Foundations of the Employment Relationship
The employer-employee relationship is the legal and social framework that defines the rights, responsibilities, and obligations of both parties in the workplace. Understanding this relationship is fundamental for HR professionals because it underpins virtually every aspect of human resource management, from hiring and compensation to discipline and termination. For SHRM exam candidates, mastery of employment relationship concepts is essential across multiple knowledge domains.
The employment relationship in the United States is primarily governed by the doctrine of employment at will, supplemented by a complex web of federal, state, and local laws that create exceptions and protections for both employers and employees.
Employment At Will
Employment at will is the default rule in all U.S. states except Montana. Under this doctrine, either the employer or the employee may end the employment relationship at any time, for any reason not prohibited by law, with or without notice. While the doctrine provides flexibility for both parties, it is subject to significant exceptions.
Statutory Exceptions
Federal and state laws prohibit termination based on protected characteristics (race, color, religion, sex, national origin, age, disability, genetic information), retaliation for exercising legal rights (filing a workers' compensation claim, reporting safety violations, engaging in protected concerted activity), and other specific circumstances defined by statute.
Contractual Exceptions
Employment contracts, collective bargaining agreements, and implied contracts can modify the at-will relationship. Courts have found implied contracts based on language in employee handbooks, policy manuals, and oral representations that suggest employees will be terminated only for cause.
Public Policy Exceptions
Most states recognize a public policy exception that prohibits termination for reasons that violate a clear mandate of public policy. Examples include terminating an employee for refusing to commit an illegal act, for exercising a legal right (such as voting or serving on a jury), or for reporting illegal conduct (whistleblowing).
Employee versus Independent Contractor
Correctly classifying workers as employees or independent contractors is a critical HR responsibility with significant legal, tax, and benefits implications. Misclassification can result in substantial penalties, back taxes, and liability for benefits and protections that should have been provided.
Classification Tests
Several tests are used to determine worker classification, depending on the legal context.
- IRS Common Law Test: Examines behavioral control (how the work is performed), financial control (business aspects of the arrangement), and the type of relationship between the parties.
- Economic Reality Test: Used under the FLSA, this test examines whether the worker is economically dependent on the employer or is in business for themselves. Factors include the nature and degree of control, the worker's opportunity for profit or loss, the worker's investment, the permanence of the relationship, the skill required, and whether the work is integral to the employer's business.
- ABC Test: Used in some states and under certain federal laws, this test presumes worker status as an employee unless the employer demonstrates that the worker is free from control, performs work outside the usual course of the hiring entity's business, and is engaged in an independently established trade or occupation.
Constructive Discharge
Constructive discharge occurs when an employer makes working conditions so intolerable that a reasonable person would feel compelled to resign. In such cases, the resignation is treated as a termination for legal purposes. To establish constructive discharge, the employee generally must show that the employer created or permitted intolerable conditions, the conditions were related to a protected characteristic or protected activity, and a reasonable person in the employee's position would have resigned.
HR professionals should be alert to situations that might give rise to constructive discharge claims, including significant demotions, dramatic reductions in pay or responsibilities, severe harassment that goes unaddressed, and unreasonable work assignments designed to force resignation.
Duty of Good Faith and Fair Dealing
Some jurisdictions recognize an implied covenant of good faith and fair dealing in the employment relationship. This covenant requires that neither party act in bad faith to deprive the other of the benefits of the relationship. For example, terminating an employee to avoid paying an earned commission or bonus may violate this covenant.
Building Positive Employment Relationships
Beyond legal compliance, HR professionals should focus on building positive employment relationships that promote engagement, trust, and mutual respect. Key practices include clear communication of expectations, fair and consistent application of policies, responsive and accessible management, investment in employee development, recognition and appreciation, and meaningful opportunities for employee voice and input.
The psychological contract, which encompasses the unwritten expectations and obligations between employer and employee, is as important as the legal contract. When the psychological contract is violated, employees experience decreased trust, engagement, and commitment, even if no legal breach has occurred.
SHRM Exam Preparation
- Understand the employment-at-will doctrine and its three categories of exceptions.
- Know the different tests for classifying workers as employees versus independent contractors.
- Recognize constructive discharge and the conditions that may give rise to such claims.
- Appreciate the importance of both the legal and psychological dimensions of the employment relationship.