Tag: Department of Labor

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Employee or contractor? 6 worker misclassification FAQs

Astronaut Dog Thinking

Summary

  • Misclassifying full-time employees as independent contractors can lead to legal and compliance issues down the line. 

  • There are a number of ways to determine whether or not a worker should be classified as an employee or contractor. 

  • Aside from seeking legal counsel, employers can use workforce management solutions to stay compliant with labor laws and properly classify workers. 

The number of freelancers and independent contractors is growing steadily in the United States. McKinsey found that approximately 58 million American workers, or 36% of the American working population, consider themselves to be independent workers. This figure is expected to reach 90.1 million by 2028. 

With this rise in contractors in recent years, worker protection laws are shifting to reduce incorrect worker classification.

Worker misclassification is when a company hires individuals as self-employed or independent contractors to carry out the tasks of a full-time worker. 

To learn more about the misclassification of employees and its implications, we spoke with Hinshaw & Culbertson law partner Aimee Delaney.

What exactly is worker misclassification?

“Misclassification is a term that is used when an employer incorrectly identifies an individual or position as an independent contractor when the individual is really an employee,” said Delaney. 

According to Delaney, there are a number of circumstances that can motivate employers to classify individuals as contractors: 

  • Independent contractors are not subject to state and federal wage laws, which means they are not entitled to overtime if they work over 40 hours a week. 
  • An employer does not have to pay the employer portion of payroll taxes and does not make withholdings for an independent contractor. 
  • An independent contractor is also not entitled to benefits such as workers’ compensation or unemployment benefits from the organization that the individual contracts with. 

“Misclassification does not require bad intent to be a violation,” said Delaney, “so even if it was an honest mistake, it can still present a violation of law.”

Delaney added that the definition of an employee, as opposed to an independent contractor, lies with the employer. It should evaluate whether it has employees on the payroll who are performing the same work and function as the independent contractor. A good follow-up to that question is will the independent contractor be performing the main work of the business.

“Answering these questions in the affirmative is usually a sign of trouble,” Delaney said. “So if I run a home health business and have a staff of 25 home health workers but want to bring on three more as independent contractors, you are probably well on your way to misclassification.”

Delaney said the home care and home health industry can suffer from labor shortages. While trying to use independent contractors to address a shortage of workers may be tempting, it can also be risky, she said.

“Staffing agencies would be a better resource in that scenario, as it avoids the misclassification issue,” Delaney said. “You may not be able to avoid a joint employer issue, but at least you should avoid the misclassification issue.”

Why does employee misclassification matter?

Employee misclassification is bad for business, bad for workers, and bad for the public sector. According to the U.S. Department of Labor (DOL), misclassified employees lead to lost government contributions that should be going towards things like state unemployment insurance and workers’ compensation insurance.  

While employers might attempt to incorrectly classify their employees to avoid having to deal with tax withholding, the financial and reputational consequences of doing so greatly outweigh the savings.

Workers who carry out the role of employees but are contracted as freelancers are not entitled to the same rights and benefits. They are not eligible for things like paid vacation and sick leave and can be laid off much more easily.  

Independent contractors are also responsible for paying their own Social Security and Medicare through the Self Employment Tax (SET).

How do employers typically classify a permanent employee versus an independent contractor? 

When an employer hires a permanent employee, that person is expected to devote their full workday to the tasks they are given by the employer. Permanent employees cannot work for other organizations at the same time. 

The employment relationship between a company and an independent contractor, on the other hand, is of a different nature. According to Delaney: 

An employer will typically only have an independent contractor for some type of special project that falls outside of the normal business conducted by the operation. For example, a law firm may need to upgrade its document management system and retain a third-party vendor as an independent contractor to complete the project. The contractor is not performing the work of the law firm, the law firm does not exercise control or supervision over the vendor and only controls the ultimate product. This concept is also separate from the concept of temporary staffing, which relies on the use of temporary workers that are employed by a third party.

The  California law Assembly Bill 5 (AB-5) clarifies the difference between employee and contractor in the state. The California Supreme Court requires the use of the ABC test, outlined on the ca.gov website, which assigns three conditions that must be met to consider an employee as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
(Source: https://www.labor.ca.gov/employmentstatus/abctest/)

Also read: Ease compliance concerns with workforce management software

What is the advantage for employers to classify their workforce as independent contractors? 

Some employers think worker misclassification is worth it because contractors are more affordable. But Delaney says the risks involved outweigh the perceived benefits:

“There is no advantage to employers if the classification is not correct, because the risk and liability will generally outweigh any benefit. If the classification is appropriate, the advantage is often a lower cost with a known end date. As noted above, independent contractors are not subject to state and federal wage laws, so they are not subject to the minimum wage and overtime requirements.”

What should employers know about defining their workforce to avoid misclassification? 

“Employers must be aware of the key concepts and tests that are applied to determine whether independent contractor status is appropriate,” says Delaney. “These are the tests that will get used by the Labor Department, the Equal Employment Opportunity Commission (EEOC), the IRS, etc. In some form or fashion, these tests all look to the level of control exercised by the organization over the individual and the economic realities of the relationship.”

If you are using the services of independent contractors, Delaney recommends that you carry out regular audits to make sure that you are doing so in a compliant way. If you do find cases of misclassified employees, you will also need to assess whether any overtime wages are owed to them.  

Also read: What employers and HR should expect from new Labor Secretary Marty Walsh

Is employee misclassification a growing trend in wage and hour/overtime violations? If so, why is that?

The wage and hour laws stipulated in the Fair Labor Standards Act (FLSA) do not apply to independent contractors. Because of this, companies with misclassified workers are often found guilty of breaking wage and overtime violations.

If a worker is found to be misclassified, their employers might end up owing them significant amounts of money in back wages. 

Stay compliant with a workforce management tool

Navigating federal and state laws around labor codes and employee classification can be tricky. The language is complicated and misinterpreting it can lead to mistakes that break the bank and your reputation. So when in doubt, seek legal advice. 

Workforce.com can help with our powerful wage and hour compliance platform. It accounts for federal, state, and regional wage laws when paying salaries, even in situations where your staff might be distributed around the country. And most importantly, an automated workforce management system helps you maintain an accurate paper trail for whenever external audits come knocking. With detailed labor records, you can rest assured that misclassification accusations will never catch your organization off guard. 

Book a demo today to keep your time tracking and scheduling air-tight. 

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Exempt vs. non-exempt employees: knowing the difference

employer looking at posted notes

Summary

  • Employees are exempt from FLSA requirements when they meet specific exemption criteria based on how much they earn and what their duties are.

  • State and federal laws have multiple exceptions and differences depending on location, industry, and job, so HR needs to be vigilant in determining each new classification.

  • Failure to classify employees properly can lead to DOL penalties and employee dissatisfaction.

Exemption in the context of employment classification refers to whether or not a worker is eligible for certain Fair Labor Standard Act protections regarding overtime and minimum wage. Exempt employees are non-eligible for these FLSA rights, while non-exempt employees are eligible.

The difference between exempt and non-exempt employees is often not fully understood. For instance, some people will incorrectly say all salary workers are exempt while all hourly workers are non-exempt.

While this oversimplification may often be correct, it distorts the actual difference between these two classifications and can lead to dangerous outcomes. The difference between exempt and non-exempt employees has to do with how much these workers make and the duties they perform; any employees who meet these specific (and sometimes subjective) criteria are exempt from FLSA-mandated minimum wage or overtime pay requirements.

Understanding which criteria qualifies an employee for exempt status affects both your hiring and payroll practices. Misclassifying an employee, even unknowingly, can result in serious DOL investigations and fines. Once you understand what a non-exempt employee is and why, you can hire with confidence, knowing that there are no reclassification surprises awaiting your company moving forward.

What is an exempt employee?

An exempt employee is anyone who earns a salary or makes more than $684 a week and falls under one of these specific exemption categories:

  • Exemption for executive employees: Anyone whose primary duties primarily are concerned with running the business or a major division of a company. Read the specific requirements required to qualify for the executive exemption.
  • Exemption for administrative employees: Anyone who primarily does non-manual work that relates to the management of business operations or customers. They must also be free to use their own discretion on “matters of significance.” Read the specific requirements required to qualify for the administrative exemption.
  • Exemption for professional employees: Anyone whose duties require an advanced background in the sciences or learning. Read the specific requirements required to qualify for the professional exemption.
  • Exemption for employees in computer-related occupations: Anyone whose duties primarily include advanced computer skills, including things like computer programming or data analysis. Read the specific requirements required to qualify for the computer employee exemption.
  • Exemption for outside sales employees: Anyone whose duties primarily include selling products away from the business, like a traveling salesperson. Read the specific requirements required to qualify for the outside sales exemption.
  • Exemption for highly compensated employees: Anyone who earns more than $107,432 in non-manual work that also at least partly overlaps with the executive, administrative, or professional exemptions. Read the specific requirements required to qualify for the highly compensated employee exemption.

It’s important to note that job titles alone do not satisfy these exemptions. Job duties should align with job titles in case your classifications are ever contested.

What is a non-exempt employee?

A non-exempt employee is anyone who does not meet any of the exceptions listed above. This includes anyone considered blue collar or who is employed as a first responder. Generally, salaried workers fall under some form of exemption; however, this is not always necessarily the case.

All non-exempt employees receive certain protections under the Fair Labor Standards Act (FLSA). These protections include:

These standards are updated from time to time, so be sure to check back periodically with the DOL website for any changes made to the FLSA.

What are the repercussions of misclassifying non-exempt employees?

Employee misclassification is no small matter. Even honest mistakes can lead to financial hardships and reduced morale for your employees. Here’s what you can expect if you’re forced to reclassify an employee.

  • Fines and penalties from regulators
  • Back pay for unpaid overtime or minimum wage violations
  • Employee dissatisfaction

All of this can add up to thousands of dollars for your company and be a major headache for HR as you scramble to deal with the fallout.

How to ensure you’re classifying employees correctly

To avoid the costs associated with misclassification, get all of your employee classifications accurate from the start. Here are some tips you can follow to get it right every time.

Check industry specifics

Although there is a standard set of rules for classification, there are also exceptions and distinctions for specific industries or jobs. For instance, the DOL explicitly details what youth lifeguards are allowed to do and at what age.

Before you classify an employee, be familiar with relevant exemptions that may affect the employees you hire. You can find all of these exemptions on the DOL website — just look through to see if there are any factsheets that might affect your hires.

Be wary of classifying as an independent contractor

Some businesses try to get around the exempt vs. non-exempt distinction by classifying employees as independent contractors to save money. Like exempt employees, independent contractors do not get protection under the FLSA, so businesses don’t need to pay them overtime or minimum wage. As well, because they aren’t technically employees, businesses don’t need to provide benefits or pay certain employment taxes.

However, misclassifying your employees as independent contractors runs similar risks as misclassifying non-exempt employees. Your company could be on the hook for thousands in fines, back pay, back taxes, and more if you’re forced to reclassify.

Know the state laws where you operate

Know the state laws, if any, that add extra protections for employees. A common example of this in play is in California where they have implemented more stringent salary requirements to meet exemption criteria.

Each state may have its own laws that affect minimum wage, exemption requirements, or more. Frequently review these laws to make sure they’ve not been updated and that you’re still in compliance.

Ensure duties align with job descriptions

Exemption classifications are based on what employees actually do on the job and not what their job description says. For instance, if someone holds the job title “manager,” but doesn’t have the ability to influence hiring or firing, they wouldn’t qualify under the exemption for executive employees.

HR needs to be aware of gaps between what employees do and what their stated duties are. If this gap exists and a misclassification has occurred, it’s better to deal with this problem sooner rather than later to avoid further disruptions and financial penalties.

Be proactive when it comes to compliance

Staying compliant with employee classification is just one facet of what HR departments need to handle every day to keep their businesses out of trouble with labor laws and regulations. To help them do their job more effectively, they need the right workforce management tools and education that’ll allow them to proactively make sure every facet of hiring and payroll is compliant with relevant labor laws.

To learn more about keeping your business compliant, read our Complete Guide to Wage and Hour Compliance. In this guide, you’ll see what you can do to ensure your business keeps up with the ever-changing rules and expectations of our modern economy.

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Poor recordkeeping contributes to contractor paying $500K in back pay, fines after Labor Department probe, litigation

poor recordkeeping

A New York-based contractor agreed to pay 69 employees $500,000 in back wages and damages to resolve violations of the Fair Labor Standards Act’s overtime and recordkeeping requirements after being sued in federal court by the Department of Labor.

Investigators from the department’s Wage and Hour Division found that Maio Building Corp. and owner John Maio often directed laborers and masons to work 10-hour days, five or six days a week, knowing the FLSA required employees to receive overtime pay when they worked more than 40 hours per week. The company reached a settlement and was ordered by the U.S. District Court for the Eastern District of New York to pay $250,000 in back wages and an equal amount in liquidated damages, according to a Labor Department statement.

Clean up recordkeeping

Maio also paid employees in cash or a combination of check and cash and failed to keep accurate records of employees’ work hours and regular hourly rate of pay, according to the Labor Department statement.

Poor FLSA compliance and recordkeeping that lead to steep Labor Department fines is avoidable, said employment law attorney William J. Anthony, a partner at Blank Rome in New York. The FLSA permits any form of timekeeping system as long as it accurately records all hours worked, he said. 

Also read: How to schedule employees effectively: 5 proven steps

“Many employers use electronic timekeeping systems and payroll companies to help with compliance and avoid legal issues,” he said.

Enforce your time and attendance policies

Sonya Rosenberg, a labor law attorney and partner with Neal Gerber in Chicago, added that it’s not enough to just have written policies. 

“You want to be sure they are consistently enforced and that there are established, working procedures in place for when any corrections need to be made,” she said. “Every organization needs to ensure that all of its employees, and particularly its frontline supervisors, managers and HR staff are well trained in wage and hour requirements.”

Employers must emphasize that accurate time tracking is an essential element of each employee’s job and that failure to adhere to the rules will result in discipline, said Kara Govro, senior legal analyst at HR consultancy Mineral (formerly ThinkHR and Mammoth). Make sure employees see and read the policy. Enforcing these policies is crucial.

“If you say you’re going to be serious about it, be serious about it,” Govro said. “Write employees up, issue final warnings and be prepared to terminate if you have employees who refuse to meet your clearly articulated expectations.”

Anthony cited four ways to clean up recordkeeping practices. 

  1. Publish a policy on how to accurately record time and how to report any payroll errors.
  2. Have employees certify that their weekly time records are accurate.
  3. Train new employees on proper timekeeping.
  4. Monitor the timekeeping and payroll systems regularly to ensure accuracy. 

Anthony also said that responsibility for accurate wage and hour recordkeeping typically falls on human resources or the in-house legal department to ensure compliance. In smaller organizations, it may be the owners or management personnel who are responsible, he said. 

“Under the FLSA, an employer includes individuals with decision-making authority and operational control over payroll and wage and hour practices,” he said.

The consent judgment is the outcome of a lawsuit filed by the Labor Department’s Office of the Solicitor. In addition to the payment of back wages and damages to the employees, the judgment prohibits Maio Building Corp. from:

  • Future violations of the FLSA’s overtime and recordkeeping requirements.
  • Taking retaliatory action against employees who exercise their FLSA rights.
  • Telling any of their employees not to speak with or provide untruthful information to Labor Department investigators.
  • Soliciting or accepting the return or kick back of the wages and damages from the affected employees.
  • Threatening or implying adverse action against any employees or former employees because of their receipt of funds due under the judgment or the FLSA.
  • Otherwise obstructing or interfering with any department investigative activities.

Maio denied the allegations and said the company acted in good faith and complied with the law, according to a June 7 Equipment World article. The response said the Labor Department’s claims were barred by the Federal Motor Carriers Act and that the division had denied Maio due process rights at the closing conference by “refusing to discuss the MCA exemption,” the article stated.

Stricter Labor Department enforcement

On April 30, 2021, a settlement agreement was filed with the court in which Maio neither admitted nor denied the allegations, but that the company agreed to the settlement “to avoid the burden and expense of litigation,” according to the article.

Given that the Labor Department under Secretary Marty Walsh is stepping up enforcement versus guidance, particularly in its wage and hour division, Rosenberg urged employers to review and update wage and hour policies and practices and to make any appropriate adjustments or corrections. 

“The DOL investigators are making no secret of the department stepping up efforts and increasing penalties for noncompliant employers,” she said. “For any employer with a significant number of nonexempt employees, this should be a high-priority area.”

Interestingly, a newly released survey by law firm Ogletree Deakins notes that 47 percent of employers surveyed say that state and federal agencies are more aggressive in terms of enforcement than ever. Anthony added that between stepped-up enforcement, changing regulations and guidance, along with state wage and hour laws, it is critical that employers stay abreast of all legal developments. 

“This is an area of the law where claims can be avoided if employers regularly focus on compliance,” he said. “Conducting internal pay practice audits, regularly reviewing payroll policies, training personnel responsible for compliance, ensuring accurate timekeeping systems and payroll practices can usually avoid damages being assessed by the Labor Department or a court.”

Labor Department investigations are largely driven by employees contacting the agency, Govro said. Once that call has been made, federal laws are in play, she said. 

The Labor Department isn’t going to just “guide” an employer in the right direction when they have been failing to pay minimum wage or overtime, she added. They are going to collect the back pay.

“The bottom line is that employers need to be paying very close attention to timekeeping and accurate payment of wages at all times, regardless of the DOL’s mood,” Govro said.  

Book a demo today to see how to build schedules, manage labor costs and ensure labor compliance with Workforce.com’s No. 1 employee scheduling software.

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Q&A: Excelling in defense of employers sued for wage and hour violations

employment law, Idalski

When employment law giant Seyfarth announced the arrival of partner Annette A. Idalski to its Labor & Employment department and Wage Hour Class & Collective Actions practice group, they were clearly adding someone who was used to winning high-stakes cases.

Since she began practicing employment law in 1995, Idalski has gained hundreds of successful outcomes defending employers against lawsuits brought by employees involving independent contractor status, wage and hour compliance, discrimination, and whistleblower complaints. Idalski was named among the Top 50 Women Lawyers in Georgia and was quoted in a profile as saying, “I strive for excellence and do not tolerate mediocrity. My clients hire us to win and we do everything in our power to make that happen.”

Following her move in May to Seyfarth, Idalski spoke via email with Workforce Editorial Director Rick Bell for this Q&A.

Workforce: What should employers do to avoid wage and hour violations?

Annette A. Idalski: Employers should draft and disseminate a policy clearly stating how nonexempt employees must record their time including time off for meal periods or breaks in service. It is also advisable to describe with particularity in the employee’s offer letter how the employee will be classified and to explain how the employee’s pay will be calculated including overtime pay and bonuses. Employees should sign their offer letter to acknowledge that he or she understands how his or her pay is calculated.

Workforce: The Department of Labor is once again stepping up enforcement, particularly in its wage and hour division. How are you counseling clients to boost their compliance?

Idalski: Employers should be quick to correct any mistakes that they identify as a result of wage compliance audits, or employee complaints. Proactive employers who make an effort to come into compliance before a DOL audit will fare much better with DOL investigators and could avoid penalties such as liquidated damages.

Workforce: Are you a believer that guidance from the Department of Labor is a stronger deterrent of wage and hour violations than enforcement?

Idalski: Yes. In my opinion, the DOL should focus more on teaching and training companies rather than trying to find violations. The majority of employers want to do the right thing. They want to comply with the law and would be receptive to “help” and “guidance” from the DOL. Unfortunately, the DOL has not focused on guidance and has over the years focused on enforcement which has caused many employers to fear the DOL rather than see the department as an ally.

Also read: Worker misclassification leads to $358K penalty for home health care provider

Workforce: Do any of your clients record time and attendance and overtime manually? What are the compliance challenges facing employers using a manual, paper-based system versus an automated system? 

Idalski: Yes, some clients record time and attendance and overtime manually. The compliance challenges facing employers who prefer a manual, paper-based system rather than an automated electronic system is most often inadvertent loss of the paper documents and less accurate reporting of hours worked, which can result in violations of the FLSA. For example, if an employee is required to keep track of his or her paper timesheet, the individual may lose it and then attempt to recreate the timesheet which, of course, may not be accurate. If litigation later ensues, the employer is left with missing timesheets and incomplete records. Further, employees who are manually recording their time may forget to do so on a daily basis and prepare all of their timesheets weekly or when the employer requires him or her to turn them in. Therefore, employers who use a paper-based system must have strict rules for compliance which include preparation and submission of all hours worked, start and end times, and breaks on a daily basis. Employees should also be required to sign their timesheets attesting to their accuracy.

Workforce: Is it generally an oversight when employees are misclassified?

Idalski: Yes. The majority of the time, misclassification occurs because the employer is well intentioned but simply made a mistake. For example, the employer may not know all of the tasks or the frequency of the tasks that an employee performs and may make classification decisions based on job titles and job descriptions rather than actually interviewing employees regarding their job tasks and the time it takes them to complete those tasks. Very rarely do employers intentionally misclassify employees.

Workforce: Do you look at the Labor Department as an adversary?

Idalski: On rare occasions yes. But not the majority of the time. The Department of Labor has an important role in ensuring that employees are paid fairly. While I have dealt with overzealous DOL investigators from time to time as well as investigators that I did not agree with regarding their application of the facts to the independent contractor (e.g., Gate Guard Services v. Hilda Solis) and exemption tests, most investigators simply want to ensure that employers are following the law, that they understand the law and that employees are legally paid.

Workforce: You’ve had some major victories in defending against wage and hour claims. What case are you proudest of?

Idalski: I am very proud of all our client’s victories. The case that has had the most significant positive impact on the energy industry (and other industries using similar models) is Parrish v. Premier Directional Drilling. The Fifth Circuit recognized that directional drillers were independent contractors and not employees. While this case concerned directional drillers, the court’s analysis can be applied to a myriad of oil field positions, and as such, has preserved the oil and gas industry’s business model. Given the fluctuations in demand for labor in the oil and gas industry, independent contractors are routinely used. If this business model were deemed illegal, it would be very difficult if not impossible for oil field services companies and oil and gas companies to operate successfully. I am very proud to have helped the energy industry in this way.

Also read: Oilfield pipeline inspectors working across 40 states awarded $3.8M in back wages

Workforce: How do you get people to look past, “big bad company cheating employees of their hard-earned pay” and realize that the company was in compliance after all?

Idalski: In the oil and gas industry in particular, workers who are classified as exempt from overtime or as independent contractors earn hundreds of thousands of dollars per year and are highly compensated. Those that are classified as independent contractors write off expenses, pay very little, if any, taxes, and enjoy the freedom to accept or reject projects offered to them. So when these workers file overtime claims against companies, it does not take long for juries or judges to understand that oftentimes it is the worker that is trying to take advantage of the company rather than the company taking advantage of the worker. It is unconscionable that a worker earning over $100,000 annually and who pays very little in taxes is entitled to overtime pay. Clearly, the public policy behind overtime pay was to ensure the lowest paid workers were not being overworked and taken advantage of. The overtime laws were not intended to overcompensate six-figure wage earners. These same facts play out in other industries as well such as cable, construction and drivers offering rides to the public.

Workforce: What is your guiding mantra, or philosophy, when defending an employer against a wage and hour complaint?

Idalski: If my client’s practices are legally compliant with the FLSA and/or state wage laws, I encourage them not to settle but to fight and win. When they do, they rarely are sued again, and in the long run it is the best financial decision. Further, it helps the industry and other companies because positive precedent is established that supports their business model. Companies who are innocent and settle because they worry about defense costs oftentimes double or triple their litigation expenses because they are deemed an easy target by plaintiffs’ lawyers. This is not to say that an innocent company should never settle because sometimes it makes sense depending upon their business. More often than not, settling negatively impacts companies.

Workforce: What compliance trends should employers expect to see under Labor Secretary Marty Walsh?

Idalski: Unfortunately, Marty Walsh and the Biden administration are not proponents of independent contractor status and favor the employer-employee relationship. Highly compensated workers will suffer with this approach as they stand to benefit from the tax advantages and flexibility of their independent contractor status. And we can expect the DOL to be focused more on enforcement and penalties and less on guidance. Liquidated damages will almost certainly be automatic if the DOL finds violations.

Workforce: Besides the independent contractors issue, in your crystal ball, what other employment law trends should employers be aware of over the next four years?

Idalski: Employers should be prepared for COVID-related litigation, especially during the next 12 months. This litigation may well include allegations by employees that the employer did not create a safe working environment by requiring and policing  the wearing of masks which resulted in the employee contracting COVID and post-COVID related illnesses.  Employers who do require vaccinations or reward employees who are vaccinated over employees who are not vaccinated could face discrimination claims.  Finally, given social pressures and issues facing the nation, employers should be prepared for an increase in Title VII race and retaliation claims. To avoid this risk, employers should re-examine diversity training and enforcing positive and accepting working relationships among employees and management.

Book a demo today to see how to build schedules, manage labor costs and ensure labor compliance with Workforce.com’s No. 1 employee scheduling software.

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More uncertainty for employers as Labor Department withdraws independent contractor rule

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After months of anticipation, the U.S. Department of Labor withdrew its Independent Contractor Final Rule on May 5.

The Final Rule was published in the final two weeks of the Trump administration. Almost immediately following President Joe Biden’s inauguration, it became the subject of a delayed effective date (from March 8, 2021, to May 7, 2021) and notice of proposed rulemaking, in which the Labor Department proposed to withdraw the Final Rule before its delayed effective date.

In light of the Labor Department’s withdrawal of the Final Rule, employers will continue to be subject to the existing “economic realities” standard applied by the agency for determining whether a worker is an employee or an independent contractor. However, employers should remain vigilant as the Labor Department may soon revisit this issue.

The Final Rule had sought to clarify the relevant factors the Labor Department would consider to classify workers as independent contractors or employees. This designation is important because independent contractors, unlike employees, are not afforded minimum wage and overtime protections under the Fair Labor Standards Act.

Because the FLSA provides minimal guidance to employers regarding worker classification, the Labor Department and the courts have developed their own standards, including the so-called “economic reality” of the relationship between the employer and the worker.

Before the Final Rule, the Labor Department and most courts had long utilized a six-factor test for determining whether a worker should be classified as an independent contractor or an employee. The Supreme Court originally set out this test in United States v. Silk, indicating the following factors:

  1. The employer’s versus the individual’s degree of control over the work.
  2. The individual’s opportunity for profit or loss.
  3. The individual’s investment in facilities and equipment.
  4. The permanency of the relationship between the parties.
  5. The skill or expertise required by the individual.
  6. Whether the work is part of an integrated unit of production.

Since the Silk ruling, most federal courts and the Labor Department analyzed employee classification using a variation of the multifactor weighing test with all factors being given equal consideration. Indeed, in its primary regulatory guidance issued in July 2008, the Labor Department confirmed in Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act its reliance on the economic reality test and listed seven factors to be considered, which largely mirrored the six factors identified in Silk and added the “amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor” as an additional factor to be considered.

Breaking with the Labor Department’s prior practice of treating these seven factors as equally weighted, the Final Rule sought to pare the inquiry down to five factors and stated that two of those factors — the “nature and digress of the individual’s control over the work” and “the individual’s opportunity for profit or loss” — should be “afforded greater weight.”

As such, the Final Rule directed that only if the two core factors were inconclusive should the three remaining factors — namely, the skill or expertise required by the individual; the permanency of the relationship between the parties; and whether the work is part of an integrated unit of production — be considered.

Although many praised the Final Rule for simplifying what has become an inconsistent patchwork of approaches to the economic realities test in courts across the country, the Labor Department has since stated that the Final Rule was inconsistent with the FLSA’s text and purpose, and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent. Accordingly, the agency announced May 5 that the Final Rule was withdrawn effective immediately.

The Labor Department has not stated whether it intends to issue new guidance or regulations addressing the classification of independent contractors. Further complicating this issue for employers, both the initial delay of the Final Rule and its subsequent withdrawal are the subjects of a lawsuit pending in the U.S. District Court for the Eastern District of Texas brought by four employer-focused interest groups who seek the court’s intervention to declare the withdrawal unlawful and make the Final Rule effective.

The lawsuit is in its initial stages, and it remains to be seen how it will be resolved.

For the time being, all Labor Department regulations and guidance concerning independent contractor classification in place before the Final Rule’s publication continue to apply. However, given recent remarks by President Biden and U.S. Secretary of Labor Marty Walsh, the Labor Department may revisit the independent contractor standard.

If that occurs, it is expected that the Labor Department would take a more aggressive approach toward enforcement of worker classification laws and seek to further narrow the subset of workers who may be properly classified as independent contractors under the FLSA, particularly gig economy workers.

Notwithstanding the pending legal challenge to the withdrawal of the Final Rule, employers would be wise to evaluate their practices as to classification of employees and ensure that any independent contractors are properly classified under the Labor Department’s current 2008 guidance.

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Oilfield pipeline inspectors working across 40 states awarded $3.8M in back wages

timeclock, wage and hour, schedule, timesheet rounding

FIS Holdings LLC, a pipeline inspection company based in Sand Springs, Oklahoma, was fined $3,852,968 after violating overtime requirements of the Fair Labor Standards Act for 1,100 of its employees, a Labor Department investigation discovered.

The oil and gas industry depends on independent inspection companies like FIS Holdings to protect this essential infrastructure. The employees, who work in 40 states ranging from Massachusetts to California and Idaho to Alabama, keep more than 2.6 million miles of pipe in the U.S. secure, the Labor Department said in an April statement.

Investigators discovered that the company, which does business as Frontier Integrity Solutions Operations LLC and operates in the U.S. and Canada, paid workers a fixed amount per day, regardless of the number of hours that they worked. The practice resulted in violations when employees worked more than 40 hours in a workweek, but the employer failed to track those hours or pay workers overtime.

The employees typically worked between 50 and 60 hours per week. The employer’s failure to keep records of the number of hours employees worked also resulted in recordkeeping violations, the Labor Department release stated.

Kate Bischoff, an employment attorney at tHRive Law & Consulting LLC, said that managing employees’ time and attendance across multiple states shouldn’t necessarily complicate the process. The employer wasn’t following federal law for tracking time and paying overtime, she said. And that responsibility cuts across the entire organization, not just a single department like human resources or payroll.

“Everyone needs to play a part in compliance,” Bischoff said. “Frontline managers are important to get accurate time records from each employee. Payroll needs to verify, compile data including deductions, and ensure pay stubs are accurate. And, HR needs to make sure everyone has the tools and knowledge to do their jobs accurately.”

Many employers are looking for ways to make payroll as easy as possible, including paying fixed rates to non-exempt employees, misclassifying workers as independent contractors, and not requiring employees conduct paperwork when their actual work is dangerous, Bischoff said.

Bischoff pointed out that the investigation wasn’t handled by one office and one investigator but was a much bigger effort by multiple field offices to get the outcome for FIS employees.

Also read: Federal contractors fined $293K by Labor Department for wage violations

Bischoff said it’s clear that the Labor Department is focusing on enforcement over guidance. 

“The Biden administration’s Department of Labor under Secretary Walsh is going to focus on enforcement as a major motivator for employers to get their wage and hour houses in order,” she said.

Bischoff advised employers to talk with their attorneys and their technology vendors to ensure compliance before a Labor Department investigator comes knocking. 

“The Department of Labor’s focus on enforcement is designed to be a deterrent for all employers to motivate them to comply with the law,” she said. “Work with an attorney to really focus on making sure your I’s are dotted and T’s are crossed on wage and hour issues.”

Book a demo today to see how to build schedules, manage labor costs and ensure labor compliance with Workforce.com’s No. 1 employee scheduling software.

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OSHA finally gets real about COVID-19 safety

COVID-19, FMLA, mask, OSHA

Consider the following COVID-19 safety and health violations OSHA recently uncovered at a Massachusetts tax preparation business.

  • Employees and customers were prohibited from wearing face coverings in the workplace despite a statewide mask order that mandated the business to require employees and customers to wear masks.
  • Employees were required to work within 6 feet of each other and of customers for multiple hours while not wearing face coverings.
  • Adequate means of ventilation in the workplace were not provided.
  • Controls such as physical barriers, pre-shift screening of employees, enhanced cleaning, and other methods to reduce the potential for person-to-person transmission of the virus were not implemented.
What did these violations cost this employer in OSHA penalties? $5,000? $10,000? $25,000?
How about $136,532!

According to OSHA Regional Administrator Galen Blanton in Boston, “This employer’s willful refusal to implement basic safeguards places her employees at an increased risk of contracting and spreading the coronavirus. Stopping the spread of this virus requires business’ support in implementing COVID-19 Prevention Programs, and ensuring that staff and customers wear face coverings and maintain physical distance from each other.”

This appears to be the first company cited under OSHA’s recently launched national emphasis program focusing on COVID-19 enforcement efforts. If you’ve waited for the past 13 months without taking COVID safety seriously in your business, you better do so now. OSHA is watching, and based on this one example, violations are going to be quite expensive.

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Wage and hour violations during staff gatherings lead to substantial Labor Department fines

wage and hour law compliance, wages

Employee meetings are typically meant to discuss policies, reinforce training and build organizational transparency.

Two companies discovered the hard way that if not properly monitored, such gatherings can violate wage and hour and overtime laws, leading to the Fair Labor Standards Act violations and steep financial penalties.

Investigations by the Department of Labor Wage and Hour Division determined that Keystone Adolescent Center Inc. owed workers $44,858 in back wages for time spent in meetings, while Maggiano’s Little Italy restaurant in Philadelphia owed 82 employees $116,308 in back wages for minimum wage and overtime violations stemming from pre-shift meetings.

According to investigators, supervisors and behavior specialists gathered every two weeks at Keystone Adolescent Center’s five Greenville, Pennsylvania, facilities where they discussed policy changes, completed required training and reviewed safety procedures to help the at-risk youth they serve.

Also read: Labor Department reopens the floodgate to liquidated damages in wage and hour investigations

Keystone also used the meetings to distribute paychecks, yet failed to pay 80 workers who attended these meetings and required training outside of their regular shifts for the time they spent at them. The investigation determined that — by excluding this work time from employees’ pay — Keystone Adolescent violated the FLSA, leading to the recovery of back wages for the workers.

Wage and hour violations during staff meetings

According to an April 5 Labor Department press statement, investigators found that Keystone paid employees for time spent at staff meetings and required training only if those meetings and training occurred during their scheduled shifts. 

The employer failed to pay workers attending outside of their normal work hours for time they spent in those meetings and required training. Failing to record and pay for this time violated FLSA overtime and recordkeeping requirements, according to the statement.

“Employers must pay employees all the wages they legally earn, which includes paying them for any hours they work outside of their scheduled shifts,” said Wage and Hour Division District Director John DuMont in Pittsburgh.

Complying with federal, state laws

Aimee Delaney, a labor and employment law expert at law firm Hinshaw & Culbertson in Chicago, said that any time an employer requires a non-exempt employee’s attendance at a meeting, training or other mandatory event, the employer needs to realize that this time is considered hours worked and is compensable under state and federal law. This also means that if the time spent at the mandatory meeting puts the employee over 40 hours for the week, the employee is entitled to overtime for any time over 40 hours.

Aimee Delaney, wage and hour violation
Attorney Aimee Delaney, Hinshaw & Culbertson

The employer also needs to understand that state law may require overtime at different thresholds.

“One easy question an employer can ask itself when trying to determine if the time is compensable is whether the meeting or other event was mandatory, as that is usually a sign that the time must be paid,” Delaney said.

Compensation for pre-shift meetings

Oftentimes restaurant managers hold pre-shift meetings to motivate their employees, reinforce training or update the day’s menu. It is time for which employers typically should also be paying their workers, which is the lesson Maggiano’s Little Italy restaurant learned the hard way after a Labor Department investigation.

Investigators found minimum wage and overtime violations of the FLSA. In addition to the $116,308 in back wages, the Wage and Hour Division assessed a civil money penalty of $68,060 as investigators deemed the violations as willful, according to an April 12 Labor Department press statement.

The division determined that by failing to pay workers for time they spent attending pre-shift meetings, the restaurant failed to pay the required federal minimum wage. Maggiano’s Little Italy required dining room servers to attend 15- to 30-minute meetings before the start of their scheduled shifts. When employees worked more than 40 hours in a workweek, this unpaid time triggered overtime violations, according to the Labor Department.

“Restaurant workers are often among the nation’s lowest paid, and most vulnerable, particularly during the coronavirus pandemic,” said Wage and Hour District Director James Cain in Philadelphia. “When employers fail to account for all hours employees work, they deprive workers of their hard-earned wages. Other employers should use the outcome of this investigation as an opportunity to review their own pay practices, and ensure they comply with the law.”

Delaney noted that the Labor Department has a number of resources that explain the law and regulations on this topic specifically and there are specific rules on when activities by a non-exempt employee outside of work hours must be considered hours worked and/or compensable.

She also pointed out that vigorous enforcement of wage and hour and overtime laws is nothing new.

“While there may be a number of areas that employers can expect stricter compliance enforcement on with the new administration, this is a fairly settled area of the law and violations of this nature have been and will continue to be enforced regardless of a change in administration at the top,” she said.

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Labor Department reopens the floodgate to liquidated damages in wage and hour investigations

restaurant industry employees, wage and hour compliance for employers

The Department of Labor’s breakup with liquidated damages in wage and hour investigations lasted only four years.

Late last week, the agency announced that it would again seek liquidated damages (an amount equal to the unpaid wages themselves) in investigations, undoing a  policy change made by the Trump administration.

According to the DOL, it will “return to pursuing liquidated damages from employers … in its pre-litigation investigations provided that the Regional Solicitor of Labor or their designee concurs with the liquidated damages request. … Liquidated damages shall not be assessed by WHD where the employer has set forth credible evidence of a good faith defense or the where the RSOL deems the matter inappropriate for litigation.”

What does this mean for your business? You have twice the financial stake in getting your wage and hour house in order as soon as possible.
If the DOL investigates, you should expect to pay double what you would have in the past four years. Your $X in unpaid wages will take $X*2 to settle with the DOL.
If your only defense to these liquidated damages is “credible evidence of good faith,” you better take steps to create that good faith now, such as by having your employment lawyer sign off on how you classify and pay your employees.
Once the DOL comes knocking, it will be too late.
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What employers and HR should expect from new Labor Secretary Marty Walsh

Department of Labor Secretary Marty Walsh

Recently confirmed Labor Secretary Marty Walsh will be the first union member to head the U.S. Department of Labor in half a century.

Given Walsh’s extensive union background, labor-management issues such as the unionization push among employees at an Amazon warehouse in Alabama will be front and center during his tenure as the Labor Department’s new leader. It’s also expected that Walsh’s leadership of the agency will prompt a crackdown in the enforcement of wage-and-hour laws and workplace safety regulations, among other worker-friendly policies.

According to a post on law firm Fisher Phillips’ blog shortly after Walsh was nominated in January to lead the Labor Department, “Many view Marty Walsh as a leader who aims for pragmatic solutions to problems and strives for unity and consensus-building. His first allegiance, however, will be toward workers. ‘Working people, labor unions, and those fighting every day for their shot at the middle class are the backbone of our economy and of this country,’ Walsh said in a tweet soon after Biden announced him as the nominee. ‘As Secretary of Labor, I’ll work just as hard for you as you do for your families and livelihoods. You have my word.’ ”

Kevin M. Young, a partner in labor and employment in Seyfarth’s Atlanta office, Jason E. Reisman, co-chair, Labor and Employment Practice Group, for Blank Rome in Philadelphia, and Christopher D. Durham, partner in Duane Morris’ Employment, Labor, Benefits and Immigration Practice in Philadelphia, offered their thoughts on what employers should expect as Walsh begins his tenure as the new Labor secretary.

Aggressive enforcement

Durham said employers can expect the Labor Department to more vigorously enforce employment laws through audits, investigations and court actions against employers, contrasting with the Trump administration’s focus on securing employer compliance through education, outreach and other less adversarial means. 

“These shifting enforcement priorities will be supported by regulations and sub-regulatory guidance that is more protective of employee rights than the generally business-friendly interpretations of the prior administration,” Durham said. “We have already seen examples of this regulatory shift in the DOL’s moves to undo the prior administration’s regulations on joint employer status and tipped-employee wages.”

Also see: Simplify labor compliance with accurate time and attendance tracking

Young pointed out that while the Labor Department under Trump was not as light on employers as some might assume — the Wage & Hour Division set a new record for back wages recovered in 2019 — it took a softer approach than previous administrations on the topic of damage enhancements. Liquidated damages, which is a penalty in an amount equal to back wages owed, were taken off the table in all but the rarest cases, he said.

“The new administration has reversed course on that issue, and it’s likely that other enforcement measures will reenter the picture, too,” Young said. “It’s not clear yet whether the number of investigations will increase — that depends on the budget as much as anything else — but employers should certainly be preparing for more aggressive investigations than in past years.” 

Reisman said that although Walsh was confirmed with strong bipartisan support, employers should expect his reputation as someone who is a consensus-builder to be tested early with so many critical items on his agenda, including the pandemic response and some critical Trump-era regulatory initiatives.

Employers also should expect there to be an ongoing clash between the age-old tensions that exist between the Labor Department when operated under a Republican administration and under a Democratic administration. 

“There is no question, given Walsh’s labor background and leadership of the building trades, that he will be a staunch supporter of workers’ and unions’ rights,” Reisman said. “He will not want to alienate his base of union support, or that of President Biden, especially in light of Biden’s promises to empower workers and unions.”

Employers can expect a return to a Labor Department that resembles and likely surpasses the enforcement efforts of the Obama administration, Reisman said. The DOL will be back on the trail of finding violations and holding employers accountable. 

“The focus will be less on assisting with compliance and educating employers and more on the gotcha game of penalizing employers who — knowingly or unknowingly — are not in compliance with the laws the DOL enforces,” he said.

Enforcing wage-and-hour and overtime violations

Nowhere will the shift in Labor Department enforcement priorities and positions be felt more by employers than enforcement of the Fair Labor Standards Act’s overtime and minimum wage requirements, Durham said. 

“I expect the number and scope of audits conducted by the DOL’s Wage & Hour Division to increase substantially, and that the DOL will not be as willing to settle violations for less than ‘make-whole’ relief for affected employees,” he said. “In addition to back wages, the DOL is more likely to insist that employers pay liquidated damages when settling a wage-and-hour investigation, and the DOL likely will increase the use of civil monetary penalties as a potent deterrent to send a message to employers.”

Also read: Wage and hour violations cost restaurant $697,000

Employers should expect a return of the enforcement tools of the past, liquidated damages being almost automatic as penalties in wage-and-hour investigations, Reisman added. “We expect more willfulness assertions by the DOL, which allow a back wage look-back period of three years, rather than two. And, yes, the use of civil money penalties will be used more broadly as a tool than in the last four years.”

Minimum wage and the tip credit

Young said that the new administration clearly supports increasing the federal minimum wage. And there’s also little doubt that the benefit of any increase will apply for tipped workers.

“The question here is whether the FLSA will continue to allow a portion of a tipped employee’s minimum wage to come in the form of tips,” he said. “A recent federal legislative proposal would remove this so-called tip credit, requiring restaurants to directly pay the full minimum wage to each tipped employee, without credit or concern for the amount of tips they earn on the job. If passed, this could have a seismic impact on a restaurant industry that operates on thin margins and has spent most of the last year on life support.”

Supporting fair workweek and predictive scheduling

Fair workweek laws have swept the nation and in particular the retail, fast food and hospitality industries over the past decade or so, Young said. These laws are likely on the radar of Biden and Walsh.

One recently took effect in the president’s back yard (Philadelphia), and another has been the focus of lobbying efforts in Walsh’s home state of Massachusetts, Young noted.

“Instituting this sort of reform at the federal level would require an act of Congress,” Young said. “After all, the DOL can’t make new law, only interpret and enforce what’s on the books, and I don’t get the sense that this sort of measure is among Democratic lawmakers’ core labor priorities.” 

Also read: The fair workweek squeeze on employer scheduling

In the past couple of years multiple local jurisdictions including Chicago, Seattle and San Francisco passed predictive scheduling laws, with more such laws likely to hit the books in the coming years, Durham said.  

Absent new legislation at the federal level, it is highly unlikely the Labor Department will impose requirements similar to these laws because the FLSA generally does not impose requirements on employers related to scheduling employees, he added. 

“However, one way in which the DOL could enhance the financial benefit to employees of such laws would be to take the position that certain penalties under predictive scheduling laws, such as penalties for shift cancellations or other scheduling changes with insufficient notice to employees, need to be included in the regular rate of pay for purposes of calculating overtime under the FLSA,” Durham said. “The DOL’s current position, set forth in a Fact Sheet published in December 2019, is that most such penalty payments do not need to be included in the regular rate of pay.”

Reisman also questioned whether the Labor Department will have the time or resources to make its way far enough down its priority list to fair workweek/predictive scheduling regulations, or what its authority would be in seeking an impact in that realm. 

Still, he added, “Anything that would entail a nationwide policy or regulation such as paid leave could be well-received by many employers if it serves to preempt state and local laws and regulations that have created an almost unmanageable web of compliance pitfalls for multi-state employers.”

Labor law enforcement can strike your business at any time. Ensure simplified and automated compliance to federal, state and local labor regulations and avoid costly penalties. Book a demo and see Workforce.com’s powerful compliance tools in action.