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

Misclassification of employees as independent contractors is expected to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years.  To help make up for this shortfall, the proposed budget includes a joint proposal by the Departments of Labor and Treasury.  The joint proposal, a $25 million initiative, would enhance the ability of both agencies to penalize employers who misclassify their employees and would attempt to eliminate or reduce opportunities under current law for employers to misclassify workers.  The initiative also provides for competitive grants to boost states’ incentives to address the problem, as well as the hiring of 100 new enforcement personnel to target worker misclassification. 

The President’s proposal also is likely to build momentum for legislation, already introduced called the Taxpayer Responsibility, Accountability, and Consistency Act of 2009, that would revise the Revenue Act of 1978’s safe harbor provision (which allows an employer to treat a worker as a contractor if certain requirements are met) to make it more difficult for employers to classify workers as independent contractors for employment tax purposes.  The legislation also would significantly increase employer penalties in the event of misclassification.  In addition, states also are enacting new laws to impose harsher penalties for misclassification.  Colorado, for example, passed a law in 2009 that included penalties of up to $5,000 per employee for the first offense and up to $25,000 per employee for subsequent violations.  Other states have passed similar laws.

In light of these developments, which continue a trend that has been building for the past several years, employers will need to be vigilant to ensure that their independent contractor relationships will pass muster.  Misclassifying an employee as an independent contractor will be a very costly mistake. 

We know from NLRB numbers over the last ten years that union win rates in these elections have increased from just over 50% in the first half of the decade to about 55% or more in each of the years of the second half.  So, let's see what those numbers tell us when compared to the rhetoric over EFCA.  

Union membership continues to decline and that's why unions say that EFCA or something like it should be made law. In 2009, as in previous years, unions initiated far fewer elections even though statistics show they win more than half of the ones in which they participate.  But absent passage of EFCA, unions can't win new members if they don't organize and hold elections.  Their strategy for passage of the EFCA free ride appears to amount to a self fulfilling prophecy.  That is, if unions refuse to engage in the election process, their numbers will continue to dwindle, which to some creates a problem in need of EFCA as the solution.  And the Obama administration seems to be making the same argument.  On January 22nd Hilda Solis, Secretary of Labor, said the membership numbers make "clear why the Administration supports the Employee Free Choice Act. "     

The Secretary's adherence to this stance in the face of statistics to the contrary is grounded in her sincere belief that employees are better off with a union.  However, with  a 55% win rate, why don't unions use the election mechanism available to them? The  unions say the deck is stacked against them and they can't win. The numbers reported for the last decade or more refute that claim. They also say that top down, corporate campaigns work better. The continuing drop in membership casts doubt on that assumption as well. But one certainly can believe that, if an employer can be forced  into a card check and neutrality agreement through a corporate campaign  publicly attacking its corporate image, the union win rate should vault into the 80 to 90% range.  EFCA in either its current or modified form will accomplish nearly the same thing.

As has been said from the outset, this proposition is not about better workplace democracy… it is about pre-ordaining union victory irrespective of free choice.

The extension is retroactive for those who lost COBRA coverage because they stopped paying the premiums due to the expiration of their subsidy.  By way of example, someone who was laid off and began receiving their subsidy in March 1, 2009 was subsidy eligible through November 30, 2009.  If that individual did not pay his or her December 2009 premium because the subsidy expired, that person will have an opportunity to pay the lower amount to receive retroactive continuation coverage until May 31, 2010.  To obtain this retroactive extension, that individual must pay their share (35%) of the past premium cost by the later of February 17, 2010 or 30 days after the required notice is given by the plan administrator.  Any individuals who retained COBRA coverage after exhausting the subsidy must either be reimbursed or credited for the COBRA subsidy amounts that they would have been entitled to.

Plan administrators must be sure to update election notices to ensure they provide updated premium reduction information.  Furthermore, the new legislation mandates that individuals who have already been provided a COBRA election notice without the updated information must be notified of the changes in the following manner:

• All previously eligible individuals must be notified by February 17, 2010. 
• Individuals that have been involuntarily terminated on or after October 31, 2009 and lost health coverage must be notified within normal timeframes. 
• Individuals whose 9-month subsidy period ended before December 19, 2009, and are now eligible for the subsidy period extension must be notified within 60 days after the date on which the 9-month subsidy period ended.

The Occupational Safety and Health Administration (“OSHA” or the “Agency”) recently announced its intent to reinstate the “musculoskeletal disorder” column on its injury and illness 300 Form.  The Agency is also developing a proposed rule to add a definition of musculoskeletal disorders to the Occupational Safety and Health Act (the “Act”).  A notice of the proposed rule-making and opportunity for public comment will be issued in January 2010.

Ergonomic-related regulations were implemented in 2000, but were revoked in 2001.  The Bush Administration also repealed the Ergonomics Standard in 2001.  Since then, OSHA has evaluated ergonomic issues by using the General Duty Clause of the Act.  Elimination of the musculoskeletal disorder checkbox on the 300 Form resulted in part from a 2001 settlement agreement between OSHA, the National Association of Manufacturers, and the U.S. Chamber of Commerce, which resolved an industry challenge to the Agency’s recordkeeping requirements.

It does not appear that the new regulations will fully reinstate all the provisions that were repealed in 2001, particularly the recordkeeping provisions, which if fully reinstated likely would be challenged in court.  Although Secretary of Labor Hilda Solis said the Agency does not intend to propose new ergonomics regulations at this time, employers should not conclude that ergonomics is not on the agenda for Obama’s Department of Labor.  The Obama Administration is under heavy pressure from the unions to move forward during this term.  The AFL-CIO, the largest federation of labor unions, pressed for new recordkeeping requirements at its annual convention in September as well as in documents it provided to President Obama’s transition team, and it has been relentless in its pressure regarding new ergonomics rules.

Several officials within OSHA have made statements suggesting that new regulations may be coming.  For example, the current Deputy Assistant Secretary of Labor for OSHA, Jordan Barab (who also headed the ergonomics issue during the Clinton Administration), spoke about ergonomics at a May 2009 legislative conference of union nurses held in Washington, D.C.  In that speech, Barab pledged that the Obama Administration was committed to bringing back regulation in the area of ergonomics.  The new Assistant Secretary of Labor for OSHA, Dr. David Michaels, also has spoken in favor of instituting new ergonomic standards.  In the past, he has conducted epidemiologic studies examining the repetitive motion hazards facing printers, construction workers, bus drivers and other groups of workers.

In light of all these factors, it seems clear that regulation of ergonomics is coming soon.  It will be very interesting to see how any new regulations compare with those previously enacted and rescinded.  Regulations that are substantially similar to those put in place during the Clinton Administration would require specific authorizing legislation by Congress.  Stay tuned for additional developments in this area.

The LMRDA requires employers on an annual basis to report fees paid to labor consultants who engage in activities designed to persuade employees not to unionize (commonly referred to as “persuader activities”).  Similarly, any labor consultant who engages in persuader activities also must file an annual report indicating the amount and source of any compensation received for such activities.  The DOL has interpreted these reporting obligations to apply to persuader activities of attorneys as well as labor consultants.

The LMRDA’s reporting requirements have long been of concern to consultants, attorneys, and employers insofar as they require disclosure of otherwise confidential professional relationships and use of private funds for such activities.

Section 433(c) of the LMRDA provides an exception for advice work.  To the extent the work performed by a management attorney or a labor consultant is limited to advice directed to the employer and its supervisors, as opposed to persuader activities directed to employees, the advice exception is a “safe harbor” from LMRDA reporting requirements. 

In its December 7 announcement, the DOL indicated that its new proposed rule will narrow the scope of the advice exception.  According to the DOL, “a narrower construction would better allow for the employer and consultant reporting intended by the LMRDA.”  Although currently the DOL has provided no further details as to how exactly it intends to narrow the advice exception, there is little doubt that the new proposed rule will require employers and labor consultants to report information about relationships and expenditures that currently would be deemed confidential.

If the new proposed regulation proceeds in the direction indicated by the DOL, it should draw strong criticism from employers, labor consultants, and attorneys.  This would be yet another step in the rapid march toward increased oversight and regulation of employers in order to create a more favorable climate for unions.  The DOL acknowledged that it expects a negative response from employers and stated that it plans to hold a public meeting to discuss the new regulations.  Once published in the Federal Register, the new rule will be subject to a mandatory public review and comment period, in which all those concerned about the DOL’s actions will have an opportunity to express their thoughts.

Both the House and Senate bills would extend the COBRA subsidy, but the terms vary.

The “Extended COBRA Continuation Protection Act of 2009,” House bill (H.R. 3930),  was introduced  on October 23 by Representative Joe Sestak (D-Pa).  It would extend for six months the maximum COBRA period for individuals whose coverage was the result of a termination or reduction in hours occurring on or after April 1, 2008 and before January 1, 2010.  The bill would also extend the eligibility period for the ARRA COBRA subsidy from December 31, 2009 to June 30, 2010, and would extend the maximum period of ARRA premium assistance from 9 to 15 months.  The House bill has been referred to the Committees on Education and Labor, Energy and Commerce, and Ways and Means.

The Senate version of the bill, the “COBRA Subsidy Extension and Enhancement Act,” (S. 2730) was introduced on November 4 by sponsors Senators Robert Casey (D-Pa), and Sherrod Brown (D-Ohio).  The bill also has the support of Senators Al Franken (D-Minn.),  Arlen Specter (D-Pa),   Robert Mendez (D-N.J.), and Sheldon Whitehouse (D-R.I.).   The Senate bill contains some of the same features as the House version, such as extending the eligibility period for six months until June 30, 2010, and extending the subsidy period from 9 to 15 months.  In addition, however, the Senate bill extends subsidy eligibility to employees who lose their health insurance because of a reduction in working hours (as opposed to complete loss of employment), and to employees who are eligible for retiree health coverage.  Another noteworthy aspect of the Senate bill is an increase in the subsidy amount, from 65% of the cost of the COBRA premium to 75%.  The Senate bill has been referred to the Committee on Health, Education, Labor and Pensions. 

Some version of the COBRA subsidy extension is expected to pass.  Employers should stay alert to these legislative developments and should be prepared to revise existing COBRA notices.  COBRA participants will need to be informed of all changes, deadlines and expirations.  The Department of Labor provides information about COBRA and COBRA Model Notices to employers.  However, specific legal advice from counsel should be obtained as to how best to implement any legislative changes.

Solis said the DOL will be working with "advocacy groups and other stakeholders" to develop and distribute campaign materials to workers.  She noted that this initiative signifies her intent to increase both employee outreach efforts and enforcement efforts against employers who are accused of violating the law.  Solis had a strong rebuke for employers who are not in compliance with minimum wage and overtime standards: "There is no excuse for employers who disregard federal labor standards - especially those that are designed to protect the most vulnerable in the workplace."
 
To help support this effort, Solis has hired 250 new wage and hour investigators, who she says will ensure that the DOL can properly respond to complaints and "undertake more targeted enforcement."  Solis vows that the DOL "will not rest until the law is followed by every employer."
 
We have commented previously that the federal agencies charged with enforcing workplace protection laws, such as EEOC, OSHA, and NLRB, all have indicated that they will be pursuing employee complaints more aggressively.  Solis' recent announcement is yet another example that the Obama administration is taking a more employee friendly approach to federal enforcement.  Employers should be taking steps now to ensure that their pay practices comply with the FLSA and applicable state wage and hour laws, which may include a privileged pay practices audit by experienced legal counsel.
 

Shiu is considered to be an aggressive advocate of employee rights and disadvantaged persons.  This, coupled with an expected increase in the OFCCP’s budget, suggests that the OFCCP’s enforcement efforts will be particularly active under her leadership.  Her new position currently is classified as a Deputy Assistant Secretary of Labor, which does not require Senate confirmation.  However, following a reorganization in the DOL, Shiu will report directly to Labor Secretary Hilda Solis, which could elevate her title to Assistant Secretary of Labor and require Senate confirmation.

Shiu has been an employment attorney with the Legal Aid Society of San Francisco since 1983.  She focuses primarily on employment cases of alleged race and sex discrimination.  Shiu also directs the Legal Aid Society’s Works and Family Project and is the Vice President of Programs.  Shiu graduated from the University of San Francisco School of Law, and spent several years in private practice before joining the Legal Aid Society.

In the federal arena, Shiu’s experience includes an appointment to the Department of Education’s Civil Rights Reviewing Authority during the Clinton administration.  She is also a former board member and past vice president of the National Employment Lawyers Association, a plaintiffs’ attorney group.

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.