Employee Misclassification

The Department of Labor Wage and Hour Division (WHD) recently released a new fact sheet providing guidance on the “white collar” exemptions under the Fair Labor Standards Act (FLSA) for positions common in Higher Education Institutions. These positions include teachers, coaches, professional employees, administrative employees, graduate teaching assistants, research assistants, and student residential assistants. As I know you know, the FLSA provides a so-called “white collar” exemption from minimum wage and overtime requirements for employees who perform executive, administrative, professional, or outside sales duties.

The new fact sheet notes that professors, instructors, and adjunct professors generally qualify under the exemption. The WHD also noted that “the regulations do not restrict where bona fide teaching may take place, to whom the knowledge can be imparted, or how many hours a teacher must work per week to qualify for the exemption.” Thus, the exemption may also apply to faculty who teach online or remotely.  The WHD notes that it is unlikely that recruiters qualify, and whether a coach qualifies depends on (among other things), the amount of time instructing student-athletes in a team sport. Additionally, the fact sheet indicates that professional employees including certified public accountants, psychologists, certified athletic trainers, librarians, and postdoctoral fellows, generally are exempt under the professional employees’ exemption. Employees may also be exempt under the administrative employees or the academic administrative employee’s exemption. Such employees may include admissions counselors, student financial aid officers, and department heads.

I think I’ve said this ad nauseam, but for each test, it is important to look at an employee’s actual job duties, qualification and education for determining whether an employee is exempt under any of the “white collar” exemptions. Employers cannot just rely on Fact Sheets, but must put each job to the test. Additionally, don’t forget the employee must also meet the salary basis test – currently a salary at a rate not less than $455 per week.

On April 2, 2018, the Supreme Court ruled in Encino Motorcars v. Navarro that car dealership service advisors (individuals that consult and sell customers on servicing solutions at car dealerships), are exempt from the Fair Labor Standards Act’s (FLSA) overtime requirements. While this is certainly a win for car dealerships, the biggest win for all employers is the Supreme Court’s holding in this ruling that the FLSA is not to be read narrowly, but “fairly”:

Because the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.'”

Since 1966, service advisors have been deemed exempt under an exemption added to the FLSA covering “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles [. . .].” However, confusion sprung when, in 2011, the Department of Labor (DOL) issued a rule rejecting the interpretation of “salesman” to include service advisors.

Thus, in 2012, relying on the DOL’s rule, current and former Encino service advisors sued the Mercedes Benz dealer, claiming Encino violated the FLSA for failing to pay them overtime. The case has been bouncing around ever since. In 2016, the Supreme Court reversed the 9th Circuit Court of Appeals, finding it improper for courts to defer to the 2011 DOL rule, because “the regulation undermined significant reliance interests in the automobile industry by changing the treatment of service advisors without a sufficiently reasoned explanation.” Accordingly, this ruling finally puts the issue to rest – service advisors are exempt from the FLSA’s overtime requirement.

On March 6, 2018, the U.S. Department of Labor announced a new nationwide pilot program called “PAID” – Payroll Audit Independent Determination. For an initial 6 month trial period, employers can self-audit their wage and hour practices.  If violations are found, an employer can voluntarily report it to the DOL’s Wage and Hour Division (WHD), in hopes of resolving the potential violations without liquidated damages penalties (usually an amount equal to the back wages due) and with a release of claims (as to the violations only).

Why? The DOL is hopeful that employers who discover violations will come forward and pay the employee 100% due promptly, in exchange for a settlement waiver and no liquidated damages, lawsuit, attorneys’ fees, etc. In turn, employees are paid faster than in a lawsuit or DOL investigation, and 100% of what is allegedly due.

Who is eligible? All employers subject to the FLSA. The program cannot be used for any pending investigation, arbitration, lawsuit, or threatened lawsuit (with an attorney involved). Also repeat offenders are ineligible.

What’s the catch? The DOL notes that it is an employee’s right to not accept the back wages, and not release any private right of action against the employer (and they cannot be retaliated against for such refusal). Further, unlike a typical litigation settlement release, the release must be narrowly tailored to only the identified violations (i.e. overtime, minimum wage, off-the-clock, misclassification, recordkeeping (for every violation)), and time period for which the back wages are paid. The WHD can still conduct future investigations of the employer, and employers cannot use the program to repeatedly resolve the same violations. So, in reality, an employer could notify 100 employees that they were paid incorrectly, and 90 accept and 10 reject and file a lawsuit seeking liquidated damages and attorneys’ fees (since they were just told by the employer that they “stole” their wages).

That being said, an employer could, as always, pay the employee the alleged back wages due in a supplemental check, and thus cut off their alleged damages as to that portion (which makes it a lot less attractive as a case to a plaintiff’s attorney), but they will not get a release. Sure, the employee cannot be forced to cash the check, but that would be a remote occurrence. Of course, the employee could still sue, stating they are entitled to interest or liquidated damages, etc., but such suit would likely not sit as well before a court without additional claims (i.e. you were paid what you were due, why are you taking up our limited judicial resources…).

How does the process work? Employers wanting to participate must review the program information and compliance assistance materials that will be available on the PAID website.  The employer then conducts the audit and identifies the potential violations, affected employees, time frame, and back wages. Next, the employer contacts WHD to discuss the issues, and the WHD determines if it will allow the employer to participate in the program. If allowed, the employer must then submit information such as the backup calculations, scope of violations for release, certification that this is all in good faith and the materials have been reviewed, and that practices will be adjusted to avoid the same violation in the future. The WHD finally issues a summary of unpaid wages (this is likely the same form they use today except no liquidated damages will be assessed).  KEY – once this process has been completed, the employer must issue the back wages by the end of the next full pay period.  Thus, employers should be careful to not begin/end the process until ready and able to pay.

In reality…while some are calling it a “get out of jail free card” for employers, I really don’t see it. An employer who discovers an error after a good faith internal investigation can chose to report itself to the DOL. Now, they are on the DOL’s radar with an admission that they believe they have paid their employees in error. The DOL can reject participation in the program and conduct a full investigation. If the DOL allows participation, all affected employees will be notified of the error (who may not have otherwise known), and can chose to opt-out and file a private lawsuit against the employer that just came clean. Further, neither relieves the employer of a future DOL investigation. Get out of jail free card? I think not. More like playing a game of Risk.

 

In Velox Express Inc., National Labor Relations Board, the National Labor Relations Board (Board) is considering under what circumstances, if any, should the Board deem an employer’s act of misclassifying employees as independent contractors a violation of Section 8(a)(1) of the National Labor Relations Act (Act). On February 15, 2018, the Board announced it was inviting the parties and others interested to submit a brief addressing their opinion on the issue. Briefs are due to the Board on or before April 16, 2018.

The Board is reviewing the case after an Administrative Law Judge found that Velox had violated the Act by misclassifying its drivers as independent contractors rather than employees. By misclassifying the drivers, the ALJ held that Velox had effectively told the drivers they were not entitled to the protections for concerted activity offered under Section 7 of the Act.

What rights does Section 7 offer, that Velox allegedly denied to its drivers? Generally, Section 7 gives employees the right to self-organize, form, join, or assist unions, collectively bargain for changes in terms and conditions of employment, and engage or refrain from protected concerted activities. Under Section 8 of the Act, it is a violation for an employer to take adverse action or threaten to take adverse action against an employee for invoking their rights under Section 7. The Administrative Judge found that by misclassifying the drivers as independent contractors, Velox had effectively told the drivers they were not entitled to the protections under Section 7, since the Act only affords protection to employees.

Why does this matter?  Well, not only will an employer be liable for FLSA damages associated with misclassification (double damages plus attorneys’ fees), it can also be found to have engaged in an unfair labor practice under Section 8 (typically resulting in a cease and desist order, reinstatement or back pay, and other affirmative actions such as notice posting). Thus, in reality, such decision would likely add a notice and cease and desist to the mix, as the wage (and benefit) piece would already be handled from the FLSA side.

Minnesota employers of drivers take note – the Minnesota District Court in Farah v. Alpha & Omega USA, Inc. dba Travelon Transportation held that drivers’ trip logs provide constructive notice of unpaid overtime. The employer, a transportation service company for elderly and disabled individuals, employed Plaintiffs under an independent contractor agreement as drivers. As a part of their job, the drivers were required to track, for each individual trip, the mileage traveled, the customer’s name, the addresses of each customer’s pick up and drop off location, as well as when the driver began and ended driving.

The drivers brought a lawsuit claiming the company misclassified them as independent contractors, and as a result denied them minimum wage and overtime in violation of the FLSA. The court dismissed the company’s claim that it was unaware the drivers were working overtime hours because the pay system was based on number of jobs, not on hours worked. The Court found the trip logs provided the company with constructive notice the drivers were working overtime because “the trip logs were the very records used to document the work Plaintiffs performed and which formed the basis for their compensation.”

A couple of takeaways here. First, recall that employers may require all employees – even salaried employees – to record their time.  In the event of a claim of misclassification, the parties can avoid usually the most costly part of the dispute – how many hours the employee allegedly worked (unless they allege off-the-clock work, of course).  Second, the employer can avoid a recordkeeping violation that almost always accompanies a misclassification claim because the salaried employee didn’t record hours worked (as required of an hourly employee). And finally, this goes to hourly (properly classified) workers – if there is a log of time driven (or worked) as here, it should be cross referenced against a time card so as to avoid an “off the clock” argument.  Nothing new here, just a reminder.

 

The DOL started 2018 with a bang, adopting the primary beneficiary test in lieu of the previous six-part test for determining whether interns and students are employees for purposes of the FLSA. This is a pretty big deal for employers desiring to use unpaid internships. The decision to adopt the primary beneficiary test comes after numerous federal courts rejected the DOL’s six-part test that required an intern or student to meet all six factors in order to be exempt under the FLSA requirements. As a practical matter, most internship programs failed to meet at least one of the six factors resulting in the intern being consider an employee and subject to minimum wage and overtime requirements.

The new seven factor primary beneficiary test analyzes “the ‘economic reality’ of the intern-employer relationship to determine which party is the ‘primary beneficiary’ of the relationship”.  Here are the seven factors:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Since no single factor is dispositive, the DOL now has greater flexibility to determine the relationship of the employer and intern or student on a holistic case-by-case basis.

I suspect you have all heard by now, but on September 5, 2017, Judge Mazzant of the Eastern District of Texas declared the proposed overtime overhaul regulations to be invalid. As a result, the minimum salary levels remain as before the revisions -$23,600 annually, or $455 per week. For highly compensated employees, the amount will remain at $100,000 annually.

I know what you’re thinking – I did all that work and preparation for nothing!?  Fear not!  With a few exceptions, this was actually a good exercise for many employers who, upon doing an internal audit, discovered that based on the duties test, some employees were likely misclassified. Remember, you can never err by paying overtime, only by not paying overtime if the employee is entitled to it. Accordingly, I’d caution advisers to hesitate before reverting an employee back to exempt (no matter how bad they want it to) without really performing an exempt analysis of the position.

So, now what happens?  The U.S. Department of Labor has moved to withdraw its Fifth Circuit Court of Appeals case, and will not appeal the Order. Instead, it has noted its intention to revisit this entire issue, and is seeking public comments on changes to consider making in the future. For employers, continue to evaluate positions as you have been before the revisions, although it wouldn’t hurt to look especially carefully at positions whose annual salary is less than $47,476.

checklistThe old adage is right on – prepare for the worst and hope for the best. In this case, my spring cleaning tip #3 is to review your policies, practices and records as if the U.S. Department of Labor (DOL) were to investigate your business practices tomorrow.  A few issues I’ve dealt with (a lot) this year are listed below:

  • Verify employees are properly classified as exempt/non-exempt.
    • Pay particular attention to sales employees, marketing, and office workers.
    • The DOL overtime regulations overhaul is still on hold pending the Trump administration’s decision whether to pursue the appeal. However, as I mentioned before, the DOL’s revised salary threshold was not all that far from what is usually reality for what an exempt person makes in many industries (excluding small business owners, small towns, etc.). Point is, just because it is on hold does not mean you shouldn’t ensure that salaried employees meet the duties test (and current salary threshold).
  • Ensure independent contractors are properly classified.
    • Have a contract with the entity, and keep records of payments made and Form 1099s.
    • Think twice before a former employee is made an independent contractors…no matter how badly the individual asks for it.
  • Be sure you are properly calculating travel time for non-exempt employees.  I’ve blogged about this in the past as this can get very tricky.
  • Ensure employees are provided “sufficient time” to eat a meal.  Record meal time on time cards for hourly employees.
  • Recordkeeping – these are the easiest violations to spot. You’ve either kept the required records or not.
    • Have a document retention policy and use it.
  • Have employee time cards accessible for three years.
  • Have payroll stubs/history and employee wages accessible for three years, including W-2s.

Keep in mind that, should you receive a visit, the DOL investigator is just there to address and audit compliance with federal wage and hour laws. I just sat in an audit where the DOL investigator instructed the employer as to a withholding issue that is inconsistent with Minnesota law. Accordingly, recall that just because the FLSA permits something, does not mean that Minnesota law allows it. If Minnesota laws are more strict (advantageous to employee), Minnesota law must be followed instead.

The United States Department of Labor has added yet another website, this time providing a framework for individuals to research whether they are properly classified as an “independent contractor” or an “employee”. This new site provides information about pay and misclassification; health and safety concerns on the job; unemployment insurance and misclassification; anti-retaliation/anti-discrimination rights; federal taxes and misclassification; health care and retirement benefits; and state and federal government resources. Why is classification important? Independent contractors have no taxes withheld (responsible for paying their own), are not provided benefits, minimum wage, overtime, fringe benefits, unemployment compensation, workers’ compensation and the like through the hiring business. So, the DOL is responsible to ensure that an employer does not skirt those obligations by falsely labeling a worker.

There has been no change in the law, just heightened awareness and enforcement. Accordingly, employers who are heavy users of independent contractors (outside of the computer sciences arena) should take a look at how the individual is being utilized to ensure a true independent contractor relationship is appropriate. There is no bright line test, unfortunately, and the IRS, DOL and courts all have different factors they consider. The IRS uses the “control test” which looks at the degree of control over the worker based on three areas: (1) behavior control; (2) financial control; and (3) the relationship of the parties. For more information on this method, click here. Keep in mind that, especially with long-term independent contractors, if the degree of control changes, a worker may start out in one classification and end up in another. Thus, when you are doing an HR audit of wages and compensation, that is a good time to also look at your independent contractor classifications as well.

 

 

clickAs a result of President Obama’s White House Summit on Worker Voice, on October 28, 2016, the U.S. Department of Labor’s Wage and Hour Blog announced its new beta website – Worker.gov. This website is, according to the DOL, designed to provide “easy-to-access” solutions for employees who need answers “fast”. The DOL admits that “Even the best government websites can be difficult to navigate” – true, true. That being said, it makes it only about 4 clicks for a worker to file a claim electronically.

In short, the website, which is in beta and therefore undergoing constant changes, is designed to provide employees with an easy way to determine whether their rights are being violated, then provides them with a simple click to file a claim against an employer. Partnering with the NLRB, EEOC, and DOJ, the DOL wants the website to provide “critical information” to employees about their rights, who may not know whether they have a “FLSA” or “FMLA” problem, but an “unfairness-on-the job problem”. Employees answer a “few simple questions” and voila! The website will supposedly provide the relevant information, expanding in the weeks and months to come, and “learning” from the workers that use it about what kind of information is being sought – and the site will supposedly begin to feature that information prominently for similar workers.

The beta site provides a drop down, under which five job titles are currently available – day laborer; office worker; nail salon worker; restaurant worker; and construction worker. From there, it takes to you a “Tell Us what happened. We can help.” screen with several options such as – “You have the right to be treated equally.”, “You have the right to engage with others to improve wages and working conditions”, “You have the right to a safe and healthy work environment”, and “You have the right to be paid.”  From there, the employee can chose what happened (i.e. suggestions – all are in the negative – such as “I was not paid for work I performed”) , and then be taken to a “File a Claim” screen.

What does this mean for employers? I have to believe we will see an increase in filed complaints, as that is the whole purpose of the website – to make it easy for employees to complain about unfair work treatment – and provide a simple click to do so.