Independent Contractor Misclassification Litigation on the Rise: Strategies for Defending, Settling and Minimizing Claims

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Lee Barber
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1 Presenting a live 90-minute webinar with interactive Q&A Independent Contractor Misclassification Litigation on the Rise: Strategies for Defending, Settling and Minimizing Claims WEDNESDAY, DECEMBER 7, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Jonathan A. Keselenko, Partner, Foley Hoag, Boston Dean L. Silverberg, Shareholder, Epstein Becker & Green, New York Douglas Weiner, Of Counsel, Lipman & Plesur, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you that you will receive immediately following the program. For additional information about continuing education, call us at ext. 35.

4 Worker Misclassification: Recent Trends in Independent Contractor Litigation Jonathan A. Keselenko Foley Hoag LLP Boston, MA

5 Importance of Proper Classification Independent contractor status is defined by law, not by the parties agreement. It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors by carefully evaluating the relevant factors. For employees, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. They are issued IRS Form 1099s. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered Foley Hoag LLP. All Rights Reserved. 5

6 Employee v. Independent Contractor Misclassification Why are employees misclassified? - Ignorance or Misapplication of applicable legal standards Merely categorizing someone as an independent contractor does not make them one Paying an individual as a non-employee and issuing a 1099 does not make them an independent contractor - Arrangements that have evolved over time and lost the proper characterization - Individual decision-maker fails to follow company policies or directives - Cost independent contractors are cheaper than employees and some employers are willing to take the risk Foley Hoag LLP. All Rights Reserved. 6

7 Damages and Theories of Recovery Wage and Hour Claims Under the FLSA - Misclassification of independent contractors can jeopardize FLSA compliance, particularly for workers in job classifications that would otherwise be non-exempt. - Typical problem scenario: Employer hires independent contractors, assuming then it does not need to make exemption determination or worry about hourly wage rates or overtime. Workers dissatisfied with perceived long hours, menial duties, or low pay claim misclassification. Commonly-litigated Issues: - Failure to pay minimum wage. - Failure to pay overtime. - Minimum wage and overtime claims often brought simultaneously Foley Hoag LLP. All Rights Reserved. 7

8 Other Misclassification Issues Government Investigations - Many state Attorneys General/Departments of Labor have publicly committed to investigating and curbing misclassification. - Investigations may generate negative publicity and can result in civil citations and hefty fines. - In some states, the AG/DOL may have the option of bringing a court action against non-complying employers. - Criminal penalties available in some states Foley Hoag LLP. All Rights Reserved. 8

9 Other Misclassification Issues Tax Consequences - The IRS has stepped up enforcement of worker misclassification rules. - If a tax violation is found, employers may be assessed fines and penalty fees and be held liable for years of back payroll taxes on misclassified workers. - For employers who offer tax-qualified benefit plans, misclassification of workers who would otherwise be eligible for plan enrollment may jeopardize those plans tax-qualified status Foley Hoag LLP. All Rights Reserved. 9

10 Determination of Contractor Status Remember: Independent contractor status is defined by law, not by the parties agreement. Different Agencies Use Different Tests Internal Revenue Service: Right to Control Test Fair Labor Standards Act: Economic Realities Test National Labor Relations Act: Common Law Agency Test Title VII of the Civil Rights Act of 1964: Combined Test Employment Retirement Income Security Act: Common Law Agency Test Many varying state laws Foley Hoag LLP. All Rights Reserved. 10

11 IRS Test: Overview For federal tax purposes, the usual common law rules are applicable to determine whether a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: - Behavioral Control - Financial Control - The Relationship of the Parties Foley Hoag LLP. All Rights Reserved. 11

12 IRS Test: Behavioral Control Behavioral Control covers facts that show whether the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means Foley Hoag LLP. All Rights Reserved. 12

13 IRS Test: Financial Control Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. This includes: - The extent to which the worker has unreimbursed business expenses - The extent of the worker's investment in the facilities or tools used in performing services - The extent to which the worker makes his or her services available to the relevant market - How the business pays the worker, and - The extent to which the worker can realize a profit or incur a loss Foley Hoag LLP. All Rights Reserved. 13

14 IRS Test: Relationship of the Parties Relationship of the Parties covers facts that show the type of relationship the parties had. This includes: - Written contracts describing the relationship the parties intended to create - Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay - The permanency of the relationship, and - The extent to which services performed by the worker are a key aspect of the regular business of the company Foley Hoag LLP. All Rights Reserved. 14

15 Employment Tests Vary By Statute - FLSA The Fair Labor Standards Act ( FLSA ): The FLSA defines an employee, subject to certain limited exceptions, as any individual employed by an employer. 29 U.S.C. 203(e). The statute also defines employ as to suffer or permit work. 29 U.S.C. 203(g) Foley Hoag LLP. All Rights Reserved. 15

16 Employment Tests Vary By Statute - FLSA Because the FLSA itself lacks a definition of who is an employee, courts have developed their own legal test on the issue the so called economic realities test. (see Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376, 1382 (3d Cir. 1985), cert. denied, 474 U.S. 919 (1985)). Some circuits consider only five factors (leaving out #6 below), while others consider all six factors. (1) The degree of control exercised by the employer over the work performed; (2) The relative investments by the employer and the worker in materials and equipment; (3) The degree to which the worker s opportunity for profit and loss is determined by the employer; (4) The skill and initiative required in performing the job; (5) The permanency of the relationship; and (6) Whether the worker s service is an integral part of the employer s business Foley Hoag LLP. All Rights Reserved. 16

17 Federal & State Government Compliance Efforts - FLSA DOL Misclassification Initiative: The current DOL (under President Obama) has been actively partnering with federal and state agencies to reduce instances of worker misclassification. As part of this initiative, the DOL has targeted certain industries, including the construction, restaurant, and landscaping industries, and identified specific cases for investigation. Aggressive Administrative Interpretation Federal & State MOU s: DOL has signed an MOU with federal and state agencies. IRS and DOL have increased information-sharing. Information sharing with certain states. Incoming administration s position is not clear Foley Hoag LLP. All Rights Reserved. 17

20 Litigation and Settlement Strategies for Worker Misclassification Lawsuits

21 Litigation and Settlement Strategies for Worker Misclassification Lawsuits The issue of worker misclassification is continuing to skyrocket in both public and private litigation. The US Department of Labor has publicized the We Can Help promotional campaign to raise public awareness of workers rights. Many states have targeted worker misclassification as a major problem in need of increased scrutiny and enforcement. 21

22 Litigation and Settlement Strategies for Worker Misclassification Lawsuits Private litigation has even outpaced the increased activity of government enforcement. Challenges to worker classification is at an all time high. Established business models are under intense scrutiny and may leave entire industries vulnerable to current wage hour claims. 22

23 Litigation and Settlement Strategies Work Best When They Work Together Litigation and settlement strategies are most effective when implemented in a complementary manner designed to achieve the ultimate goal of a final resolution of the claim, and closure to a dispute. The most effective litigation strategy uses a settlement component, and the most effective settlement strategy uses litigation to secure the best terms. 23

24 Individual, collective or class action? 1. An individual action is a claim from a single worker. 2. A collective action is a claim under the federal wage-hour law, the Fair Labor Standards Act, where a worker brings an action on behalf of himself and all those similarly situated. Only workers who sign a written Consent to Sue declaration, and file it in court, may join the lawsuit. 3. A class action is a claim by named representatives alleging common violations for numerous absent class members adjudicated in one lawsuit as a single class. 24

25 Strategies To Oppose Class Certification Distinguish named plaintiffs from other workers by position descriptions, duties, location, time periods, or managers Demonstrate employment policies are compliant with law and violations, if any, are aberrations to a lawful policy 25

26 Attack Class Certification 1. Are there more than 40 workers? 2. Are there common questions of law and fact? 3. Is the named plaintiff typical of the class? 26

27 Collective De-certification Defendants Motion For Class Decertification After mailing notice of lawsuit Evaluate claims of those who filed opt-in Consents to Sue Where claims are dissimilar, move to decertify the collective using the same standards for attacking class certification 27

28 Litigation and Settlement Strategies for Worker Misclassification Lawsuits Multidistrict litigation considerations A high profile settlement by an enterprise in California may spawn copy cat cases in New York, Florida or elsewhere. 28

29 Plaintiffs Attorneys Fee Awards The FLSA and many state wage laws are cost shifting statutes. A prevailing party may also recover attorneys fees from an employer. Attorneys fees must be factored into litigation and settlement strategies. When an issue is resolved in a Government investigation, there are no plaintiffs attorneys fees 29

Douglas Weiner Of Counsel weiner@lipmanplesur.com Lipman & Plesur, LLP Phone: (516) 931-0050 Fax: (516) 931-0030 500 N.

30 Douglas Weiner Of Counsel Lipman & Plesur, LLP Phone: (516) Fax: (516) N. Broadway, Suite 105 Jericho, New York DOUGLAS WEINER is Of Counsel to the Labor and Employment practice of Lipman & Plesur, LLP. He has 30 years of federal wage and hour litigation experience. Mr. Weiner: Provides compliance advice and counsel to employers to avoid litigation Defends class actions in federal and state courts Defends FLSA collective actions in arbitrations Defends government contract investigations involving prevailing wage requirements Negotiates settlements of law enforcement and class and collective actions Represents employees in class and collective actions As Senior Trial Attorney for the New York Regional Solicitor's Office of the U.S. Department of Labor (DOL), Mr. Weiner was the lead prosecutor on the Northeast Region's most significant and difficult wage and hour and whistleblower cases, including those pursuant to Sarbanes-Oxley, OSHA and the Fair Labor Standards Act. Mr. Weiner's past experience includes: Litigating federal wage and hour matters, including complex FLSA actions involving misclassified employees, tip credit issues, "off the clock" working time, government contract requirements, inter alia Conducting many trials as first chair prosecutor of actions brought by the U.S. DOL in the U.S. District Courts for the Districts of New York, New Jersey and Puerto Rico Successfully resolving through settlement negotiations hundreds of cases involving a wide variety of wage and hour and whistleblowing issues Guiding Wage - Hour agency officials in their most challenging investigations Guiding OSHA agency officials in their most complex whistleblower investigations Awards and Appointments In 2004, the Solicitor of Labor presented Mr. Weiner with the U.S. DOL's National Award for Excellence in Trial Litigation for being the DOL's "top gun" trial attorney. Additionally, during the last 13 years of Mr. Weiner's federal career, he was awarded the Secretary's Exceptional Achievement Award for excellence in Fair Labor Standards Act litigation nine times, including awards for the following: (i) FLSA litigation in the restaurant and car wash industries; (ii) guiding U.S. DOL officials in managing hundreds of cases; (iii) tip credit and overtime litigation in the catering industry; (iv) off-the-clock work in retail establishments; (v) FLSA litigation involving retaliation and overtime in manufacturing facilities; (vi) FLSA litigation in the wholesale warehouse and delivery industry (Mr. Weiner won the Secretary of Labor v. Harold A. Levinson Associates case after a full trial, and prevailed again in a remand proceeding involving overtime calculations. Both judgments were affirmed by the U.S. Court of Appeals for the Second Circuit. The U.S. Supreme Court denied a Petition for Writ of Certiorari in the case); (vii) Davis Bacon and Related Acts (DBRA) litigation involving prevailing wage rate issues on federally funded construction projects and (viii) FLSA litigation involving misclassified employees in the retail supermarket industry (Mr. Weiner won the Secretary of Labor v. Waldbaum case after a full trial. The judgment was affirmed by the U.S. Court of Appeals for the Second Circuit). 30

31 Worker Misclassification: Best Practices to Limit Liability Presented by Dean L. Silverberg, Esq. Epstein Becker & Green, P.C. (212) December 7, Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com

Presented by Dean L. Silverberg, Esq. Shareholder Epstein Becker & Green, P.C.

34 WHERE S THE BEEF? August 1, 2015 New York Times article. Obama administration has significantly began enforcement on employment laws targeting misclassification. Expansion of overtime coverage and increased efforts to investigate and audit employers. Administration has been working to empower the economically marginal 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 34

35 CONSIDER THESE SIGNIFICANT NUMBERS 30 percent: Department of Labor estimates that up to that percentage of companies misclassify workers On July 15, 2015, in a guidance letter, the DOL has stated that misclassification is increasing in workplaces Renewed guidance had made this one of the DOL s top priority * * * Plaintiffs (your employees) and their attorneys are ready 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 35

36 DOL s Administrative Interpretation - Independent Contractor Misclassification The DOL s July 15, 2015 guidance cautions against placing undue weight on the degree of control a business exercises over a worker, a factor courts often relied heavily on in their analysis New DOL focus: Whether a worker is economically dependent on a single business for his/her livelihood Guidance is merely the DOL s interpretation of the law Under the DOL s interpretation it will be very difficult to establish an independent contractor relationship Need for employers to take a long and detailed look at the composition of their workforce 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 36

37 DOL s Administrative Interpretation - Independent Contractor Misclassification: Keep The Earlier Presentation in Mind The DOL guidance concludes that Most Workers Are Employees Six-factor economic realities test For the DOL, issue is: Whether a worker is economically dependent on the alleged employer, or is really in business for himself or herself Endgame: The DOL is essentially attempting to end, or severely limit, the classification of independent contractors 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 37

38 PREVENTIVE MAINTENANCE: CONDUCT YOUR INTERNAL AUDIT Assess The Workforce and Business Model Scrutinize The Workforce: Critical Eye and Devil s Advocate Check For Inconsistencies Research Industry Standards 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 38

39 CONTRACTOR RELATIONSHIPS Single Consultant Incorporated Consultant Incorporated Entity Groups Staffing Agencies Professional Employer Organizations ( PEOs ) Vertical and Horizontal Employers 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 39

40 Is Your House In Order: Proper Documentation Incorporated Entities (reprise) Agreements with Staffing Agencies and PEOs Independent Business Entities Listing/Website Address Telephone Number Invoicing Payment Independent Contractor/Consultant Agreement (more to follow) 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 40

41 Agreements With Staffing Agencies and PEOs Not The Panacea/Cure-all Creates a Distance and a Perception Spell out Rights and Obligations Interviewing Payrolling Insurance Employee Benefits (Economic Scale) Indemnification Employment vs Dual/Joint Employment Vertical and Horizontal Employment Joint Liability 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 41

42 SPECIAL IMPACT ON EMPLOYEE BENEFIT PLANS Affects maintenance and operation of all types of employee benefit plans Covering workers who are not employees places the tax-favored status of the plan at risk Excluding from participation workers who are eligible employees can similarly place the tax-favored status of the plan at risk, and give rise to claims for benefits 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 42

43 SO WHAT DO YOU DO? Employers not precluded from including plan language to exclude certain groups of individuals from participation Plan Fail-Safe Language Expressly define terms and exclude independent contractors Contractors excluded from plan participation, even if subsequently reclassified as a common-law employee 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 43

44 SO WHAT DO YOU DO? Example of this type of language: If an individual not classified by the Company or a Participating Employer as an Employee is retroactively reclassified as such by any governmental or regulatory authority, such individual shall nonetheless be deemed to have become an Eligible Employee only prospectively on the event of such reclassification (and not retroactively to the date on which he was found to have first become an employee for any other purpose), and then only if he otherwise satisfied the requirements of this Section Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 44

45 IF WORKERS HAVE BEEN MISCLASSIFIED UNDER RETIREMENT PLANS Rev Proc (as amended)(new Rev. Proc in effect beginning 1/1/17): IRS Employee Plans Compliance Resolution System ( EPCRS ) Self Correction Program ( SCP ) Voluntary Correction Program ( VCP ) Audit Cap Correction on audit 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 45

47 Sample Agreement Highlights Commercial Relationship Services vs Duties/Jobs Delineate Fees and Invoicing Procedure Confirm Status Fees and Tax Obligations to Contractor No Benefit Entitlement Handbook Benefit Programs Employee Benefit Plans 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 47

48 SAMPLE AGREEMENT HIGHLIGHTS (CONTINUED) Non Exclusivity Site of Services Control (result rather than means, manner & method) Termination of Services 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 48

49 Reclassifying Contractors As Employees on a Prospective Basis Timing of Reclassification Operational Issues Delineation of Worker Classification Compensating for Past Liability: A Two Edged Sword 2016 Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 49

51 A Final Note: Special Circumstances for New York City and New York State Employers New York City Freelance Isn't Free Act, eff. May 15, 2017 Requires a written contract for freelance work worth at least $800 Addresses the difficulty contractors have in getting paid from those who retain them Applies to freelance worker as an individual who is hired or retained as an independent contractor by a hiring party to provide services in exchange for compensation Covers workers who live in New York City. There is some ambiguity regarding coverage to workers who live outside New York City, but work in the City -RED Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 51

52 In the Matter of Yoga Vida NYC, 10/25/2016, N.Y. Court of Appeals (Special Note: Unemployment Insurance Context) Yoga studio with instructors who were composed of both staff and nonstaff (independent contractors) Record did not demonstrate that the company exercised sufficient direction, supervision and control to support an employment relationship Contractors made their own schedules and determined how they are paid Contractors were paid only if a certain number of students attended No restrictions on contractors working for other studios and they could tell students where else they worked Contractors were not required to attend staff meetings or receive training Epstein Becker & Green, P.C. All Rights Reserved. ebglaw.com 52

Heightened Scrutiny of Worker Classification Avoiding Liability and Penalties Amid Aggressive DOL and IRS Enforcement

Presenting a live 90 minute webinar with interactive Q&A Employee or Independent Contractor? Heightened Scrutiny of Worker Classification Avoiding Liability and Penalties Amid Aggressive DOL and IRS Enforcement