Hunton Employment & Labor Law Perspectives : Employment Lawyers & Attorneys : Hunton & Williams Law Firm : Labor Law Legislative Updates

In initially certifying the class, the court had accepted the plaintiffs’ argument that Dollar Tree’s payroll certification forms, which store managers were required to fill out weekly and which asked them to indicate whether they spent more than 50% of their work time each week performing exempt managerial duties, provided common proof of how the store managers were spending their time and would obviate the need for much individual testimony.  However, in the court’s July 8th decision, Judge Samuel Conti explained that subsequent developments in the case and in the case law had persuaded the court that individualized issues predominated and that trial as a class action would present “unmanageable difficulties.” 

With respect to developments in the case, Judge Conti observed that after the class was certified, briefings by both parties revealed that a majority of the class members had stated under oath that their payroll certification forms were not truthful or did not accurately reflect the time they actually spent performing managerial duties.  Thus, certification of the class could no longer be premised on the reliability of the forms as common proof of misclassification.  With respect to developments in the case law, Judge Conti explained that Dukes had “heightened” the court’s concerns and provided “a forceful affirmation of a class action plaintiff’s obligation to produce common proof of class-wide liability in order to justify class certification.”

Using language from the Dukes decision for support, Judge Conti found that the plaintiffs had “failed to provide common proof to serve as the ‘glue’ that would allow a class-wide determination of how class members spent their time on a weekly basis.”  Even though the plaintiffs had presented evidence of Dollar Tree’s centralized operational and human resources hierarchy and evidence that all store managers were given uniform training and training-related materials, received “daily planners” that required them to perform certain tasks, and were subject to other Dollar Tree policies that were intended to standardize the experiences of all store managers, Judge Conti observed that such evidence, although providing some proof that class members shared a number of common employment experiences, did not provide common proof of whether they were spending more than 50% of their time performing exempt tasks. 

Although it is too early to tell whether this decision is the beginning of a trend among federal courts, it is a positive sign that the Dukes case can be used as a meaningful weapon against not just overbroad employment discrimination class actions, but also against overbroad wage and hour class actions.  Stay tuned for further developments.

Right to Know Under the FLSA (RIN: 1235-AA04):  According to the DOL, this regulation was designed to “update the recordkeeping regulations under the Fair Labor Standards Act in order to enhance the transparency and disclosure to workers.” This proposed regulation would require any business that claims employees are exempt from FLSA coverage to perform a classification analysis and provide the analysis to the covered employees.  Employers would also be required to maintain records of the analysis for potential review by the DOL. The “Right To Know” amendment is set for proposed rulemaking in April 2011. The potential economic impact on private sector employers is serious in that the required analysis, whether performed in house or by an outside source, will be extremely expensive. Moreover, increased litigation under the FLSA is likely should the rule be implemented.

Injury and Illness Prevention Programs: As part of the DOL’s “Plan/Prevent/Protect” enforcement strategy, OSHA is seeking to establish a rule on Injury and Illness Prevention Programs, or the “I2P2” rule. The aim of the proposed rule will be to address all workplace hazards, an extreme broadening of OSHA’s typical standards which focus on specific hazards in the workplace. Some states such as California have already implemented this type of heightened standard. Employers should be concerned about the enforcement of the I2P2 standard, which may result in employer liability for failing to predict even the most rare or unlikely workplace accident.

Employer and Labor Relations Consultant Reporting under the LMRDA (RIN: 1245-AA03): This June, the DOL will seek to revise the section of the LMRDA that provides for an “advice exemption” to the reporting requirements for individuals and employers who attempt to influence workers’ decisions regarding union organizing or collective bargaining. The DOL’s position is that the current interpretation of the exemption is too broad. The concern for labor attorneys in particular is that the new rule will limit the exemption in such a way that several previously-exempt entities, including attorneys, may be required to report any labor advice provided or services performed in relation to so-called “Persuader Agreements.”         

Employment Nondiscrimination Act: Now that the Obama Administration has secured the repeal of “Don’t Ask, Don’t Tell,” proponents of ENDA are likely to ramp up efforts to get a bill through Congress and on to President Obama. One version of the law prohibits discrimination against individuals based on sexual orientation or gender identity, while a more conservative version protects only against discrimination based on sexual orientation. President Obama has expressed his support for the broader version of the law. While the new Congress has not indicated whether it intends to take up the issue, the recent DADT repeal has placed this issue squarely at the forefront of voters’ minds and House and Senate members are likely to reopen the ENDA discussion at some point during the current term.

Employers who violate the notice and/or recordkeeping requirements or misclassify a worker would be subject to a civil penalty of up to $1,100 per worker for a first offense and up to $5,000 per worker for willful or repeated violations.  Employers who misclassify workers and violate the minimum wage and overtime requirements would be subject to treble damages.  The proposed legislation also contains broad anti-retaliation/discrimination provisions.

To enforce the Act’s provisions, the Department of Labor would be directed to perform targeted audits focusing on employers in industries that frequently misclassify employees.  The Department of Labor and Internal Revenue Service would be permitted to refer incidents of misclassification to each other.  The states would be directed to increase their own penalties for worker misclassification, conduct audits for the purpose of identifying employers who misclassify workers, and report the results of the audits to the Department of Labor on a quarterly basis. 

While the EMPA is in the earliest stages of consideration by both houses of Congress, its introduction is significant because it follows introduction of the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (“TRAC”) (H.R. 3408, S. 2882), which would revise the Revenue Act of 1978’s safe harbor provision (the safe harbor provision allows an employer to treat a worker as a contractor if certain requirements are met), make it more difficult for employers to classify workers as independent contractors, and significantly increase employer penalties in the event of misclassification.  It also follows President Obama’s proposed budget for 2011, which includes significant funding for the U.S. Department of Labor’s Wage and Hour Division to increase the Division’s number of investigators, train investigators to detect misclassification of workers, and focus on industries where misclassification is most prevalent.  In sum, the EMPA serves as a reminder that curtailing employers’ use of independent contractors remains a significant issue in Congress.  Employers who have not yet done so would be well-advised to review their independent contractor relationships and ensure that they are on the up and up before the Department of Labor and/or a corresponding state agency does it for them. 

Although the proposed regulation is unlikely to be limited to independent contractor classifications, this all comes on the heels of renewed DOL efforts to crack down on the misclassification of employees as independent contractors.  During a Live Q&A Session to discuss the new Regulatory Agenda, Nancy Leppink, Deputy Administrator of WHD, was asked whether WHD is concerned that the implementation of rules tightening worker classification enforcement will upset the benefits associated with employing independent contractors.  Ms. Leppink responded by essentially parroting a DOL fact sheet on the proposal, which states that “updating the recordkeeping requirements to promote transparency is expected to encourage greater levels of compliance by employers, to enhance awareness among workers of their status as employees or independent contractors . . . and to facilitate DOL enforcement.”

Some of the issues that DOL will need to consider as it formulates the rule include:

• Whether any industries will be exempted from the classification analysis and enhanced recordkeeping requirements.
• Whether the classification analysis is to be conducted on a position-by-position or a worker-by-worker basis.
• The required content of analysis disclosures to workers and whether each worker will have to be formally notified of his or her FLSA status and how it was determined.
• What the proposed retention requirements for classification analysis will be in light of the Lilly Ledbetter Act.

If the proposed rule is implemented, employers will almost certainly be required to expend substantial amounts of time re-analyzing worker classifications and drafting new documents to comply, ultimately generating a significant amount of paperwork.  DOL plans to issue a formal Notice of Proposed Rulemaking for this rule in August, at which time employers will have an opportunity to submit comments on the proposed rule. Stay tuned for more information in August. In the meantime, employers should examine their current worker classifications to protect and prepare themselves.

Civil litigation over employment status is becoming increasingly common, perhaps because more employers are relying on contingent arrangements, economic conditions make it more difficult to find traditional full time employment, and more individuals and attorneys are aware of the issue following high profile verdicts, settlements, and fines.

Although enforcement of various laws by state and federal agencies has been spotty in the past, there are signs that enforcement efforts will increase.  With the economy in decline, there has been a heightened focus on capturing more revenue through employment taxes, which often is a reason why companies seek independent contractor arrangements.  A recent study by the U.S. Government Accountability Office, commissioned by several Congressional committees, called upon the U.S. Department of Labor and the Internal Revenue Service to step up their efforts to police classification of workers as independent contractors.

Some cases come to the attention of government agencies through routine audits, some come through complaints, and some come through other action on the part of the individual, such as filing a claim for unemployment benefits.  Increasingly, state and federal agencies are sharing information and coordinating their enforcement efforts.  In light of the discussion above, companies that utilize independent contractor arrangements can expect to encounter more challenges, and more intensive scrutiny, than they have in the past. 

More federal laws related to classification of contractors are likely on the way.  There is a bill in Congress (H.R. 3408: “The Taxpayer Responsibility, Accountability and Consistency Act of 2009”) that would increase penalties for misclassification and eliminate or sharply curtail the “safe harbor” provisions of Section 530 of the Revenue Code, which currently allows businesses to avoid tax penalties if they have a good faith reason to believe that a worker is an independent contractor, even if ultimately found to be an employee as a matter of law.  Within the past two years, there have been several other bills introduced in the House and Senate that would amend the Revenue Code and the Fair Labor Standards Act to make it more difficult to properly classify workers as independent contractors and to increase penalties for doing so incorrectly. 

Courts and government agencies use a variety of legal tests to determine whether a worker is properly classified.  These tests can vary according to what law is allegedly violated, and it is conceivable that a worker could be deemed an independent contractor for purposes of one statute but not for another.  Under any test, however, simply agreeing on a status such as “independent contractor” or “temporary worker” does not establish a non-employment relationship.  Instead, the proper classification is determined according to the specific facts of a particular case.  Depending on the test applied, factors considered can include:  who has the right to control the means and manner of performance; who provides the tools and equipment needed for the work; where the work is performed; whether the work is part of the recipient’s core business; whether the worker can bring in assistants or subcontract the work; and whether the worker is economically dependent on a single entity, or whether the worker is truly “independent” such that his or her work would continue for other clients if one relationship were discontinued.

The Labor and Employment Team at Hunton & Williams has ample experience litigating issues related to contingent workers, before state and federal agencies and in courts across the country.  We regularly take on difficult cases for clients in this area and provide preventive guidance to avoid litigation or enforcement where that is an option. 

Any company that is considering such an arrangement, however, should be advised of the costs and risks that can accompany a contingent worker or contractor, including:  significant transaction and administrative costs; reduced quality or efficiency; compromised security of intellectual and other property; liability for wage and hour violations; obligations for employee benefits; assessments of back taxes and penalties; and damages for various types of employment-related claims.  Incorrect classification can lead to significant adverse consequences, particularly if multiple workers are involved.  A number of large and sophisticated companies have been forced to pay staggering amounts to resolve cases alleging misclassification of workers.

What can you do to avoid an adverse outcome with respect to contingent workers?  Getting the right legal guidance is paramount.  Once your objectives and concerns have been properly identified, there are likely a number of ways to address them.  Properly structured contingent worker arrangements will account for all types of risk.  In some instances, it may become clear that hiring an employee on a part time or full time basis is more desirable than engaging a contingent worker, once all the costs and benefits are fully considered.

The Labor and Employment Team at Hunton & Williams has a task force focusing on issues related to contingent workforces and independent contractor relationships.  We would be glad to discuss with you how you can best accomplish your business objectives while minimizing your risks.  This may include proactive planning for future engagements of contractors, or perhaps an audit of current engagements to determine whether they can withstand challenge by a government agency or individual claimant.  The most important thing is to gain awareness of the risks and to seek ways to address them before they become liabilities.

The GAO conducted the study to examine: the extent of misclassification of workers as independent contractors; actions the DOL and IRS have taken to address the issue, including coordination of efforts; and options that could help address the issue.  Among the reasons noted for conducting the study were the need to ensure that workers “receive the protections and benefits to which they are entitled” and that employers pay all required taxes.

The report identified a number of options to address the issue, almost all of which would have a significant impact on companies who use outside contractors:  clarify the distinctions between employees and contractors under federal law; allow workers to challenge classifications in U.S. Tax Court; define misclassification as a violation of the Fair Labor Standards Act; narrow the “safe harbor” provisions in Section 530 of the Tax Code for misclassification; require service recipients to withhold taxes for contractors; improve compliance programs; and enhance coordination between agencies for enforcement and sharing of data.

The GAO report undoubtedly portends greater activity on the part of the DOL and IRS with respect to enforcement of existing laws, and possibly new legislation on the part of Congress.  Bills addressing this issue were introduced in the previous session of Congress but did not reach a vote.  They are likely to be re-introduced sometime in the near future.

This is a loud and clear wake up call for all businesses that use contract workers to review their arrangements with legal counsel and ensure:  (1) that workers classified and paid as independent contractors will not be deemed employees under applicable labor and tax laws; (2) that proper documentation is in place to maximize the likelihood of a favorable outcome in the event of an audit or other challenge; and (3) that potential exposure is addressed with respect to back pay for minimum wage, overtime, liquidated damages, unpaid taxes, and penalties in the event of a finding of misclassification.

The Labor and Employment Team at Hunton & Williams has a task force focusing on issues related to joint employment, contingent workforces, and independent contractor relationships.  We would be glad to provide a copy of the GAO report and to provide guidance on this important topic.