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2 Employee Versus Independent Contractor: Best Practices For Preventing Worker Misclassification Liability March 31, 2010 Presented By: Paul DeCamp Partner, Jackson Lewis LLP Washington, D.C. Region Office

3 Overview Classifications under fire DOL s increased focus on misclassification Varying legal standards for classifying workers Pending legislation Significant recent court rulings What does it all mean?

4 Classifications Under Fire Drivers Express package delivery Restaurant meal-delivery drivers Home appliance delivery and installation Delivery personnel for home improvement store Uniform delivery Warehousing Instructors for a military consulting company

5 Classifications Under Fire Exotic dancers Cable television installers Restaurant security guards Temporary health care Home health care Janitors Professional and personnel services

6 Classifications Under Fire Real estate agents Taxicab drivers Insurance agents Web content editors for travel web site Construction Child care Meat and poultry processing

7 DOL s Increased Focus According to DOL s FY 2011 budget request: Worker misclassification... generates substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. a joint Labor-Treasury initiative to strengthen and coordinate Federal and State efforts

8 DOL s Increased Focus FY 2011 budget seeks $25 million: $12 million to fund 90 new FTE for Wage and Hour Division to focus on misclassification $11.25 million for Employment and Training Administration for grants to states to increase their capacity to focus on misclassification and reward the States that are most successful at detecting and prosecuting employers that fail to pay their fair share

9 DOL s Increased Focus FY 2011 budget seeks $25 million (cont d): $1.6 million and 10 FTE for the Solicitor s office to pursue misclassification litigation, including multi- State litigation to coordinate enforcement with States and leverage their groundbreaking work $150 thousand for OSHA to modify training to allow inspectors to identify potential employee misclassification and share information with WHD

10 DOL s Increased Focus FY 2011 budget request: Projects number of FY2010 Wage and Hour Division compliance actions to increase more than 20% over 2009 levels Projects number of FY2011 compliance actions to increase more than 41% over FY 2010 levels This goal represents a more than 70% increase in the agency s workload in just two years

11 Varying Legal Standards The FLSA s economic realities test: Extent to which the services rendered are an integral part of the principal s business Permanency of the relationship Amount of the worker s investment in facilities and equipment Nature and degree of control by the principal

12 Varying Legal Standards The FLSA s economic realities test (cont d): Worker s opportunities for profit and loss Amount of initiative, judgment, or foresight in open market competition required for the worker s success Degree of independent business organization and operation United States v. Silk, 331 U.S. 704 (1947) Brock v. Mr. W Fireworks, 814 F.2d 1042 (5th Cir. 1987)

13 Varying Legal Standards The IRC s common law test: Behavioral control Financial control Relationship of the parties

14 Varying Legal Standards The common law test behavioral control: How / when / where work is done What tools or equipment to use What assistants to hire to help with the work Where to purchase supplies and services Training

15 Varying Legal Standards The common law test financial control: Unreimbursed business expenses Investment in facilities used in performing services Extent to which worker s services are available to the relevant market Manner of payment Extent to which worker can realize a profit or loss

16 Varying Legal Standards The common law test relationship of the parties: Written contracts describing relationship Extent to which worker is available to perform services for other similar businesses Benefits, such as insurance, pension, or vacation or sick pay Permanency of the relationship Extent to which worker s services are a key aspect of regular business of the company

17 Varying Legal Standards The common law test: Topic 762 on IRS Publication 1779 IRS Form SS-8 (55-item multi-page questionnaire for obtaining determination of worker status)

18 Varying Legal Standards Under the ABC test, used in about half of the states to determine unemployment eligibility, a worker is an employee unless the company proves three elements: The worker is free from control and direction in performing the services The service is performed outside the usual course of the company s business

19 Varying Legal Standards The ABC test (cont d): The worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed E.g., Mass. G.L. c. 149, 148B

20 Pending Legislation Section 530 of the Revenue Act of 1978 terminates a company s federal employment tax liability attributable to erroneous misclassification of an employee as an independent contractor if safe harbor criteria are met: Reasonable basis for classification, based on judicial precedent or IRS rulings, past IRS audit without assessment, or long-standing practice in significant segment of industry and Consistent treatment of workers in substantially similar positions as independent contractors

21 Pending Legislation When it applies, Section 530 prevents retroactive assessment of employment tax and prevents future assessments as well IRS bears burden of proving that Section 530 does not apply Congress originally enacted Section 530 as a temporary measure to provide time to study and to prepare legislative guidance regarding classification 32 years later, still no guidance

22 Pending Legislation Pending legislation, the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R and S. 2882), would sharply limit Section 530 Future assessments would be allowed Would eliminate safe harbors for reliance on industry practice, judicial opinions, or IRS rulings not addressed to the employment status of the individual or someone with a substantially similar position Would assign the employer the burden of proof

23 Significant Recent Court Rulings Hopkins v. Cornerstone America, 545 F.3d 338 (5th Cir. 2008), cert. denied, 129 S. Ct (2009) Insurance sales leaders, who supervise more junior agents, alleged misclassification under the FLSA Court affirmed summary judgment in workers favor Company controlled hiring, firing, assignment, and promotion of subordinate agents Most sales leaders received majority of their pay based on commissions earned by agents

24 Significant Recent Court Rulings Hopkins (cont d) Summary judgment affirmed (cont d) Company paid for and controlled much of the advertising Company set prices and types of policies Sales leaders could not sell other companies products Sales leaders prevented from acquiring leads except through the company

25 Significant Recent Court Rulings Hopkins (cont d) Summary judgment affirmed (cont d) Company determined the geographic territory of each sales leader and agent Sales leaders not allowed to own or to operate other businesses Sales leaders had no specialized skills Sales leaders business was not portable Sales leaders economically dependent

26 Significant Recent Court Rulings FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009) Company refused to bargain with truck drivers 2-1 decision set aside NLRB s finding of employee status under common law test, with lengthy dissent Court noted evolution of D.C. Circuit s approach to the analysis over the years, with focus shifting away from control and toward the opportunities and risks inherent in entrepreneurialism

27 Significant Recent Court Rulings FedEx Home Delivery (cont d): Company did not control hours of work, breaks, what routes drivers follow, or other details of performance Company did not discipline drivers Drivers provide their own vehicles, which they are free to use for other purposes Drivers can independently incorporate Drivers can hire employees to cover routes Drivers can sell or assign their routes

28 Significant Recent Court Rulings NLRB v. Friendly Cab Co., 512 F.3d 1090 (9th Cir. 2008) Company refused to bargain with taxicab drivers Affirms NLRB s determination of employee status under common law test Company policies dictated details of driving Drivers not allowed to pursue passengers except through company s dispatch process Drivers not allowed to sublease their taxis

29 Significant Recent Court Rulings Bamgbose v. Delta-T Group, Inc., 2010 U.S. Dist. LEXIS (Feb. 8, 2010) Temporary health workers alleged misclassification Company maintains a registry of workers and matches them with employers in need of services Variety of working conditions Workers range from high school diploma to doctorate Court denied conditional certification of opt-in class because of individualized issues bearing on status

30 Significant Recent Court Rulings Walker v. Bankers Life & Casualty Co., 2008 U.S. Dist. LEXIS (July 28, 2008) Insurance agents alleged misclassification under California law Court initially certified class under Rule 23 After discovery, court decertified class based on significant variations in testimony regarding control over sales techniques, work hours, training, and lead generation

31 What Does It All Mean? Virtually any independent contractor classification could come under scrutiny if: The work is part of the company s normal business The company exerts significant control over the manner in which the work is performed, as opposed to the quality of the good or service provided The worker cannot or does not work for other clients or customers The worker cannot subcontract the work

32 Thank you! Paul DeCamp Jackson Lewis LLP Parkridge Boulevard Suite 300 Reston, Virginia (703)

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