Halachic Considerations of Hiring: Employee Compensation & Minhag HaMedina

By Dayan Yehoshua Wolfe

In our last article, we discussed the differences between a “S’chir Yom” – day laborer – referred to in American law as an “employee”, and a “Po’el Kablan” – a contractor – referred to in American law as an “independent contractor”. In this article, we will discuss the difference between these two workers as it relates to compensation.

Secular Law

In the secular system, many of the laws that govern financial transactions are primarily relevant during litigation, in lieu of a prior agreement. More often than not, two sides that mutually agree to disregard the law- are not “breaking the law”. Therefore, seeing as these secular laws contractually can be overridden, the principle of Dina D’Malchuta Dina – “the law of the land is the law” – does not apply.

Yet, when it comes to matters of labor, secular law is frequently relevant. This section will glance, through the prism of Halacha, at several legal differences between the compensation of employees and independent contractors (ICs). In addition, there will be a discussion of the difference between ICs and employees regarding Ona’a (over or underpaying), as well as opposing customs.

Let us begin with The Fair Labor Standards Act (FLSA) of 1938. The FLSA provides significant benefits to most “blue-collar” workers. Under the FLSA, employees must receive a minimum wage of $7.25 per hour. Furthermore, overtime pay of one and a half times the employee’s regular salary must be paid for any hours worked over forty hours per week. This law applies only to employees. ICs on the other hand, are not covered by the FLSA. Given that these obligations cannot be contractually overridden; according to many opinions, it may be Halachically inappropriate to deny any non-exempt employee of these benefits.

The stiff “hours worked” laws, spelled out in the Code of Federal Regulations (29 CFR Subpart C), is an adjunct to the FLSA. They therefore also cannot legally be denied due to any language in the contract.

Justified or undue, the result is taxing. Human resources often account for a substantial portion of company overhead, and even unassuming expenses often result in measurable spending. Employers, then, might be inclined to hire independent contractors in order to avoid these government-sanctioned requirements, which apply to employees, and not to independent contractors.

However, employers seeking to gain relief from the provisions of the FLSA by hiring ICs should be mindful of Ona’a. Ona’a is classified as a subdivision of Gezel (or theft), and exhibits an important Halachic economic philosophy. Halacha widely views commerce as a fair exchange of wealth. Hence, the accepted common law practice of caveat emptor (a Latin saying for buyers beware) does not suffice, and anything short of fair market value, is then seen as a form of Halachic thievery.

While secular law (l’havdil) traditionally goes to great lengths to ensure the fair treatment of employees, the Torah, in contrast, relating to appropriate human resources compensation, exclusively protects contractors (Po’el Kablan). Barring extreme circumstances, a laborer’s right to claim Ona’a vis-à-vis his employer can only be exercised by a Po’el Kablan – contractor – but not a S’chir Yom – employee. The parameters of how and when this claim is invoked stretch beyond the scope of this article. It is important to note, however, that according to many opinions, the difference between Halachic employees and contractors applies only to the claim of Ona’a and not its prohibition.

Following the Minhag

Halacha puts forward the unspoken terms of an agreement. It governs business relationships not through external regulation, but as a capacity for ascertaining the intention of the contract. Thus, the Halacha, is secondary to any verbal stipulation. Moreover, the Talmud Yerushalmi states: “Minhag Mevatel Halacha” – a custom [in monetary law] voids Halacha. Halacha maintains that unless alternatively specified, a contract follows course with the commercial custom.

Notably advancing this notion that the terms of a contract are determined in consideration of the commercial custom, HaRav Moshe Feinstein זצ”ל uses this principle in many instances where there is no recognized custom. He contends that if Halacha acknowledges that a contract is intended to comply with commercial custom, then certainly it acts in accordance with secular law. HaRav Moshe therefore contends that even at times when Dina D’Malchuta Dina technically might not apply, if not otherwise stipulated — even in absence of a practiced custom — the contract is assumed to follow the law of the land.

The relevance of the aforementioned Halachot varies with the independent nature of every situation, and given their sensitive nature, they should be decided by an experienced Dayan. The following is a list of several commonly occurring issues where Halachic counsel is advised:

Many firms routinely offer employer-provided benefits. These may include health insurance, paid vacation and pension plans. In situations where this custom exists, unless otherwise stipulated, the Halacha allows employees to claim these benefits. Moreover, in industries where businesses do not usually offer benefits, but it is the custom of a particular firm to grant them, even if not specifically agreed upon, this is the assumed arrangement with respect to all individual employees. Seeing as benefits are usually only extended to employees and not ICs, here is another example of how employers save money by hiring independent contractors.

Additionally, though employees are usually given workspace and equipment, ICs themselves generally invest in these expenses.

Finally, regarding some positions within the Jewish community, it is the custom that when a worker is excused without cause, he collects severance pay at the rate of one month per every year worked (Hodesh L’Shana). This custom usually applies to employees and not ICs.