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Searching for a way out of the employment compliance maze

Remember the last time an employment law was repealed?

No, neither do I.

The compliance burden on employers just seems to keep growing each year, with no end in sight. Congressional gridlock may have given us a respite from new federal employment laws, but federal agencies have leaped into the gap to issue new regulations and interpretations, as well as stepping up enforcement of existing laws. State legislatures have also been active in the employment area, adding another layer of complexity to compliance.

Community bankers, already subject to wide-ranging financial industry regulation, can't be blamed for looking for ways to avoid employment liability.

Unfortunately, few effective ways to beat the compliance burden exist. I'll describe four possible solutions--each with its attendant pitfalls.

Fifty's the magic number—think before hitting 51

A small community bank planning expansion should be aware that once the number of employees exceeds 50, the bank becomes subject to federal employment law in two important areas:

• Affirmative Action. Executive Order 11246, signed back during the Johnson administration, requires federal contractors with more than fifty employees to create and maintain affirmative action plans and programs for women and minorities. (The government deems banks to be contractors through their relationship with FDIC.) This responsibility entails extensive record keeping and sophisticated statistical analysis to determine if women and minorities are appropriately represented in each of the bank's job groups.

This obligation is likely to get more complicated this year when the Office of Federal Contract Compliance Programs is expected to issue final rules extending affirmative action plans to veterans and the disabled.

• Family and Medical Leave Act. Banks typically have sick leave and vacation policies that cushion employees when they face their own or a family member's illness. From one point of view, FMLA merely provides a backstop to those policies, guaranteeing up to twelve weeks of unpaid leave for an employee who has worked at least 1,250 hours in the previous year for a bank with more than 50 employees.

However, tracking FMLA leave accurately can become a recordkeeping nightmare. And an employee with disciplinary or performance issues may use FMLA leave as a shield against termination.

Think twice about hiring that 51st employee.

Leased employees--don't borrow trouble

Using a staffing agency to find and manage workers for temporary positions offers a way out of the time-consuming job of recruiting, background-checking, training, and payroll. The danger here is that unless the bank maintains a strictly hands-off relationship with the leased employees, it may find itself a "joint employer" with all the responsibility it already carries for its own employees.

Remember, your relationship is with the staffing agency, not the worker. Make sure your contract with the agency spells out that the agency:

• Indemnifies the bank for liability towards leased employees provided under the contract.

• Represents that it is in compliance with all laws, including employment laws.

• Confirms that the agency, and not the bank, establishes wages, benefits, and other terms of employment.

• Acknowledges that leased employees are ineligible for bank benefits.

• Disclaims "joint employer" status.

The agency should handle discipline and training issues.

If a leased employee's tenure exceeds three months, consider whether to hire the worker as a regular bank employee. The courts have found that long-term "temporaries" may be eligible to participate in the bank's employee benefits.

Employee or contractor? An issue in the federal crosshairs

The Internal Revenue Service has joined forces with the U.S. Department of Labor to crack down on the misclassification of employees as independent contractors. If you are using a Form 1099 rather than a W-2 to document payments to an individual, this is a good time to review: Is this truly a business relationship, or more like an employment relationship?

There are various tests for whether an independent contractor is correctly classified. They boil down to control:

• Behavioral control—Avoid offering specific instructions or additional training.

• Financial control—Don't provide a computer, cell phone, or dedicated office space. Don't reimburse for travel and other business expenses. Don't require services be performed exclusively for the bank.

• Type of relationship—the written contract should reflect a business relationship; include a disclaimer of employee benefits; and state a definite time period for project completion

In the initial honeymoon stages of a relationship, the worker is often eager to adopt independent contractor status to avoid tax withholding. When the relationship sours, the bank may be faced with a claim for unemployment benefits, workers' compensation, or wrongful termination, all of which may attract the scrutiny of the enforcement agencies.

Interns, trainees, and volunteers

In a time or geographic area of high unemployment, workers may be willing to accept an internship or trainee position for little or no pay in exchange for a "foot in the door." However, the Fair Labor Standards Act defines the term "employ" very broadly to include to "suffer or permit to work."

Internships and trainee positions in the for-profit private sector will generally be viewed as employment, and must be paid at least the minimum wage and overtime compensation for hours worked over 40 in a workweek.

However, an exception applies to trainees whose work benefits only themselves, rather than the entity giving instruction. Six criteria determine whether an internship or training program meets this exclusion:

1. The internship is similar to training which would be given in an educational environment.

2. The internship experience is for the benefit of the intern.

3. The intern does not displace regular employees, but works under close supervision of existing staff.

4. The employer that provides the training derives no immediate advantage from the activities of the intern.

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

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

No way out?

As I've discussed, using a staffing agency as an intermediary, or characterizing an employee as an independent contractor, intern, or trainee, does not necessarily avoid the burden of employment law compliance. Keeping below the 50-employee radar protects against some legal coverage--but most employer obligations kick in with the first employee, not the 51st.

Doing what's right for your bank--whether that's establishing an internship program with a local community college, contracting with a consultant for a one-off project, or expanding the workforce by opening another branch--is ultimately much more important than minimizing compliance issues.

Marian Exall

Marian Exall ( is an employment lawyer and HR professional with more than 25 years' experience advising banks and other employers on compliance issues. She is a principal and co-founder of Employment Law Compliance, Inc. which provides HR compliance solutions to banks exclusively through the American Bankers Association. She is a frequent speaker and writer on human resources compliance in the banking industry, on association briefings and webinars, and at national and state bankers' association conferences. For more information on this or other employment compliance topics, please call Employment Law Compliance at 866-801-6302 or go to

Marian also writes fiction. Her latest novel is a mystery called A Slippery Slope. For more information and to order, go to

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