Employee Misclassification

 

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.

MinneapolisMinneapolis recently “reaffirmed” its commitment to the 2015 Minnesota Responsible Contractor Act, Minn. Stat. 16C.285, and enacted additional factors and implementation procedures when determining whether a contractor is “responsible” for purposes of being awarded public construction projects.  Are you a responsible contractor?  If you are a contractor doing business with the State of Minnesota pursuant to a contract of over $50,000, you must be, or you may be prohibited from doing business with the State.  For more information on the actual Act, click here for the Minneapolis PowerPoint presentation.  In any event, the Act states that a contracting authority (such as a city), may establish “additional factors for defining contractor responsibility.”  Of course, Minneapolis has done just that.

On April 21, 2016, Minneapolis passed Resolution No. 2016R-127, stating that, in order to be “responsible”, a contractor must verify that, for the past 3 years, it has not violated the requirements for payment of wages for construction work as provided by any Minneapolis ordinance, resolution, policy or contract.  Specifically, the contractor must not have had to pay back wages or penalties in excess of $10,000 on one or more projects during this 3 year period.  Further, the contractor must not have made any false statements in a verification of compliance submitted to Minneapolis during the 3 year period.

How is this implemented? Contractors should see these additional factors in solicitation documents for all covered projects. Keep in mind, nobody is excluded; it applies to the general and subcontractors alike. Failure to comply with these new procedural requirements will render the contractor ineligible to be awarded the bid.

 

Salary plus overtimeFollowing the big news about the overtime regulations overhaul, I’ve been fielding several calls from concerned HR professionals regarding the actual conversion of certain employees (paid less than $47,476) from exempt to non-exempt by December 1, 2016.  As I predicted, many employees are already voicing concerns about not being paid a salary (and thus, not having a definite salary each workweek, even when 40 hours are not worked). While not interchangeable, people often will say employees are either exempt (salary) or non-exempt (hourly). However, this is not the case.  As I touched upon in my earlier post announcing the new overtime regulations, a non-exempt employee can actually be paid a salary. Here’s how, in 3 easy steps.

Step 1: Pay the Employee a Salary of At Least Minimum Wage 
First, the employee is not exempt from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime protections.  This means no matter what, the employee must be paid at least minimum wage for all hours worked in a workweek. Federal minimum wage is currently $7.25/hr. Minnesota minimum wage is currently between $7.25/hr. and $9/hr., depending on the employer size. Accordingly, a non-exempt employee’s salary must be at least $7.25 x 40 = $290/wk (small employer) or $360/wk (large employer).  Annually, this equates to $15,080 and $18,720, respectively.  However, for the most part, employers will typically use this method for paraprofessional employees (that will be misclassified as of December 1) in the $30k-$47k range, so the minimum wage issue is rarely a factor.  Either way, the employee’s salary must be at least (but can be more) the minimum wage.  Keep in mind too, the whole point is that if the employee works LESS than 40 hours, you are still going to pay the salary. Thus, the employee has a guaranteed income each week, no matter what.  Work gets slow, the employee gets the salary.  Work gets crazy, the employee gets the salary (plus overtime).  However, as you’ll see below – the employer actually pays less for overtime each hour the more overtime the employee works, so it is generally a wash in the long run.

Step 2: Pay the Employee Overtime at the “Regular Rate” for the Workweek

Next, the employee must, like any “hourly” employee, record all hours worked. There are several ways this can be done, which I blogged about here. Why? Because the employee is not exempt from the FLSA, the employee is entitled to overtime (time-and-a-half), for all hours worked over 40 in a workweek (or 48 hours in a workweek for Minnesota businesses if the FLSA does not apply to your business – I’ll stick with FLSA 40 hours for this example).   So, the employee’s paycheck will show the salary for 40 hours plus the additional pay for overtime hours at 1.5 x the regular rate.  What is the employee’s “regular rate” for overtime purposes if the employee is paid a salary?  The regular rate is (unlike an hourly rate), an hourly rate that is determined by actual hours worked and actual monies paid to the employee for a workweek.

To determine the regular rate for any workweek (for a salaried employee), divide the total compensation paid to the employee in the weekly payroll by the total number of hours actually worked in that workweek.  For example: $500/40hrs = $12.50 (regular rate).  $500/45hrs = $11.11 (regular rate).  $500/50hrs = $10.00 (regular rate).  As I noted above, the overtime rate will actually decrease with each additional hour worked.  Thus, the overtime rate for working 45 hours in this example is $11.11 x 1.5 = $16.66.  The overtime rate for 50 hours is 10 x 1.5 = $15.  While this seems odd (that the employee actually gets paid less overtime the more he or she works), the trade off is that the employee makes his or her salary even when working less than 40 hours in a workweek.  Otherwise, if the employee was a straight hourly worker, let’s say $12.50/hr, the overtime is always going to be $18.75, but the employee will only get paid for actual hours worked at the $12.50.  So, if the employee only worked 30 hours in a workweek, the employee would only get paid $375 that week versus the $500.

Also, many employers have pay periods of two week or more.  In this case, the “regular rate” still needs to be broken down to a workweek.  In the case of a semimonthly salary, multiply the salary by 24 (number of payrolls in the year) and divide by 52 (number of weeks in the year).  In the case of a monthly salary, multiply the salary by 12 (number of payrolls in the year) and divide by 52 (number of weeks in the year).  If the employee agrees, the regular rate for a monthly salary may also be determined by dividing the number of working days in the month and then by the number of hours of the normal or regular workday.  I know you know this, but again, the resulting regular rate may never be less than minimum wage for a non-exempt employee (even if salaried).

Step 3: Pay the Employee Additional Overtime After a Non-Discretionary Bonus

Finally, if a non-exempt employee is paid a non-discretionary bonus, that bonus must be layered into the corresponding pay period and included in the “regular rate” (hourly rate) in order to determine the rate for overtime. Remember, as I noted above, the regular rate is used to determine the overtime rate – and the regular rate is determined based on “actual” compensation – which includes all compensation paid to the employee for work (even if that compensation is paid in a later payroll).  Non-discretionary bonuses are compensation paid to the employee for work – unlike discretionary (“just because”) bonuses – such as holiday bonus, summer bonus, whatever.  I won’t lie – this is an administrative nightmare for your accounting team.  For example, the employer must determine what workweeks the bonus is related to (monthly bonus, quarterly bonus, something else?), and then add that compensation to the already earned compensation for that time period, then pay additional overtime for the overtime hours worked during that time period on the now-increased regular rate.  While daunting – it can be done – and in the case of these paraprofessionals who are not often given a nondiscretionary bonus, it can still be worth it.  See my post here for a step-by-step on this process: Paying An Additional Overtime Premium After Paying An Additional Overtime Premium.

So, there you have it.  Three easy steps – (1) pay the salary; (2) pay the overtime based on the regular rate; and (3) pay the additional overtime on any non-discretionary bonus paid.  Voila!

DOL Wage Hr DivThe wait is finally over!  Tonight the Department of Labor (DOL) announced that it is releasing the final rule tomorrow, May 17, 2016, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” which will mandate the new minimum salary level to be $913/wk or $47,476 per year. The DOL’s Fact Sheet was released tonight, along with a wealth of information that is available such as Q&A, Comparison Table of the proposed rule and final rule, a Small Entity Compliance Guide, a Guidance for Private Employers, and many others. Commonly referred to as the “white collar exemption”, the Fair Labor Standards Act (FLSA) provides that all employees subject to the FLSA are entitled to overtime, unless they are otherwise exempt.  The actual rule was not released (go figure), so I’ll certainly post an update tomorrow (probably when you are reading this anyway as I’m having my wage and hour geek-out tonight).  Although, according to one of the fact sheets, the Final Rule should be posted here: dol.gov/whd/overtime/final2016.

In order to exclude an employee from minimum wage and overtime requirements, three thresholds must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work (the “salary basis test”); (2) the employee’s salary must be a minimum amount (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the FLSA (the “duties test”).  Neither the salary level test nor the salary basis test applies to outside sales (I stress outside).  The Rule does not change the duties test.

Increased Salary Level & 3 Year Automatic Updates

As I wrote about in my earlier post when the rule was in the approval phase, the current threshold for executive, administrative or professional employees is that the employee must be paid a salary of at least $455/week ($23,660/year).  The significant change is that this base threshold is now increased to $913/week ($47,476/year) effective December 1, 2016.  For Computer-related employees, they may be paid the $913/wk or at least $27.63/hr.  The threshold for “highly compensated employees” (these folks do not need to meet the duties test because it is presumed they will meet it since they are highly paid) is increased from $100,000/year to $134,004/year effective December 1, 2016. Notably, unlike before (the previous thresholds were set in 2004), the new rule provides that the salary and compensation thresholds will be automatically updated every three (3) years, the amounts of which will be posted in the Federal Register at least 150 days prior to their effective date.

Also, keep in mind that there are, as always, quirks and nuances to the new rule and this blog is just a general overview of what’s to come.  For example, employees may be paid on a “fee basis” rather than a “salary basis”.  In this way, the employee is paid an agreed sum for a single job, no matter how long it takes.  However, to determine if the fee payment meets the threshold, you consider the time worked on the job and determine if that payment is at a rate that would equal at least $913/week if the employee worked 40 hours.  Thus, a computer programmer is paid $800 to fix an app and takes 10 hours to do so, this meets the test as $800/10=$80/hr x 40 = $3,200 (much more than $913).

Don’t Forget About the Duties Test – the Employee Must Be “White Collar”

Regardless of an employee’s salary, an employee may make more than the threshold amount and still not qualify for the exemption. Continue Reading Overtime Exemption Rule Announced: $47,476 Is the New $23,600, Effective December 1, 2016