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

Fact Sheet #77A: Prohibiting Retaliation Under the Fair Labor Standards Act (FLSA) provides information concerning the FLSA’s prohibition of retaliation against any employee who has “filed any complaint” or cooperated in an investigation under the FLSA.  Fact Sheet #77A explains that employees are protected from retaliation under the FLSA when making a complaint orally or in writing.  It also recognizes that not only are complaints made to the DOL Wage and Hour Division protected, but that most courts have ruled that internal complaints to an employer are protected as well.  Additionally, Fact Sheet #77A explains that the FLSA’s prohibition against retaliation applies to all employees of an employer, even in those instances in which the employee’s work and the employer are not covered by the FLSA. Further, the fact sheet provides that the FLSA’s retaliation prohibition applies even where there is no current employment relationship between the parties. For example, it protects an employee from retaliation by a former employer.

Fact Sheet #77B: Protection for Individuals under the FMLA outlines the FMLA’s prohibition of retaliation against an individual for exercising his or her rights or participating in matters protected under the FMLA.  The new fact sheet also gives the following examples of prohibited conduct: refusing to authorize FMLA leave for an eligible employee, discouraging an employee from using FMLA leave, manipulating an employee’s work hours to avoid FMLA responsibilities, using an employee’s FMLA request as a negative factor in employment actions, and counting FMLA leave under “no fault” attendance policies.

Fact Sheet #77C: Prohibiting Retaliation Under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) provides information concerning the protections and enforcement procedures under the MSPA.  The MSPA protects migrant and seasonal agricultural workers and establishes employment standards related to wages, housing, transportation, disclosures, and recordkeeping. It also requires farm labor contractors to register with the U.S. DOL. The MSPA prohibits discrimination or retaliation against a migrant or seasonal agricultural worker who has filed a complaint or participated in any proceeding under the MSPA.

Full versions of the new Fact Sheets may be found at the following links:
Fact Sheet #77A: Prohibiting Retaliation Under the Fair Labor Standards Act (FLSA)
Fact Sheet #77B: Protection for Individuals under the FMLA
Fact Sheet #77C: Prohibiting Retaliation Under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA)

As we reported on December 23, 2010, the NLRB had issued a proposed rule regarding the notice on December 22, 2010. The NLRB received more than 7,000 comments in the six-month comment period that followed. The NLRB appears to have made minor adjustments based on comments received, but the Final Rule is substantially as proposed.

The Final Rule requires private-sector employers who are covered by the NLRA (which is most companies) to post the designated 11x17 employee rights notice wherever other workplace notices are typically posted. If employers regularly post rules or policies on an intranet or internet site, the Board’s notice must also be posted there. Translated versions must be posted where at least 20% of the workforce is not proficient in English. 

The notice tells employees of their unionizing rights, gives examples of unlawful employer and union conduct, and tells employees how to contact the NLRB with questions and complaints. The NLRB describes the notice as “similar” to the notice required for federal contractors by the U.S. Department of Labor (“DOL”). The NLRB will deem a contractor in compliance with this requirement if it posts the DOL’s notice.

Failure to post the notice may be treated as an unfair labor practice (“ULP”).

What This Means For Employers

Unless a company already posts the DOL’s comparable notice, employers should obtain a copy of the notice from the NLRB (via its website or a Regional Office), once it is published around August 30, 2011. The notice should be posted, both physically and electronically, in all places that other employee notices are posted. Companies should ensure they are in compliance with this requirement by no later than November 14, 2011.

VETS “is aware of this issue and is working to correct it.”  It expects to have the problem resolved in the next 60 days.  The electronic system should be online October 1, 2011.

Because of these issues, the DOL has said it will not initiate enforcement actions against contractors who submit the VETS 100/100A reports between October 1, 2011 and November 30, 2011.   

The VETS-100 and VETS-100A Reports

The VETS reports are required by the Vietnam Era Veterans’ Readjustment Assistance Act of 1974 (“VEVRAA”), 38 U.S.C. § 4212(d).  VEVRAA was amended by the Jobs for Veterans Act in 2002.  The criteria for the reports are as follows:

• companies with a federal contract or subcontract of $25,000 or more, that was entered into before December 1, 2003, must file a VETS-100 Report, which tracks:
  • special disabled veterans
  • Veterans of the Vietnam era
  • Recently separated veterans (within one year of service)
  • Other protected veterans (campaign badge veterans)
• companies with a federal contract or subcontract of $100,000 or more, that was awarded or modified after December 1, 2003, must file a VETS-100A Report, which tracks:
  • disabled veterans
  • Armed Forces service medal veterans
  • Recently Separated veterans (within three years of service)
  • Other protected veterans (campaign badge veterans)

Companies with contracts falling into both categories must file both the VETS-100 and 100A Reports.  The veterans categories are defined by VEVRAA’s implementing regulations at 41 CFR § 61-250 and 41 CFR § 61-300.  

What This Means

Contractors required to file a VETS-100 and/or VETS-100A report should plan to register for online filing after October 1 and must file the applicable form(s) by no later than November 30, 2011.  Unless technical problems persist, or other filing exceptions apply, the DOL may initiate enforcement actions against contractors who fail to file by November 30, 2011.  In addition, VETS-100 and VETS-100A Reports are commonly requested by the Office of Federal Contract Compliance Programs (OFCCP) during a compliance review (audit).

Sample VETS-100 and VETS-100A forms are available at the VETS website.

For many years, the Department of Labor has interpreted the “advice exception” broadly to exclude arrangements where the consultant has no direct contact with employees.  However, as we reported last spring and summer, the DOL has decided to move away from a broad interpretation of the advice exception and, as a result, held public meetings regarding its desire to narrow the advice exception.

The DOL has now taken the next step in its efforts to narrow the advice exception.  Specifically, on Tuesday June 21, 2011, the DOL issued a Notice of Proposed Rulemaking, which attempts to remedy what the DOL refers to as a “significant underreporting” problem.  According to the proposed rule, the term “advice” would be limited to “an oral or written recommendation regarding a decision or course of conduct.”  Under this narrower definition, if a consultant engages in actions or communications that would indirectly or directly persuade employees regarding organizing, such activity is reportable under section 203 notwithstanding the fact that the consultant did not have direct contact with the workers.  Thus, for example, when a consultant prepares or provides a persuasive script, letter, or videotape for use by an employer in communicating with employees, or if the consultant makes revisions to such items to enhance their persuasive message, the advice exception may not apply, and the duty to report could be triggered.

The impact of this proposed rule will be significant if it is adopted.  Employers may no longer be able to shield third-party arrangements from reporting simply by isolating consultants from direct employee contact.  Moreover, the rule may interfere with employers’ ability to obtain legal advice from law firms out of fear that both the employer and the law firm may incur reporting obligations as a result. 

Comments to the proposed rule are due no later than August 22, 2011.  We encourage all employers potentially affected by the proposed rule to review the rule closely and submit comments to the rule. 

Among other things, the app will enable workers to more easily track time worked while not on the employer’s premises. This could be particularly useful for non-exempt employees in tracking the time they spend working remotely on a smart phone, such as reading and sending e-mails and performing other work-related tasks. The app would allow the employee simply to activate the electronic timesheet before the employee starts working on the smart phone, and then deactivate it when the work is complete. With the press of a button, the employee can create a spreadsheet showing the wage calculation for any time period.

The DOL stated that this new technology is significant because, “instead of relying on their employers’ records, workers can now keep their own records,” which can “prove invaluable during [a DOL] investigation when an employer has failed to maintain accurate employment records.” The DOL further indicated that future apps may be launched to assist employees with compliance issues relating to payment of tips, commissions, bonuses, holiday pay, weekend pay, shift differential and pay for regular days of rest, as well as for impermissible pay deductions.

The introduction of the new DOL app provides further proof of the DOL’s aggressive approach to the enforcement of the FLSA and the importance of employers maintaining carefully drafted wage and hour policies and procedures. With this new technology, employers will need to be prepared to defend the accuracy of their own records in the event of a dispute with an employee or the DOL.

The Equal Employment Opportunity Commission (EEOC) recently heard testimony, on March 15, 2011, on the employment of persons with mental disabilities.  The EEOC believes this group continues to experience significant barriers to employment.  And, of course, there is the very notable recent publication of the final regulations implementing the Americans with Disabilities Act Amendment Act, which are discussed in more depth in a separate article.  

The Office of Federal Contract Compliance Programs (OFCCP), has also been focused on the employment of persons with disabilities.  Since 2010 a number of OFCCP initiatives have placed increased scrutiny on whether and how federal contractors employ disabled persons.  These initiatives include the announcement of new audit priorities that focus on disabled persons, and a Notice of Proposed Rulemaking to strengthen the regulations implementing Section 503 of the Rehabilitation Act of 1973, which helps people with disabilities obtain and keep employment.  The OFCCP has also created a website of its own to promote awareness of disability issues to the general public.  This follows the OFCCP’s earlier guidance directing that employer’s online application systems must be made accessible to persons with disabilities.

In early March, the DOL posted an online “toolkit” of resources to help federal agencies become model employers of persons with disabilities.  The toolkit helps implement Executive Order 13548, which was signed by President Obama in 2010 to increase the federal employment of disabled persons.  Federal agencies have until April 11, 2011 to submit hiring plans under the Order for increasing the employment of people with disabilities. 

In February of this year, a new website was launched by the Employer Assistance and Resource Network (“EARN”).  Called “Ask EARN.org,” the website assists employers with “recruiting, hiring, retaining and advancing qualified individuals with disabilities.” EARN is part of the National Employer Technical Assistance, Policy, and Research Center at Cornell University, which is funded by the U.S. Department of Labor (DOL)’s Office of Disability Employment Policy (ODEP). The website links employers to several resources, including a Workforce Recruitment Program, a job-matching database of prescreened applicants, a monthly newsletter and an online reference desk. 

The writing is on the wall for increased enforcement activity under the federal disability laws.    Now is the time to audit employment practices, such as: 

• application processes, for accessibility to disabled persons, including online systems
• targeted outreach to recruit disabled candidates
• review of job descriptions, for business necessity of requirements
• EEO policies, to ensure they include, and are accessible, to the disabled
• reasonable accommodations, including an interactive dialogue with employees,
• maintenance and retention of separate, confidential medical files

The Secretary of Labor is charged with enforcing the FSMA’s whistleblower protections, including awarding the appropriate relief.  If after receiving a retaliation or whistleblower complaint the Secretary concludes that there is reasonable cause to believe that a violation of Section 402 has occurred, the Secretary may issue among other relief an order reinstating the employee and providing for back pay. If the Secretary has not issued a final decision within 210 days after filing of the complaint, the employee may file a complaint in federal district court seeking reinstatement, back pay, and “compensation for any special damages sustained as a result of the discharge or discrimination, including litigation costs, expert witness fees, and reasonable attorneys’ fees.”  Food Safety Modernization Act, Pub. L. No. 111-353, § 402(b)(4)(B)(iii.), 124 Stat 3885, 3970.

While the majority of the FSMA does not become effective until 2012, the whistleblower provisions of the FSMA became effective immediately upon the law being signed by President Obama. Given its sweeping nature and broad protections, any entity potentially covered by the FSMA—which includes essentially any entity in the food industry—should consider  adopting strong anti-retaliation policies (including the provision of alternative avenues for an employee to complain), advising its managers and supervisors of the company’s anti-retaliation prohibitions, and providing training to all managers and supervisors educating them on the policy and on ways to avoid even the appearance of retaliation. 

Section 402 is the latest expansion of strong anti-retaliation whistleblower protection for employees in an increasing number of industries. Its passing illustrates again the need for employers to be mindful of the potential exposure and reputational harm from whistleblower lawsuits, and to adopt strong anti-retaliation policies and implement appropriate training programs.

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.

The Department of Labor and the Department of Transportation are partnering with OSHA in its distracted driving initiative.  These government agencies are initiating public awareness campaigns on the issue of distracted driving.

Additionally, more than half of the states have enacted laws against distracted driving beyond the traditional “workplace.”  For example, most states prohibit drivers from texting while driving regardless of whether their vehicle is used for business or not.  Eight states, including California and New York, prohibit drivers from using handheld cell phones while driving and authorize an officer to cite a driver for a violation without the requirement that any other traffic offense take place.  Thirty more states ban text messaging while driving.  A complete listing of current state laws on cell phone use and texting while driving can be found on the Governors Highway Safety Association’s website or the National Conference of State Legislatures’ website.

While OSHA’s distracted driving initiative is designed to address workplace safety concerns, it is clear that lawmakers and government agencies are focused on ending distracted driving.  OSHA warns employers that it will investigate complaints that an employer requires or encourages texting while driving and will impose penalties for those employers who fail to comply with its guidelines. 

In view of OSHA’s declaration, employers should consider issuing and enforcing a distracted driving policy that clearly prohibits the use of text, email or any handheld communication device while operating a company vehicle or driving a personal vehicle for business use.

A Department of Labor ("DOL") regulation interpreting the FMLA, which is codified at 29 C.F.R. § 825.107, enumerates the following eight factors to be considered in determining whether a firm is a successor in interest: (1) substantial continuity of the same business operations; (2) use of the same plant; (3) continuity of the work force; (4) similarity of jobs and working conditions; (5) similarity of supervisory personnel; (6) similarity in machinery, equipment, and production methods; (7) similarity of products or services; and (8) the ability of the predecessor to provide relief. However, only a handful of courts have addressed the issue of successor liability under the FMLA, and until September 27th, the U.S. Court of Appeals for the Sixth Circuit was the only federal appellate court to have ruled on the issue.

On September 27th, the U.S. Court of Appeals for the Ninth Circuit, in applying the DOL’s test, held in Sullivan v. Dollar Tree Stores, Inc.,  No. 08-35413 (9th Cir. Sept. 27, 2010), that plaintiff Christina Sullivan was not entitled to FMLA benefits because her new employer, Dollar Tree Stores, Inc. ("Dollar Tree") was not a successor in interest of her former employer, Factory 2-U. The decision is illustrative of what courts might look at when assessing whether an employer is a successor in interest of a former employer.

The basic facts of the case were as follows: Dollar Tree had purchased Factory 2-U’s leasehold of a Pasco, Washington store after Factory 2-U filed for bankruptcy, and the plaintiff, who had been working at the Factory 2-U store as a full-time store manager for over a year, was hired by Dollar Tree as an assistant store manager. The plaintiff subsequently requested FMLA leave, but because she had not been working for Dollar Tree for at least 12 months, Dollar Tree only approved some of the leave that she had requested. In determining whether Dollar Tree was a successor in interest of Factory 2-U for the purposes of the FMLA, the court considered the eight-factor test laid out in the DOL regulation.

The court noted that although Dollar Tree was operating a similar business out of the same location, Dollar Tree did not purchase any other assets from Factory 2-U other than the lease on the building, and Dollar Tree spent weeks renovating the store’s interior to meet its own design specifications. The court also noted the following: Factory 2-U’s employees were required to apply for jobs with Dollar Tree if they wanted to work for Dollar Tree, and only the plaintiff and one other employee of Factory 2-U were hired by Dollar Tree; Dollar Tree trained the employees in its own methods; and Dollar Tree employed a new store manager. The court concluded, "considering all the regulatory factors as a whole, the interests of Plaintiff and Dollar Tree, the policy goals of the FMLA, and the equities disclosed in the record," Dollar Tree was not a "successor in interest" to Factory 2-U within the meaning of the FMLA.

This recent opinion is a reminder that when merging with or purchasing the assets of another company, employers should be cognizant of the possibility that they will be considered a "successor in interest" of the other company and therefore obligated to provide that company’s employees with rights and benefits under the FMLA immediately after the merger or purchase. As shown by the opinion, any such inquiry will be incredibly fact-specific, and employers should therefore seek the advice of counsel prior to denying FMLA leave requests made by the merged or purchased company’s employees.

According to Fact Sheet #73, “Break Time for Nursing Mothers under the FLSA,” employers must provide reasonable amounts of unpaid break time and a private place for breast-feeding employees to express milk. “The frequency of breaks needed to express milk as well as the duration of each break will likely vary,” said the agency. The agency clarified that employers also must provide “a place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public,” where the employee may express breast milk. If a space is temporarily converted into a lactation area, it must be available whenever the nursing mother needs it.

The FLSA nursing break provisions cover only those employees who are not exempt from the FLSA’s overtime pay requirements, according to the fact sheet.  However, state laws may obligate employers to provide breaks to nursing mothers who are exempt from overtime pay under federal law.

Federal law does not require employers to compensate nursing mothers for the breaks they take to express milk, the agency said, but if an employer nevertheless compensates employees for breaks, an employee who uses the break time to express milk must be compensated in the same way that other employees are compensated for break time.  In addition, the FLSA’s general requirement that the employee must be completely relieved from duty or else the time must be compensated as work time applies. 

An employer with fewer than 50 employees at all of its work sites is not subject to the break-time requirement if compliance would cause an undue hardship.  The agency explained that the existence of an undue hardship is measured by comparing the difficulty or expense of compliance with the size, financial resources, nature, and structure of the employer's business.  The FLSA requirements do not preempt state laws that provide employees with greater protections, such as paid break time or coverage for more than one year.

Now that the Department of Labor has issued its regulations regarding the amendment and has clarified some misunderstandings from the Act, employers should aim to avoid potential claims.  To the extent employers have not already done so, they should consider what private locations they can make available to nursing mothers and communicate that information to their employees.  If compensating employees for breaks already, make sure to compensate the employee who uses the break time to express milk.  If you are an employer with less than 50 employees and compliance with the law would cause an undue hardship, make sure you can measure the hardship by the factors expressed by the agency.  
 

In addition to biological and adopted children, the FMLA’s definition of “son or daughter” includes foster children, stepchildren, a legal ward, or a child of a person standing “in loco parentis.”  The DOL’s recent guidance focused on the definition of in loco parentis, which has been understood to mean “in place of a parent.” 

Federal regulations define in loco parentis as those with day-to-day responsibilities to care for and financially support a child.  The DOL’s June 22 opinion, however, clarified that the definition is not intended to require that an employee standing in loco parentis both provide day-to-day care and financial support to the child.  Either factor, standing alone, can be enough to qualify that employee for leave if the employee intends to assume parental responsibilities for the child.

This clarification potentially entitles aunts, uncles, grandparents, or same-sex partners who are helping raise their partners’ adopted children, to 12 weeks of unpaid leave to care for a child who is newly adopted, born, or suffering from a serious health condition. 

While employers are entitled to request that an employee provide written documentation verifying an in loco parentis relationship when applying for FMLA leave, employers are cautioned that the DOL’s guidance requires only “a simple statement asserting that the requisite family relationship exists.”  The DOL fails, however, to give any further guidance regarding the requirements for that “simple statement.”  Employers are encouraged to contact legal counsel should any questions arise regarding an employee’s entitlement to FMLA leave based on in loco parentis standing.

DOL’s Office of Labor-Management Standards (“OLMS”) held a public meeting on May 24th in Washington, D.C. regarding DOL’s new proposal.  The purpose of the meeting was to receive comments on the planned rulemaking, and the meeting was considered a “listening session” for DOL.  Following a brief introduction to the issues, the floor was opened to those wishing to provide related comments, which became part of the record for the planned rulemaking.

A number of labor-affiliated attendees at the meeting, including the AFL-CIO and the Mine Workers of America, and spoke in favor of the new regulatory initiative.  On the other side of the aisle, attendees from the business community, such as the U.S. Chamber of Commerce and the National Association of Manufacturers, opined that narrowing section 203(c)’s advice exception would adversely impact attorney-client communications and would hinder the free speech rights of employers.

Speaking on behalf of the U.S. Chamber of Commerce, Michael Eastman, Executive Director of Labor Law Policy, expressed concern that narrowing the advice exception will make it more difficult for employers to obtain legal advice regarding labor relations and the National Labor Relations Act (“NLRA”).  Eastman also stated that the LMRDA is designed to provide disclosure when employers engage third parties to interact with and persuade employees, “because employees may not otherwise know such individuals are agents of the employer,” but that “this is not true in the case of the employer’s supervisors, managers, and officers.” 

The rulemaking process takes some time, and we will let you know as soon as DOL publishes a formal Notice of Proposed Rulemaking, at which time comments on the proposed rule can and should be submitted.

Background

Executive Order 13496 was signed by President Obama on January 30, 2009.  It revokes Executive Order 13201, which required posting of the “Beck Poster” (the Beck Poster advised employees they could not be compelled to join a union or maintain a union membership to keep their jobs, and could restrict the use of their union dues for certain purposes).  The goal of the Order is to ensure federal contracts will not be interrupted by labor unrest.  It is premised on the idea that industrial peace is best achieved by informing workers of their rights under Federal labor law.

After almost a year and a half of rulemaking, the form of the new notice has been finalized.  Hard copies can be obtained from the DOL’s Office of Labor-Management Standards (OLMS) at (202) 693-0123 or by email request at olms-public@dol.gov. 

What The Notice Does 

The new notice informs employees of their rights to organize, join a union, bargain collectively, and engage in other protected concerted activity under the NLRA.  It also gives examples of illegal conduct by employers and unions, and gives contact information for National Labor Relations Board.

Is Your Company Affected?

Companies should carefully scrutinize any federal contracts or subcontracts that are signed or modified after June 21, 2010.  The new posting obligation is triggered by the government agency or department’s inclusion of a notice clause in the government contract.  The  clause may not be included in full, however, so also look for inclusion by reference to “29 CFR Part 471, Appendix A to Subpart A.” 

Exceptions to the posting requirement include federal contracts under $100,000, subcontracts below $10,000, and contracts/subcontracts for work to be performed exclusively outside the territorial U.S.  Also, employers who exclusively employ workers excluded from coverage under the NLRA are not covered.

What Should You Do To Comply?

If the notice clause is present in your contract, the company must conspicuously post the prescribed notice wherever employees covered by the NLRA are engaged in activities related to performance of the contract.  The notice must be posted in all places where notices to employees are customarily posted, both electronically and physically.  Physical postings must be on 11x17 size paper.  For electronic postings, the employer must provide an electronic link to the actual notice.  If a large portion of the company’s workforce is not proficient in English, a translated notice must be provided.  Translations can be obtained from the OLMS.  
 
In addition, the contractor must include provisions requiring posting of the same notice in all subcontracts entered into in connection with the contract.

Penalties and Enforcement

The Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) will conduct evaluations to determine compliance with the new requirement.  It is thus particularly important for any company undergoing audit by the OFCCP to ensure the new notice is posted by June 21, 2010.  The OFCCP has issued a Powerpoint Presentation of guidance to federal contractors.  Employees also may file complaints about noncompliance.

Failure to comply with the notice and posting obligation can result in cancellation, termination or suspension of the government contract, in whole or in part.  The contractor may also be declared ineligible for further government contracts.  In addition, the Secretary of Labor may publish the names of any contractors that have failed to comply. 

WHD recently indicated that it would no longer issue fact-specific opinion letters and that it would instead issue what it refers to as “Administrator’s Interpretation Letters” (“AI”) that will provide general interpretation of wage and hour laws and regulations.  The WHD claims that the AI process will help it “provide meaningful and comprehensive guidance and compliance assistance to the broadest number of employers and employees” and “will be a much more efficient and productive use of resources” than the opinion letter process.

Though we do not doubt WHD’s interest in providing comprehensive guidance and in avoiding inefficient processes, there may be other reasons why WHD has decided to forego the fact-specific opinion letter process.  In several prior posts, we have discussed the fact that the new WHD seems to have made enforcement investigations its top priority.  The elimination of the opinion letter process in favor of the more general (and less helpful) AI process is yet another step in the enforcement direction. 

Over time, the elimination of the opinion letter process will weaken the Portal Act’s safeharbor provision related to reliance on opinion letters.  The move away from fact-specific opinion letters to AIs is also troubling because the AIs will not be based on a specific factual scenario but instead will be based on WHD’s assumptions about a particular industry or position.  For example, the first AI issued by WHD said that mortgage loan officers were not exempt from the FLSA’s overtime requirements.  In doing so, the WHD assumed that all mortgage loan officers performed a set of “typical job duties.”  This is contrary to the WHD’s own regulations, which make clear that wage and hour issues, particularly questions about an employee’s exempt status, are fact-specific and do not turn on job titles alone.  Even within one employer, the courts have long-recognized that employees with the same job title are not necessarily equally exempt or non-exempt because their job duties may be varied. 

WHD claims that it will still accept requests for opinion letters from employers but at the same time has indicated that such requests “will be responded to by providing references to statutes, regulations, interpretations and cases that are relevant . . . but without an analysis of the specific facts presented.”   Such a response would be of little assistance to employers because locating statutes, regulations, and cases that are generally applicable to a particular issue tends to be the easy part of wage and hour compliance.  It is the application of those statutes, regulations, and cases to a particular set of facts that presents challenges to employers.

Many employers believe that including language in a contract stating that a worker is an independent contractor will end the classification inquiry.  The inquiry, however, will extend beyond the contract language since determination as to whether a worker is properly classified as an independent contractor is based on multiple factors.  While written contracts and job titles are certainly important factors to consider when assessing whether an independent contractor has been properly classified, a thorough audit should focus on all the facts and circumstances surrounding the worker’s specific job functions and the relationship between the worker and the company.  Examples of questions that should be asked during an audit include: 

• Does the company have the right to control the means and methods of the work or just the work result?
• How, when and where does the worker perform the work?
• Who provides the equipment?
• To whom does the worker report?
• Does the company have a right to determine which workers can perform the services?
• How is the worker paid?
• How does the worker earn vacation and benefits? 
• Are the services performed by the worker traditionally services that are performed by employees? 

While an employer should always review its job classifications at the outset of a new employment relationship or new job classification, employers should also reexamine such classifications periodically to ensure continued compliance with the various applicable laws.

The Department’s current policy is to construe the “advice exception” broadly to exclude arrangements where the consultant has no direct contact with employees.  This excludes, for instance, situations where the consultant coordinates a campaign to defeat a union organizing effort, so long as the consultant does not contact employees directly.

The Department now views this policy as overly broad.  It intends to publish notice and comment rulemaking to consider a narrower interpretation of the “advice exception” that more closely implements the Department’s new interpretation of the intent of the LMRDA.  The Department’s goal is twofold:  to provide greater labor-management transparency for the public, and more information to workers to ensure effective participation in the workforce. 
 
The Department has announced a Notice of Public Meeting where interested persons can provide comments, to be held May 24, 2010 in Washington, D.C.    Interested participants can register by calling 202-693-0123 or sending an email to olms-public@dol.gov.  At the same time, the Department will seek comments on whether electronic filing should be mandatory for the Form LM-10 and LM-20 reports.

The rulemaking process takes some time, so new regulations are not likely to be finalized for several months.  However, if the Department narrows the “advice exception” as planned, the impact on employers could be significant.  Employers will no longer be able to shield third-party arrangements from reporting simply by isolating consultants from direct employee contact.  A wider range of consulting arrangements will be open to public scrutiny.  Rather than face increased public reporting, employers may elect to perform in-house more of the activities designed to persuade employees as to their bargaining rights.  Employers will have to weigh the benefit of experienced third-party assistance against the cost of public disclosure.

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.

The Department of Labor’s “We Can Help” campaign, is two-fold: (1) It intends to raise awareness of workers’ rights among “vulnerable” classes of workers; and (2) it adds 250 field investigators who will target employers in communities that have a history of labor problems.  The campaign will focus on violations under the Fair Labor Standards Act (“FLSA”) and related federal rules governing minimum wages, overtime payments and hours worked.

These vulnerable classes include low-wage employees, immigrants (regardless of legal status), women in male dominated professions, young workers, subcontractors, and the disabled. The Department will target industries it believes are known for employing vulnerable workers including construction, apparel, manufacturing, restaurants, home health care, hotels and motels, janitorial, food service, and agriculture.

To inform workers of their rights and ways they can report violations to the Department, Solis said the Department will partner with labor and religious organizations across the nation to offer advice and steer workers to federal investigators. Solis said,

“[T]he campaign will inform workers of their rights and encourage them, regardless of their immigration status, to report violations of wage and hour laws on the job.”

The campaign will also involve public service announcements featuring prominent actors and activists, billboards, videos, internet-based resources, and a toll-free hotline. Information will be available in several languages including Spanish, Chinese, and Polish.
 
While this campaign intends to target certain categories of workers and employers, it will undoubtedly raise awareness of wage and hour laws among employees generally.  Thus, all employers should take note of the campaign and audit their compliance with wage and hour laws.  Depending on the situation, either the employer or an independent consultant can conduct the audit, but it is important to have legal counsel involved throughout this process.
 
A thorough audit will address time-keeping policies and procedures, recordkeeping, required workplace postings, and overtime pay requirements.

During a Department investigation, there are several points to keep in mind:

• Get legal counsel involved.
• Assuming the investigator wants to be fair and being responsive to the investigator will likely create a positive tone for the employer’s relationship with the investigator.
• Be sure to gather basic information first: Ask the investigator for documentation proving they are an investigator; ask if a complaint was filed; and determine the scope of the investigation.
• If an investigator seems unprofessional, have a third-party witness involved in interactions with the investigator and be sure to document those interactions soon after they occur.
   

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.