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

The Board’s decision likely will be reviewed by an appellate court since the NLRA allows D.R. Horton to appeal Board decisions in the District of Columbia Circuit, or in any circuit where the unfair labor practice arose or where the company does business.  The decision is almost surely to be challenged on grounds that it is at odds with the United States Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), where the Court held that a California law prohibiting class action waivers in consumer arbitration agreements was preempted by the Federal Arbitration Act, meaning that class action waivers in consumer arbitration agreements may be enforceable.  The Board’s decision also is likely to be challenged based on the fact that it was issued by only two Board members, potentially in violation of the Supreme Court’s decision in New Process Steel v. NLRB.

In D. R. Horton, Inc., 357 NLRB No. 184 (January 3, 2012), a plurality of the Board held that D.R. Horton’s class/collective action waivers in its arbitration agreements - which employees were required to sign as a condition of employment - constituted an unfair labor practice under the National Labor Relations Act. 

This case started innocuously enough, as the charging party alleged that he was misclassified as an exempt employee under the FLSA, and initiated arbitration on behalf of himself and similarly situated employees.  After D.R. Horton asserted that arbitration of collective claims was prohibited under his arbitration agreement, the charging party brought a ULP charge against the company.  With only two members participating in the decision (as the third and only other Board member recused himself), the Board held that D.R. Horton engaged in an unfair labor practice by including waivers of class or collective claims in arbitration agreements that its employees were required to sign. 

The basis for the Board’s plurality opinion is Section 7 of the NLRA, which provides employees with the right “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection . . . .”  29 U.S.C. § 157.  “The Board has long held, with uniform judicial approval, that the NLRA protects employees’ ability to join together to pursue workplace grievances, including through litigation,” and “that concerted legal action addressing wages, hours or working conditions is protected by Section 7.”  Thus, D.R. Horton’s mandatory arbitration agreement, which precludes employees from pursuing class or collective claims in any forum (judicial or arbitral) “clearly and expressly bars employees from exercising substantive rights that have long been held protected by Section 7 of the NLRA,” and constitutes an unfair labor practice.

The Board’s decision expressly dealt with the Supreme Court’s ruling in Concepcion, distinguishing that case because it did not involve “the waiver of rights protected by the NLRA or even employment agreements.”  Likewise, the Board noted that Concepcion dealt with a conflict between California state law and federal law (the FAA), which implicated the Supremacy Clause, while the D.R. Horton case addressed alleged conflicts between two federal laws - the NLRA and FAA.  To the extent a conflict does exist between the two federal laws, the Board stated that the FAA would yield to the NLRA and its protections on the right to engage in concerted activity.

While the NLRB usually decides cases involving unionized workforces, this decision based on Section 7 of the NLRA would apply to union and nonunion employees, so long as the employer meets the jurisdictional requirements of the NLRA.

Even the Board’s ruling has some limitations, of which employers should be aware:

• The class waiver prohibition is limited to statutorily defined “employees” under the NLRA, meaning it does not apply to managerial employees or supervisors. 
• Employers may still insist that any arbitration proceedings be on an individual basis “[s]o long as the employer leaves open a judicial forum for class and collective claims.” 
• The Board does acknowledge that a union is still free to collectively bargain away its members’ ability to pursue class or collective claims, just as it may agree to arbitration provisions that waive other actions.  The key is that the union negotiates this, not an employer unilaterally imposing such waivers.

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)

At present, the FLSA contains numerous regulations defining what companions and live-in domestic workers can and cannot do while remaining exempt from the Act’s overtime and minimum wage obligations.  The DOL proposes to revise the regulations in four primary respects:

• Limit the tasks that may be performed by an exempt companion to those of “fellowship and protection.”
  • Examples of such tasks would be watching television, taking walks or engaging in hobbies.
• Clarify the type and amount of “incidental” activities that an exempt companion may provide.
  • Such activities would include making lunch, doing minor household work, and assisting with some “intimate personal care” services such as hair combing and teeth brushing, but may not exceed 20% of the total hours worked.
  • Such activities could no longer include work benefiting other members of the household, such as performing housekeeping or laundry services for the household.
• Limit the exemption to companions or live-in domestic workers who are employed only by the family or household using the services. 
  • Third party employers – like health care staffing agencies – could not take advantage of the exemption, even if the employee is jointly employed by the third party employer and the household/family.
• Change the recordkeeping requirement for live-in domestic workers. 
  • Employers would no longer be able to avoid keeping formal pay records for these workers simply by having an agreement regarding work hours, but instead will be required to keep and maintain accurate records of actual hours worked.

These proposed rule changes reflect the DOL’s belief that in-home care industry has fundamentally changed since the FLSA’s regulations governing “domestic services” were implemented in 1974, and its expectation that in-home care services will grow by 50% in the next decade.  The DOL has emphasized its hope that the new rules would provide a positive social impact for women and minorities, who comprise the majority of in-home care workers.

Notably, the proposed changes would overturn the United States Supreme Court’s 2007 decision in Long Island Care at Home, Ltd. v. Coke and require third party employers, like staffing agencies, to pay companions and home health workers overtime under the FLSA when they work more than forty hours in a week.

We recommend interested employers review the proposed rule and consider participating in the mandatory 60-day notice and comment period that will end on February 27, 2012 by submitting a comment through the federal eRulemaking portal identified by RIN 1235-AA05.

On October 4, 2011, Congressmen Cliff Stearns (Republican, Florida) and Timothy Bishop (Democrat, New York) introduced H.R. 3086, The Fair Wages for Workers with Disabilities Act of 2011 (the “Bill”). The Bill would eliminate the ability of the Secretary of Labor to approve sub-minimum wages to the disabled to any new businesses, and would require the phasing out of existing certificates held by private, government, and non-profit entities within one, two and three years, respectively. Proponents of the Bill assert that employees with disabilities, when provided proper rehabilitation services, training and tools, can be as productive as nondisabled employees and that the ability of employers to pay disabled workers less than the federal minimum wage gives them an incentive to exploit the cheap labor provided by their disabled workers rather than prepare them for integrated employment in the mainstream economy. Some activist groups oppose the Bill, claiming that if enacted many individuals with disabilities who have lower productivity at work will not be able to maintain employment. Businesses that employ disabled workers or are considering doing so should pay particular attention to the Bill. Hunton & Williams LLP’s labor and employment team will continue to monitor the situation and provide updates to HELP blog readers as the Bill moves through the legislative process.

In Wang, a hybrid FLSA collective action and state-law wage and hour class action case involving employees at a single facility, the district court had granted certification of the class action under both Rule 23(b)(2) and 23(b)(3), and the case then proceeded to trial. The Ninth Circuit, after affirming the certification under Rule 23(b)(2), found it unnecessary to consider the certification under 23(b)(3).  Now, on remand, the Ninth Circuit may consider both the Rule 23(b)(2) and 23(b)(3) certifications.  Indeed, if the Ninth Circuit overrules the Rule 23(b)(2) certification, it will be required to address the 23(b)(3) certification.  Although Wal-Mart v. Dukes did not analyze certification under Rule 23(b)(3), it did analyze Rule 23(a)(2), which is a prerequisite to any certification under Rules 23(b)(2) or 23(b)(3).

At a minimum, the Court’s remand is a signal that its decision in Wal-Mart v. Dukes is not limited to multi-facility Title VII cases or “intent” cases, but also applies to wage and hour cases. It also makes clear that Dukes applies to post-trial reviews. The true impact of Wal-Mart v. Dukes on wage and hour class actions remains to be seen, but it is clear that parties must now wrestle with Dukes in contexts going beyond the facts of the Wal-Mart case.

The plaintiff, Natalie Dellinger, alleged that she was offered a job with the defendant, Science Applications International Corp. ("SAIC"), in August 2009.  The offer was contingent on Dellinger passing a drug test, completing a number of forms, and transferring a security clearance from her former employer, CACI, Inc.  Dellinger disclosed on one of the forms that she had filed a FLSA lawsuit pending against CACI.  SAIC subsequently rescinded its job offer, and Dellinger sued SAIC for retaliation.  She claimed that SAIC withdrew its offer based on her revelation that she had engaged in FLSA protected activity, and that such action violated the FLSA's prohibition against retaliation by an employer against any "employee."
 
The U.S. District Court for the Eastern District of Virginia granted SAIC's motion to dismiss, and Dellinger appealed.  In a two-to-one decision, the Fourth Circuit affirmed, noting that the FLSA's anti-retaliation provision was governed by the FLSA's definition of "employee."  The Court declined to extend the FLSA's reach to prospective employees, noting that the statutory term "does not exist in a vacuum" but is in fact defined elsewhere in the statute as "any individual employed by an employer."  By defining "employee" in this way, the Court observed, "Congress was referring to the employer-employee relationship, the regulation of which underlies the act as a whole, and was therefore providing protection to those in an employment relationship with their employer."  Given this limited construction of the statutory text, the Court concluded that it was "not free to broaden the scope of a statute whose scope is defined in plain terms, even when 'morally unacceptable retaliatory conduct' may be involved."
 
Circuit Judge Robert King dissented, arguing that the majority failed to apply the logic of the U.S. Supreme Court's opinion in Robinson v. Shell Oil Co., 519 U.S. 337 (1997), in which the Supreme Court unanimously ruled that the term "employee" in Title VII of the Civil Rights Act of 1964 included former employees.  The majority responded that Robinson involved a claim by a former employee against his former employer, not by an applicant (like Dellinger) who had never worked for the defendant employer.
 
While the Dellinger decision is precedent setting, it is not clear what, if anything, employers (especially those outside of the Fourth Circuit) can take from it.  It goes without saying that an employer takes a sizable risk if it denies employment, or rescinds an employment offer, based on an applicant's prior assertion of federally protected rights.  We will be watching closely whether other Circuit Courts address this issue and, if so, how they rule.

In Pitts v. Terrible Herbst, Inc., Gareth Pitts sued his employer for overtime and minimum wages, asserting a collective action under the Fair Labor Standards Act, a class action under Nevada state wage and hour laws, and a class action for breach of contract.  Before Pitts could move for class certification, the defendant-employer made an offer of judgment pursuant to Fed. R. Civ. P. 68 “to allow judgment to be taken against it in the total amount of $900.00 plus costs and reasonable attorney’s fees.”  Pitts’ claimed damages in the case were only $88.00, but he nonetheless rejected the offer. 

In response, the employer filed a motion to dismiss the case on the grounds that Pitts’ rejection of the offer of judgment mooted the entire case.  The district court disagreed and held that a Rule 68 offer of judgment does not moot a putative class action so long as the class representative can still file a timely motion for class certification.  The district court went on to find that Pitts had failed to timely move for class certification and thus granted the motion to dismiss on other grounds.

On appeal, the Ninth Circuit affirmed the district court’s ruling regarding the effect of a Rule 68 offer of judgment on a yet-to-be-certified class action, holding that “[a] rule allowing a class action to become moot simply because the defendant has sought to buy off the individual private claims of the named plaintiffs before the named plaintiffs have a chance to file for class certification would thus contravene Rule 23’s core concern:  the aggregation of similar, small, but otherwise doomed claims.”  The Court acknowledged that the wage and hour claims at issue in the case were not “inherently transitory” like most claims previously found to be resistant to the mootness doctrine.  Nonetheless, the Court reasoned that “[t]he end result is the same:  a claim transitory by its very nature and one transitory by virtue of the defendant’s litigation strategy share the reality that both claims would evade review.” 

Underlying the Ninth Circuit’s decision was its belief that a “plaintiff who brings a class action presents two separate issues for judicial resolution.  One is the claim on the merits; the other is the claim that he is entitled to represent a class.”  According to the Court, though the offer of judgment may moot the named plaintiff’s claim on the merits, it does nothing to moot the named plaintiff’s right to have a class certified if the requirements of the rules are met.

Though not the focus of this posting, it should be noted that the Ninth Circuit ultimately reversed the district court’s ruling that the named plaintiff had missed the time for filing a motion for certification and thus reinstated the class action.

Could this be true?  After all, Concepcion wasn’t an FLSA or even an employment case.  Two consumers had attempted to bring a class action against a company for fraud and false advertising stemming from the purchase of phone services.  The Supreme Court had snuffed out the consumers’ class claims because they had signed arbitration agreements binding them to bringing actions only in their “individual capacity.”

Now, thanks to a pair of strippers and an operation called Cousin Vinnie’s Back Room, a result has arrived from the first test case since Concepcion of an employer using the class waiver in an arbitration agreement to defend against an FLSA collective action.  The news is good for employers.  In D’Antuono v. Service Road Corp., the federal district court in Connecticut halted a proposed FLSA collective action two months ago because the strippers had signed arbitration agreements containing class waivers.

It wasn’t a knockout blow for employers.  First, the court did not rely on the Concepcion reasoning, per se, to cut short the FLSA collective action.  Concepcion instead served as an influential alternative to the primary reasons.  (The primary reasons were that (a) Connecticut does not have a law rendering class waivers “unconscionable,” and (b) nothing about the class waiver prevented the strippers from vindicating their FLSA rights.)  Second, the court in June 2011 permitted an immediate appeal to the United States Court of Appeals for the Second Circuit (covering Connecticut, New York, and Vermont), so that court will have the final say for the strippers.

But the district court’s opinion is heartening.  The judge, Mark R. Kravtiz, is one of the nation’s most highly regarded, and his 56-page opinion is intellectually robust.  His language strongly suggests that deference to arbitration agreements -- as set forth in the Federal Arbitration Act and discussed in Concepcion -- preempts any argument that that class waivers should be unenforceable.  Among other nuggets, Judge Kravitz wrote:

[T]his Court reads the AT&T Mobility [v. Concepcion] decision as casting significant doubt on virtually any “device or formula” which might be a vehicle for “judicial hostility toward arbitration.”

Tough fights lay ahead as courts throughout the country will grapple with whether Concepcion means employers can exempt themselves from FLSA collective actions (and state wage-hour actions) through an arbitration agreement.  With the help of exotic dancers seeking more than the greenbacks in their garters, the first court to weigh in has come close to saying “yes.”

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.

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.

According to a well-reasoned opinion issued in August 2010 by the United States Court of Appeals for the Seventh Circuit, such a declaration can make an astounding difference in the damages payout should the employer be liable on the exemption question.  The court in Urnikis-Negro v. American Family Property Servs. focused on this nagging question:  When determining how much overtime pay the employer owes the employee after losing a misclassification case, what is the regular hourly rate?

Courts have been split on this issue for years.  Assume that an employee earns a weekly salary of $1,000 and works 50 hours during some weeks.  Some courts have held that the regular hourly rate is $1,000 divided by 40 − the trigger point for overtime − which is $25.  Those courts then have held that damages for the week are calculated by multiplying 1½ by $25 for the 10 overtime hours.  That’s $375.

Other courts have held that the regular hourly rate is $1,000 divided by 50 − the actual number of hours worked − which is $20.  Next, because the employee already has been paid his regular hourly rate for each of the 50 hours he worked, the overtime owed is calculated by multiplying ½ (not 1½) by $20 for the 10 overtime hours.  That’s $100.

The difference is mammoth when defending a class action in which each plaintiff has worked a significant number of overtime hours.

The Urnikis-Negro court adopted the results of those courts that use the large divisor, which is favorable for employers.  But it rejected the reasoning of all courts that have tackled this issue.  Courts previously have made their decisions based on an interpretation of a Department of Labor regulation concerning the “fluctuating workweek” method for determining whether an employee has worked compensable overtime hours.  The Urnikis-Negro court ruled that the DOL regulation has no bearing on the analysis in misclassification cases.

The Urnikis-Negro court instead relied upon the simple logic of a 1942 Supreme Court case, which held that the regular rate is to be based on what the parties have agreed the employee will be paid for the hours he actually works.  In other words, the question becomes:  For what number of hours was the employee’s fixed weekly wage intended to compensate him?

To better position themselves, employers should commit this to writing early in the employment relationship, even through an offer letter.  Something along these lines will assist:  “Your hours in this position may fluctuate, and each weekly portion of your $52,000 salary will compensate you for all hours you work during that week.”  This will greatly undermine any argument by the employee that the salary was intended to compensate him for 40 hours weekly.

Given that Urnikis-Negro contains the most detailed analysis of this issue to emerge from a U.S. Court of Appeals, its guidance is recommended for consideration.

Currently, the Internal Revenue Code provides a safeharbor for employers to avoid penalties or at least suffer lighter penalties when they misclassify employees as independent contractors as long as there is a reasonable basis for the classification.  And, given the IRS’s current moratorium on issuing guidance on worker classification issues, employers can almost always provide a rationale for their classification decision because the absence of substantial guidance allows employers to be creative in developing their reasonable basis defense.  According to Senator Kerry’s website, the proposed legislation will reduce the use of the safeharbor by:

• Ending the moratorium on IRS guidance on worker classification issues and requiring the Secretary of Treasury to issue prospective guidance;
• Amending the tax code provisions to clarify that the reduced penalty is not available where employers fail to comply with IRS/Treasury guidance;
• Requiring business owners who use independent contractors to provide each contractor a written statement regarding the contractor’s tax obligations, the labor and employment law protections that do not apply to independent contractors, and the right of the contractor to seek a status determination from the IRS; and
• Requiring the Secretary of Treasury to issue annual reports on worker misclassification.

The White House quickly gave its strong endorsement to the proposed legislation.  According to Vice President Biden, “[S]topping worker misclassification is a priority for the President’s Middle Class Task Force. . . . The legislation is timely, as misclassification is an increasing problem, one that puts employers who properly classify their workers at a disadvantage in the marketplace and costs the government billions of dollars in unpaid taxes.  I urge the Congress to stand up for workers and create a level playing field for law-abiding businesses by supporting this bill.” 

The proposal of The Fair Playing Field Act of 2010, along with the White House’s heightened interest in misclassification issues, underscores the need for employers to closely examine their independent contractor relationships and, to the extent necessary, take corrective action now before they find themselves the subject of a government investigation or a private lawsuit. 

The lawsuit was filed in 2007 under the Fair Labor Standards Act on behalf of approximately 3,000 current and former employees.  The Court conditionally certified the class, and approximately 330 employees opted in to the class.  After the close of discovery, Farmers Pride sought decertification of the class, arguing that the variations in compensation practices and pre- and post-shift activities during the limitations period, in addition to the inconsistencies in class member testimony on those issues, made collective action treatment unworkable and unfair to Farmers Pride.  Specifically, under the compensation system applicable to most class members, the amount of additional time that Farmers Pride paid employees for donning- and doffing-related activities varied widely by employees’ shift and department and over time.   

Notwithstanding the substantial briefing offered by the parties, the Court decided to take a closer look at the evidence and held a two-day evidentiary hearing where each side was given a full day to present witnesses and exhibits focused on the decertification issue.  The Court’s opinion granting Farmers Pride’s decertification motion relied on both the evidentiary hearing testimony and the other evidence submitted by the parties during the briefing process.

In ordering decertification, the Court found that there was no uniform, class-wide method for Plaintiffs to prove that Farmers Pride’s compensation system was uniformly inadequate:

“The evidence submitted indicated that there may be some hourly production workers who have legitimate claims of undercompensation for time spent donning and doffing, and some who may not; the evidence does not demonstrate, however, that the question of undercompensation can be answered in [a] manner common to all plaintiffs.”

The Court thus found that the absence of common proof made proceeding collectively unfair because, if tried on a collective basis, a verdict for the plaintiffs would make the company liable to the entire class even though it may have fully paid many members of the class.  

The Court also gave serious weight to the fact that the class members offered discovery responses and deposition testimony that were “plagued with inconsistencies,” which in turn showed “the importance of cross-examination of each plaintiff” as opposed to allowing the Plaintiffs to prove their claim through supposedly “representative” testimony.

In decertifying the class, the Court noted that, in light of the remedial purposes of the FLSA, it would give Plaintiffs two weeks to propose an alternative class consisting of a “more precisely defined and smaller group,” but only “if plaintiffs can establish that the record warrants a collective action as to that group.”  However, the Court was clear that any such proposal must take into account the Court’s findings on the evidence before it and must credit the evidence and testimony presented by defendant, which the Court considered credible and reliable.   

Hunton & Williams attorneys Michael Mueller and Ryan Glasgow, along with Jill Welch from Barley Snyder, represent Farmers Pride in the federal action, as well as a companion case pending in Pennsylvania state court.

In Kirleis, Alyson J. Kirleis filed a lawsuit against Dickie, McCamey & Chilcote. P.C., the law firm in which she was a shareholder, claiming sex discrimination, sexual harassment, unequal pay, and retaliation under both federal and state anti-discrimination laws.  Among other things, Kirleis alleged that she received less pay than her male counterparts and that discriminatory and harassing comments were made to her during her employment with the firm.  Among other allegations, Kirleis alleged that she was informed that she should give up her shareholder status to spend more time with her children.  She also claimed that she was told that “gals” in the firm should do lower level legal tasks, while the male lawyers took such cases to trial. The U.S. District Court for the Western District of Pennsylvania granted summary judgment to the law firm, based on the threshold question of whether Kirleis was an “employee” protected under the federal and state laws, or an “employer” without such protections. The district court held that certain factors of Kirleis’s shareholder position disqualified her from protection as an “employee” as defined by the federal and state laws, including Title VII and the FLSA.

In making its decision, the district court relied upon the six factors set out in a 2003 U.S. Supreme Court decision, Clackamas Gastroenterology Associates, P.C. v. Wells, which the Court used to determine whether a shareholder-director of a professional corporation is an employee or employer for application of federal anti-discrimination laws.  The six factors were based on a standard defined by the Equal Employment Opportunity Commission and focused on the amount of control the employing entity had over the shareholder-directors at issue. 

In affirming the district court’s decision, the Third Circuit agreed with the district court’s application of the Clackamas decision.  In particular the Court held that, because Kirleis was entitled to a percentage of the law firm’s profits and losses, could not be terminated from employment for cause without a three-fourths majority vote of the Board of Directors, and participated in firm governance, she was not a “mere employee” of the firm and therefore did not qualify for protection under federal and state anti-discrimination laws.

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 Jirak v. Abbott Laboratories, Inc., No. 07-3626 (N.D. Ill. June 10, 2010), Abbott Laboratories claimed that its pharmaceutical sales representatives qualified for both the outside sales and the administrative exemptions under the FLSA.  The U.S. District Court for the Northern District of Illinois, however, disagreed. 

The sales representatives’ duties involved calling on physicians to educate them about Abbott Laboratories’ products and to gain a commitment that the physician would write patient prescriptions for these products in medically appropriate circumstances. The Court held that the Abbott’s Laboratories’ sales representatives did not qualify for the outside sales exemption because their activities did not result in a sale or order, such as a contract or enforceable commitment by the physician to write prescriptions, to satisfy the “making sales” requirement of the exemption. Instead, the judge found that the sales representatives’ activities were more akin to promotional activities that stimulated sales for another department of Abbott Laboratories.

The Court also held that Abbott Laboratories’ sales representatives did not qualify for the administrative exemption because they did not exercise sufficient discretion and independent judgment in the performance of their jobs.  Distinguishing other cases in which federal courts determined that pharmaceutical sales representatives qualified for the administrative exemption, based on such details as a sales representative’s own testimony regarding the autonomy of the position, the Court found that Abbott Laboratories’ sales representatives merely applied “well-established techniques and procedures” by calling on the doctors on their call lists with the expected frequency to deliver Abbott Laboratories’ designated sales message.

The sales representative job remains controversial and may qualify for either administrative or outside sales exemptions, and the determinations by the various courts have turned on fact specific findings in each case, the duties of the representative, the performance of those duties day-to-day and the testimony presented in each case. The Abbott Laboratories decision departs from holdings in the Third Circuit and other District Court decisions. Stay tuned for further developments on this topic because decisions are pending in both the Ninth and the Second Circuits on the exemption status of other pharmaceutical industry sales representatives.

The structure of an employee’s job is crucial to a determination of whether it qualifies for an exemption under the FLSA.  As this federal court decision adds to the various conflicting decisions across the country, prudent employers should review the job descriptions and the actual job duties of their sales representatives to ensure the highest possible chance that a court would find an exemption is applicable.

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.

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.

Officials in several states, as well as the U.S. Department of Labor, however, are now taking a very close look at employers whose internship programs may violate minimum wage laws.  The influx of internships in recent years, combined with layoffs and downsizing, has made regulators suspicious of employers seeking to illegally use internships for free labor. Consequently, employers should be sure to adhere to local and federal wage and hour laws when administering internship programs.

The federal Department of Labor looks to six criteria, as outlined in Walling v. Portland Terminal Co., 330 U.S. 148 (1947), to determine whether interns are exempt from minimum wage coverage under the Fair Labor Standards Act (“FLSA”).  None of the individual criteria are dispositive, and they should be viewed together to reflect the totality of the circumstances.

Private employers seeking to maintain unpaid internship programs in which participants do not qualify as employees under the FLSA, but do receive training and experience relevant to their studies or career goals, should strive to adhere to the following suggestions: 

• The program should provide interns with training similar to what they would learn in school, only with the benefit of hands-on experience.
• The main beneficiaries of an unpaid internship should the interns, who must derive more than a minimal benefit from their exposure to the workings of the business.  Where the unpaid intern is the party receiving the program’s predominant benefit, there is generally no employment relationship.
• Interns should not displace employees; rather, they should work under employees’ close supervision in order to acquire and learn skills useful in the employer’s field.  Close supervision—rather than independent work that would typically be performed by employees—requires substantial investment on the part of the employer and may offset any economic advantage conferred upon the employer.
• If the intern performs the main work of the business, be sure to keep detailed records of regular employees’ time spent supervising and training interns.  Employers who can demonstrate that they suffered impediments like the consumption of a supervisor’s time in educating interns, even if the company ultimately experienced an economic advantage from training the interns, are more likely to prove that it was the unpaid intern who benefitted most from the valuable on-the-job experience.
• Though employers may use internship programs to assess potential employees, they should make it sufficiently clear to interns as well as regular employees that interns are not entitled to positions with the company at the conclusion of the internship.
• Be sure that interns understand they are not entitled to wages.  Reasonable stipends are not wages, and do not create an employment relationship.

Section 4207 of the new law, titled “Reasonable Break Time for Nursing Mothers,” is effective immediately and requires that employers provide, for one year after a child’s birth, reasonable break time whenever a nursing employee has a need to express milk.  Though employers are not required to pay employees during this break time, “reasonable break time” is not defined in the amendment, nor is there any specified limit on the number of breaks that can be taken per day.

Employers must also provide nursing mothers with a place in which to express milk that is shielded from view and free from intrusion by coworkers and the public.  The amendment explicitly states that the provided place cannot be a bathroom. 

While the new amendment applies to all employers covered by the FLSA, there is a possible exemption for businesses with less than 50 employees.  If such small businesses can show that providing nursing breaks or a designated place to express milk would impose an “undue hardship,” such as causing significant difficulty or expense when considered in relation to the size, financial resources, nature or structure of the employer’s business, the new requirements do not apply. 

Although many states already have statutes requiring breaks for nursing mothers, this is the first federal law to impose such a requirement.  However, the amendment does provide that if a state law has greater protections for nursing mothers than the new federal law, then employers should continue to follow the state law requirements.

Until the Department of Labor issues regulations regarding the amendment, employers should aim to avoid potential claims under the new federal law.  Employers that have not already done so should consider what private locations they can make available to nursing mothers and should also communicate with employees who request nursing breaks about the expected duration and frequency of such breaks in order to prevent misunderstandings and problems.

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.
   

Various states have enacted wage and hour laws that are very similar to the FLSA, yet allow for class—as opposed to collective—treatment.  The FLSA limits class members to those who “opt in” to the class, while under Rule 23 all eligible class members are part of the suit unless they “opt out” of the class.  If a plaintiff initiates suit alleging minimum wage violations, for example, under both the FLSA and a state law allowing for class treatment, the non-plaintiff employees potentially could receive two seemingly conflicting notices, one requiring them to opt in to pursue claims and the other requiring them to opt out.  The mechanics of such an arrangement also can be tricky for courts and employers.

In both Parker and Ervin, the district courts found an incompatibility between the two types of actions, with the result that no class was certified to pursue the state law claims.  However, there is a split of authority on this issue, and it is hotly contested.  The Secretary of Labor and others have filed amicus briefs in each case.  The Secretary of Labor’s position is that the two types of actions are compatible. 

Employers should be aware that, even though the FLSA allows only for collective actions, they may nonetheless face class challenges to their wage and hour practices under operable state law.  The difference is more than technical.  Because a class action automatically encompasses claims of all members unless they affirmatively opt out, a class action typically brings about much greater exposure.  The outcomes of the Parker and Ervin cases, therefore, could have a substantial impact for employers.

In affirming summary judgment for Johnson & Johnson, the Court relied heavily on the deposition testimony of the plaintiff that she worked unsupervised 95% of the time, that it was up to her to run her territory as she wished and that she was the expert on her own territory for the development of a strategic plan for higher sales.  Her attorney tried to disavow all such testimony at oral argument as “mere puffery.”

As the court observed, certain facts weighed against the finding of exempt status, including the fact that plaintiff worked from a list of “target doctors” the company provided.  She also  was expected to complete an average of ten visits per day and to  visit every doctor on her target list at least once a quarter.  She was directed to “extol the benefit of the pharmaceutical drug she promoted using materials pre-approved by the company and she was prohibited from using other materials that were not approved.”

Nevertheless, the Third Circuit relied on Smith’s deposition testimony to find that her primary duty in this “non manual position” required her to form a strategic plan to maximize sales, and a description of her duties that demonstrated  a “high level of planning and foresight.”   Her testimony also supported a finding that she engaged in the development of a strategic plan” that guided the execution of her remaining duties.  29 CFR § 541.203(e).  Based on that testimony, the court found she was an exempt administrative employee. Turning to the question of plaintiff’s “exercise of discretion and independent judgment with respect to matters of significance,” the next element of the administrative exemption, the court found that her testimony showed she executed “nearly all of her duties without direct oversight.”  She developed her own schedule, was free to apply the budget for expenses the company gave her at her discretion and was “the expert” on her territory.

The court declined to address Johnson & Johnson’s cross-appeal of the district court’s holding that the FLSA’s  outside sales exemption was not applicable to pharmaceutical sales representatives.  As the court observed, that issue is pending in the Second and Ninth Circuits in cases involving Novartis, AstraZeneca, and Orth-McNeil, among others. In some of those cases, the lower courts found the outside sales exemption applied, while in others, the district courts found the exemption did not apply.  The Ninth Circuit appeals also involve the scope of the outside sales exemption under California’s wage and hour statute.

In addition to the significance that the Third Circuit’s decision has for pharmaceutical companies currently facing FLSA lawsuits, the court’s central reliance on the deposition testimony of this plaintiff provides an important subtext for this decision.  The court disapproved of the plaintiff’s counsel’s attempt to disavow her testimony as puffery.  The court cited to the “sham affidavit” doctrine under which a court will not consider an affidavit of a deponent who tries to change testimony previously given in a deposition by submitting a “clarifying” affidavit or declaration.  While the plaintiff had not submitted such an actual affidavit, the Third Circuit applied the principle behind that doctrine and refused to allow plaintiff to retreat from  testimony of  which she surely “understood the significance” in the context of her case.

Under California law, one of the requirements for exempt status is the payment of a fixed, predetermined salary to employees for any day in which the employees perform any work.  In short, unlike non-exempt employees, there cannot be an hour-for-hour reduction in pay because the exempt employee works less than his/her typical hours on a particular day.  The Opinion Letter states that while an employer cannot reduce an employee’s pay for working a partial day, the employer can implement policies permitting the employer to reduce vacation or sick leave hours an employee had accrued to correspond with the amount of hours the employee took off during the partial day, without endangering the employee’s exempt status. 

This Opinion Letter potentially has financial significance for California employers since employers who decide to provide vacation to employees must comply with certain requirements.  California law generally treats accrued vacation as deferred wages.  Accordingly, employers cannot have a use-it-or-lose-it vacation policy and must pay out any accrued, unused vacation at the termination of an employment relationship.  If an employer is permitted to reduce an employee’s vacation hours for partial-day absences, then this could potentially affect how much the employer needs to pay the employee at termination.

While DLSE Opinion Letters are not binding precedent for California courts, and courts do not give deference to DLSE Opinion Letters, the courts do recognize their persuasive value.  We will have to wait and see if the California courts adopt the DLSE’s latest position.

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.
 

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.