Myth 2: An employee who is paid a salary is exempt from being paid overtime.
As discussed in this post by Christina Hausner, there are a number of circumstances in which salaried employees are entitled to overtime pay. All employees are entitled to overtime unless they are exempt under applicable law. The Fair Labor Standards Act provides specific rules as to who is exempt. Payment of wages on a salary basis does not make an employee exempt from overtime or minimum wage entitlement.
There are some pending changes to existing law proposed by the United States Department of Labor. What are known as white collar exemptions are now being rewritten to require payment of a greater minimum annual salary to qualify as exempt than is currently applicable.
Myth 3: The law requires that employers have just cause and provide written warnings prior to terminating employment.
Pennsylvania is an “at-will” employment state. This means that in general and in the absence of an employment contract or collective bargaining agreement, an employee can be terminated at any time, for any reason, provided that it’s not an illegal reason.
An employer’s internal policies often provide a process for disciplinary action, which could include written warnings, but they are not required by law. Further, such policies generally provide that the employer may skip through intermediary steps and proceed directly to termination at the discretion of the employer. Such a policy is not unlawful.
That being said, the circumstances surrounding termination from employment may impact the availability of unemployment compensation to an employee.
Myth 4: If both parties agree, and no taxes are withheld, there is an independent contractor not employment relationship.
The law concerning independent contractors is more complicated, and determining whether an individual is actually an employee or an independent contractor requires deeper analysis. In fact, authorities are clear that the parties’ agreement as to independent contractor status is not determinative. The factors that are typically considered under the Fair Labor Standards Act to determine the individual’s status are:
- The extent to which the services rendered are an integral part of the principal’s business
- The permanency of the relationship
- The amount of the alleged contractor’s investment in facilities and equipment
- The nature and degree of control by the principal
- The alleged contractor’s opportunities for profit and loss
- The amount of initiative, judgment, or foresight in open market competition with others that is required for the success of the claimed independent contractor
- The degree of independent business organization and operation
For more comprehensive resources on the independent contractor/employee distinction as applied under Pennsylvania law, check out the Pennsylvania Department of Labor and Industry’s website.
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