Employee Misclassification

On January 25, 2019, the National Labor Relations Board flopped again in SuperShuttle DFW, Inc., reinstating the pre-2014 common law agency test for determining independent-contractor status (overruling FedEx Home Delivery). Why is this important if you are not a unionized employer?  Well, the National Labor Relations Act (NLRA) does not require the same protections to independent contractors as it does for employees (and even employees who are not unionized have NLRA protections). For example, Section 7 of the NLRA gives employees the right to self-organize, engage in union actives, and engage or refrain from protected concerted activities. Because the NLRA excludes independent contractors from the definition of employee, Section 7 rights are not applicable to independent contractors, nor are the protections that the NLRA affords to employees.

Under the common law agency test, the Board considers factors such as the extent of control the employer exerts over the individual’s work, the skill required in the position, and/or who provides the work supplies. None of the common law factors are decisive, and “all incidents of the relationship must be assessed and weighed.” The Board held, “going forward we will continue to consider how the evidence in a particular case, (viewed as it must be) in light of all the common-law factors, reveals whether the workers at issue possess entrepreneurial opportunity. Funny enough, the Board noted (in a footnote), that cases in this area have not been, “entirely consistent.”  Who said judge’s don’t have sense of humor!

On November 8, 2018, the DOL issued Opinion Letter FLSA2018-24, addressing the question of when additional payments to an exempt employee based on an hourly, daily or shift basis defeats the professional exemption. In short, an exempt employee may have a “guaranteed salary”, but then also receive additional compensation on an hourly, daily, or shift basis, so long as there is a “reasonable relationship” between the guaranteed amount and actual wages earned. Generally, I tell employers not to ever pay a salaried employee based on hours worked; this is the exception to that rule – so long as it is properly done.

Usual earnings between 1 to 1.5 times the guaranteed salary will typically satisfy this test. (i.e. the employee is guaranteed $500 a week and typically earns $600 to $750 a week). The Court did not address earnings between 1.5 times and 1.8 times the guaranteed salary.  The Court noted that earnings more than that (i.e. 1.8 times or double) may not have a “reasonable relationship,” and thus, may defeat the exemption (and thus, minimum wage and overtime applies). Yet, no bright-line rule exists, and the DOL will look at it on an employee-specific basis (not as a group). Keep in mind that this test does not apply to other payments made to an exempt employee such as bonuses, commissions, etc., which do not have the “reasonable relationship” requirement.

The U.S. Department of Labor (DOL) was extremely busy with its announcements on August 28, 2018. Along with issuing 6 opinion letters, a directive, and launching a new web page (all of which I previously wrote about), it also announced the creation of not one, but two new websites, as well as the new Office of Compliance Initiatives. The new websites, worker.gov and employer.gov provide one location for information for federal worker protections (worker.gov) and information for employers about their responsibilities for federal worker protections (employer.gov).

The employer.gov website provides information regarding pay and benefits; workplace safety and health; small business resources; required posters; nondiscrimination; federal contractor requirements; and veteran and service member employment. It has frequently asked employer questions as well. In theory, the Office of Compliance Initiatives will work to promote greater understanding of federal labor laws and regulations, and will work with enforcement agencies to ensure compliance with the law.

What does that mean for the average employer? I have no idea. It seems to me to be yet another pair of government websites designed to provide consolidated information and links. But as always, nothing is as easy as it seems, and thus, it’s just one more set of data to review. In any event, Minnesota employers should also keep in mind that our laws cannot be ignored and so just because something is allowed under federal law, does not necessarily mean it is under state law. Thus, while this may be handy from a federal perspective, don’t forget about the Minnesota Department of Labor and Industry agency regulations and our Minnesota state wage and hour laws.

On July 13, 2018, the Department of Labor Wage and Hour Division (WHD) released Field Assistance Bulletin No. 2018-4 providing guidance on when caregiver registries are an “employer” of caregivers under the Fair Labor Standards Act (FLSA). Rather than providing in home care services directly, registries provide individuals, such as seniors and those with disabilities, support for finding in-home care by offering referrals of qualified pre-screened caregivers from their database. This may be nurses, home health aids, personal care attendants, or home care workers, however titled. For the past four decades, the WHD’s position has been that generally a registry, even one that performs payroll services, is not an employer under the FLSA; however, if the registry directs and controls the caregivers work and sets the rate of pay, it is an employer. However, regulation changes and requests for additional guidance promoted the WHD to pen the bulletin.

To determine whether a registry is an employer, the WHD engages in a fact-specific assessment of the relationship between the registry and the caregiver, known as the “economic reality” test. Field Assistance Bulletin 2018-4 identifies common practices of registry business practices and operations that the WHD may analyze when determining if an employment relationship exists. While the individual factors identified in the Field Assistance Bulletin are not dispositive, the factors are helpful for employers to identify business practices that may establish an employment relationship, therefore triggering obligations under the FLSA:

  • Conducting Background and Reference Checks
  • Hiring and Firing
  • Scheduling and Assigning Work
  • Controlling the Caregiver’s Work
  • Setting the Pay Rate
  • Receiving Payments of Caregiver Services
  • Paying Wages
  • Tracking Caregiver Hours
  • Purchasing Equipment and Supplies
  • Receiving EINs or 1099s

Notably, the WHD does not focus on a single factor, but rather looks at the “totality of the circumstances,” including the control and influence the registry has on the caregiver’s terms and conditions of employment.

In another of the six opinion letters issued by the U.S. Department of Labor on August 28, 2018, the DOL clarified in FLSA2018-21, that an employer that sells technology to merchants that allow them to accept credit card payments from mobile devices is indeed, a “retail or service establishment,” for purposes of the Fair Labor Standards Act exemption. While this seems to apply to a pretty limited amount of employers (for which the rest of you are wondering why you care about this and are still reading this post), the opinion letter provides guidance applicable to all.

First, the DOL references the recent U.S. Supreme Court Encino Motorcars case, noting that exemptions under the FLSA should be fairly – not narrowly – interpreted. Thus, the DOL recognizes that it “must apply a ‘fair reading’ standard to all exemptions to the FLSA – including the Section 7(i) exemption”. In doing so, the DOL opines that just because the employer sells its product to commercial entities does not mean it does not qualify for the retail and service establishment exemption. Further, the DOL notes that courts have confirmed that case law does not require a physical location accessed by the public, that a business is open to the public if they receive orders on the phone, for example.

Additionally, the DOL noted that the sales of the product (a credit card reading platform) are indeed retail sales – not wholesale, because the employer does not sell large quantities of the platform to individuals, but instead tailors the product to their customers who then use it for their clients. That being said, the DOL does caution that, while it has “considerable discretion”, the courts have final say with respect to whether sales are recognized as “retail” in a particular industry.

The result? The FLSA’s retail or service establishment exemption applies (and thus, no overtime is due) to employees of an employer that sells customer technology to commercial clients, so long as the employee’s regular rate of pay exceeds 1.5 times minimum wage in the workweeks they work overtime and commissions constitute more than half of their earnings (in other words, usually commissioned inside sales representatives).

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.