Managing Misclassification Mysteries: A Refresher on Classifying Employees & Independent Contractors

Transcription

1 Managing Misclassification Mysteries: A Refresher on Classifying Employees & Independent Contractors April 28, 2016

2 Today s elunch Presenters Monique Ngo-Bonnici Labor & Employment Practice Partner Los Angeles mbonnici@winston.com Jason Campbell Labor & Employment Practice Associate Los Angeles jscampbell@winston.com

3 Why It Matters Potential Consequences to Misclassification Liability for employment taxes and penalties Liability to employee who was misclassified Administrative agencies and the IRS closely scrutinized independent contractor relationships Challenges can arise in many forms, including: Filings for unemployment benefits Claims for unpaid wages Claims for workers compensation Charges of employment discrimination Investigations by the IRS and Employment Development Department (EDD) to audit wage payments, workers compensation coverage and Unemployment Insurance Fund contributions 3

4 FLSA Overtime Exemptions

5 Misclassification With few exceptions, to be exempt an employee must: a) be paid at least $455 per week, or $23,660 annually (for now), and b) be paid on a salary basis, and also c) perform exempt job duties Most employees must meet all of these tests to be exempt 5

6 Salary Basis Test Guaranteed minimum amount of money employee can count on receiving for any work week s/he performs any work In most cases, employees must earn at least twice $455 per week to qualify for an exemption from overtime Salary basis is not affected by whether pay is expressed in hourly or salaried terms 6

7 The Duties Tests Exemptions are limited to employees who perform relatively high-level work Job titles or position descriptions are of limited usefulness in the determination Actual job tasks must be evaluated along with how the particular job tasks fit into the employer s overall operations. Three typical categories of exempt job duties: Executive Professional Administrative 7

8 The Professional Exemption Learned Professionals Predominantly intellectual work that requires specialized education and involves the exercise of discretion and judgment Must have education beyond high school, and usually beyond college, in fields that are distinguished from (more academic than) the mechanical arts or skilled trades Creative Professionals Work requires invention, imagination, originality or talent Work contributes a unique interpretation or analysis 8

9 The Executive Exemption Job duties are exempt executive job duties if the employee Has duties and responsibilities involving the management of the enterprise Regularly supervises two or more other employees Primarily engages in: Interviewing and training employees Setting rates of pay and hours of work Maintaining production or sales records (beyond clerical) Appraising productivity Handling employee grievances Disciplining employees Determining work techniques Planning budgets for work Apportioning work among employees Has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments) 9

10 The Administrative Exemption Administrative job duties are: Office or non-manual work, which is Directly related to management or general business operations of the employer or the employer s customers A primary component of which involves the exercise of independent judgment and discretion about Matters of significance Designed for relatively high-level employees whose main job is to keep the business running Work must be office or non-manual, and must be for matters of significance Typically involves the exercise of discretion and judgment, with the authority to make independent decisions on matters which affect the business as a whole or a significant part of it 10

11 Analyzing the Administrative Exemption Schaefer-LaRose v. Eli Lilly & Co., 679 F.3d 560 (7th Cir. 2012) Pharmaceutical sales representatives alleged that they were misclassified as exempt; employer contended that the employees fell under the administrative exemption and the outside sales exemption Beauford v. ActionLink, LLC, 781 F.3d 396 (8th Cir. 2015) Brand advocate employees alleged they were misclassified as exempt; employer contended employees were covered by the outside salesman exemption and/or the administrative sales exemption Kuzinski v. Schering Corp., 801 F. Supp. 2d 20, 30 (D. Conn. 2011) Pharmaceutical sales representatives alleged they were misclassified as exempt from overtime under the FLSA Ahle v. Veracity Research Co., 738 F. Supp. 2d 896 (D. Minn. 2010) Private investigators alleged they were misclassified as exempt and their employer violated FLSA 11

12 Other Exemptions Computer professional making not less than $27.63 per hour Outside sales Wong v. HSBC Mortgage Corp. (USA), 749 F. Supp. 2d 1009 (N.D. Cal. 2010) Tracy v. NVR, Inc., 599 F. Supp. 2d 359 (W.D.N.Y. 2009) Commissioned inside sales employee Employed in retail or service establishment Earns 1.5 times the applicable minimum wage More than half of total earnings consist of commissions 12

13 Misclassification Settlements Halliburton to pay $18.3 million to 1,016 employees nationwide for incorrectly categorizing employees in 28 job positions as exempt (9/25/15) TD Bank to pay $9.9 million to settle class action alleging bank misclassified assistant store managers as exempt (8/22/14) Enterprise to pay $7.8 million to settle class action that company misclassified former assistant managers as exempt (8/29/13) Wal-Mart to pay $4.83 million in back wages and damages to more than 4,500 employees nationwide as a result of misclassifying workers as exempt (5/1/12) Levi Strauss & Co. to pay over $1 million in overtime back wages to 596 employees nationwide for misclassification of workers as exempt (3/29/11) Beck Disaster Recovery Inc. to pay $754,578 in overtime back wages to 89 current and former temporary field supervisors after who were misclassified as exempt (3/9/11) 13

14 State Exemption Laws May Differ

15 California Minimum salary must be twice state minimum wage, which is currently $800/week Primary Duty means more than 50% of the employee s time is actually spent engaging in those duties No highly compensated employees exemption Inside sales only exempts from overtime, is not available for all industries Exempt computer professionals must be paid at least a salary of $87,185.14/year Heyen v. Safeway, Inc., 216 Cal. App. 4 th 795 (2013) Multi-tasking exempt and non-exempt work does not equal exempt work 15

16 California: Discretion and Independent Judgment Executive, Administrative, and Professional exemptions all require the employee to customarily and regularly exercise discretion and independent judgment What is it? Choosing the course rather than following it 16

17 New York New York has not affirmatively recognized the highly compensated employee exemption; unclear whether courts would recognize this exemption Minimum salary required to satisfy the salary basis test is $675/week 17

18 Illinois Executive Exemption: Employee need not have the authority to hire and fire Additional requirement that such employees must exercise discretion and independent judgment. No exemption for highly compensated employees 18

19 Independent Contractors

20 Independent Contractor Tests IRS Right to Control 20 Factor Test (used for federal tax purposes) Common law Right to Control Test (used for ERISA and federal discrimination law purposes) Modified Treasury version of the common law Right to Control Test (used for Affordable Care Act purposes) Economic Realities Test (used for Fair Labor Standards Act purposes) The multitude of varying state law tests used for state wage and hour laws, workers compensation, and unemployment 21

21 DOL Wage and Hour Division: Administrative Guidance Released July 15, 2015 Part of DOL s recent efforts to curtail alleged misclassification Intended to provide guidance on how agency interprets the law as it applies generally Unknown as to the degree of deference it will be given in courts, but clearly outlines FLSA s definition of employ as to suffer or permit to work was designed to ensure as broad of a scope of statutory coverage as possible Encourages use of the economic realities test 22

22 Economic Realities Test Factors: Extent to which the work performed is an integral part of the employer s business Worker s opportunity for profit or loss depending on his or her managerial skill Extent of the relative investments of the employer and the worker Whether the work performed requires special skills and initiative Permanency of the relationship Degree of control exercised or retained by the employer 23

23 Applying the Economic Realities Test Meyer v. U.S. Tennis Ass'n, 607 F. App x 121 (2d Cir. 2015) US open tennis umpires filed suit to recover unpaid overtime Gayle v. Harry s Nurses Registry, Inc., 594 F. App x 714 (2d Cir. 2014), cert. denied, 135 S. Ct (2015) Nurses were employees using economic realities test Browning v. Ceva Freight, LLC, 885 F. Supp. 2d 590 (E.D.N.Y. 2012) Delivery drivers brought action against delivery service providers McFeeley v. Jackson St. Entm t, LLC, 47 F. Supp. 3d 260 (D. Md. 2014) Exotic dancers brought suit against owner and operator of dance club 24

24 Independent Contractor Settlements ViaSource Solutions, a call-center provider, to pay $150K in back wages for misclassifying call-center agents as independent contractors (4/14/16) Intelliconnect, a telemarketing company, to pay $280K for misclassifying telemarketers as independent contractors (2/5/15) General Interior Systems Inc. to pay $380K in back wages to more than 300 drywall installers misclassified as independent contractors (12/4/14) Norwood Commercial Contractors Inc to pay nearly $400K in back wages and liquidated damages to workers for misclassifying workers as independent contractors (12/9/13) 25

25 Other Independent Contractor Tests

26 California Control test : whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. Also: Whether the one performing services is engaged in a distinct occupation or business The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision The skill required in the particular occupation Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work The length of time for which the services are to be performed The method of payment, whether by the time or by the job Whether or not the work is a part of the regular business of the principal Whether or not the parties believe they are creating the relationship of employeremployee 27

27 California Cases Uber cases Plaintiffs alleged they were employees, not independent contractors. The trial court in O Connor certified the class and their claim for converted tips. O Connor was set for trial in June in the Northern District of California On April 22, 2016, Uber settled the California and Massachusetts class action suits covering approximately 385,000 drivers for up to $100 million ($84 million is guaranteed, and the remainder is contingent on Uber s future value). The judge has yet to approve the settlement FedEx case Class action asserting drivers were misclassified as independent contractors. The First Circuit denied plaintiffs request for consideration of the trial court s finding that one prong of the three-part independent contractor status test under Massachusetts state law was preempted by federal law On April 12, 2016, a California federal judge conditionally approved a $226 million settlement between FedEx and 2,016 drivers 28

28 D.C. Circuit Extent of control by the employer Whether or not the individual is engaged in a distinct occupation or business Whether the work is usually done under the direction of the employer or by a specialist without supervision Skill required in the occupation Whether the employer or individual supplies instrumentalities, tools, and place of work Length of time for which individual is employed Method of payment Whether or not work is part of the regular business of the employer Whether or not the parties believe they are creating an independent contractor relationship Whether the principal is or is not in the business 29

29 NLRB Board rejected D.C. Circuit Court of Appeals decision articulating a standard for determining whether an employee is an independent contractor or employee under federal labor law Board added an eleventh factor to the D.C. Circuit s ten factor list that devalues the entrepreneurial opportunity factor that D.C. Circuit held was of particular importance: NEW factor: Whether the evidence tends to show that the individual is, in fact, rendering services as an independent business 30

30 Tests May Differ Illinois ABC Test In construction-related industries, an individual performing services for a contractor is considered to be an employee unless it is shown: The individual has been and will continue to be free from control or direction over the performance of service The service performed is outside the scope of the usual course of services performed by the contractor The individual is engaged in an independently established trade or business or the individual is deemed a legitimate sole proprietor or partnership under subsection C of Section 185/10 31

31 Best Practices Assume individuals are non-exempt employees until you can demonstrate otherwise Audit exemptions: Regularly audit workers practices on the job to make sure exemption status remains appropriate Audit worker activities: Review independent contractor s activities to ensure they align with what is outlined in independent contractor agreements and align with a true independent contractor relationship Evaluate worker independence: Evaluate whether the worker is genuinely in business for himself, or economically dependent on the employer Revisit contractor agreements: E.g. address duration of project, expected outcome, that independent contractors are responsible for providing their own facilities, tools, and other equipment, and that there is going to be little or no oversight of work When in doubt, classify workers as non-exempt employees! 32

32 Thank You. Monique Ngo-Bonnici Labor & Employment Practice Partner Los Angeles Jason Campbell Labor & Employment Practice Associate Los Angeles