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

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.