Tuesday, September 30th, 2008


Thank you to everyone that attended the Annual Labor and Employment Law Update at Old Overton last week. Thanks to all of you, the seminar was a huge success.


This issue is as old as the hills, but like Freddie Kruger (this is Halloween month) it keeps coming back.

The 26th Annual Congress of the American Payroll Association held a workshop recently on the distinction between employees and independent contractors.

The IRS made a presentation – and noted that in 2009 thirty percent of IRS audits will focus on employee classification issues. Once upon a time, the IRS used a 20-factor test to determine whether someone was an employee or independent contractor, but recently those 20 factors have been grouped into three broad categories:

  • Behavioral Control – Who controls where, how and when the work is performed?
  • Financial Control – How much investment does the worker make? Can the worker earn a profit or take a loss? Can the worker perform the same service for others? Does the worker hire or use others?
  • Relationship Control – Is there a written contract? What is the expected duration of the relationship? Does the worker provide services that are a key part of the business or only a sideline aspect?

The distinction is important for several reasons. Employees are normally eligible for and entitled to employee benefits such as health insurance coverage and retirement. Misclassifying employees as independent contractors can result in substantial liability if misclassified employees sue – especially if the case is a class action.

Companies must withhold taxes on employees but not so for independent contractors. The IRS will collect back taxes and penalties from companies that misclassify employees as independent contractors.

It is important to file a Form 1099 on all persons classified as independent contractors because IRS policy is to collect back taxes for one year in misclassification cases where a 1099 was filed, but to go back three years if no 1099 was filed.


This scene plays out over and over. An employee is unhappy with some part of the job, a supervisor, a co-worker, or a Company policy and says “I quit – Friday is my last day.” Later, after cooling off, the employee changes his mind and announces that he doesn’t intend to quit after all. “Not so fast,” says the Company, “we don’t really want you back.” What gives? Must the Company let the employee change his mind and take him back?

  • The answer depends on several factors, including:
  • If the employee’s resignation was in protest of some apparently unlawful or very heavy handed action by the Company, the employee will be allowed to change his mind.
  • If the Company has not taken any steps to hire a replacement or otherwise acted in reliance on the resignation, the employee can generally keep his job.
  • But where there is no apparently illegal action by the Company and where the Company is well into the process of recruiting and hiring a replacement (especially if a job offer has been made and accepted), the Company is within its rights in refusing to allow the resignation to be revoked.
  • People often think that the key question is whether the Company “accepted” the resignation, but that fact is usually deemed to be irrelevant.
  • If the Company has a written policy of refusing to allow a resignation to be revoked (and some companies have such polices on the theory that they don’t want to keep an employee who cares so little about his job), the courts will generally allow the Company to enforce the policy even if no steps to hire a replacement have been taken – unless the employee can show that the policy was selectively enforced.

The tip? If somebody you don’t really want says he is quitting, be quick about filling that job.


Shem Fisher was a Mormon and a member of the Fundamentalist Church of the Latter Day Saints (FLDS). He worked for Forestwood Company, a family owned business located in Hildale, Utah that manufactures and installs wooden cabinets. Forestwood had about 70 employees, all of whom were members of the FLDS.

Mr. Fisher’s father was President of Forestwood, and Fisher’s half brother managed the Company. Fisher himself started as a cabinet maker and worked his way up the ladder until he was Forestwood’s top salesman.

One of the Fisher’s close friends also worked for Forestwood but became disenchanted with the FLDS and eventually left the Church and moved out of the Hildale community. Fisher agreed with his friend and stopped attending FLDS functions. As a result, Fisher was formally expelled from the FLDS fellowship. Then, an FLDS minister preached a sermon urging all FLDS members to stop doing business with “apostates.” Fisher’s friend was fired. Fisher protested and pleaded with his half-brother to reverse the firing. When that request was denied, Fisher himself quit his job.

Several months later, Fisher decided he wanted to rejoin Forestwood and talked with his father, Forestwood’s President, about that subject. Unknown to his father, Fisher secretly taped recorded the conversation. The President clearly said on tape that Fisher could and would be rehired but only if he reformed his errant ways and took steps to rejoin the FLDS.

Fisher sued Forestwood for religion discrimination, contending that he had been fired (constructively discharged) for supporting his apostate friend and that his father’s refusal to rehire him was blatant religious discrimination. The trial court ruled in favor of Forestwood on all counts.