Nauman, Smith, Shissler & Hall, LLP and MANTEC Present: 5 HR Tips to Avoid Department of Labor Citations Presented By: Benjamin C. Dunlap, Jr., Esquire
Overview 1. Proper Classification – Independent Contractor vs. Employee 2. Proper Classification – Exempt vs. Non-Exempt Employee 3. Overtime 4. Time and Attendance 5. Unpaid Internships
#1: Independent Contractor vs. Employee
The Law • Properly classifying employees is the crucial first step in complying with federal and state labor laws. • Federal: All facets of federal labor law including: IRC, FMLA, FLSA, ADA, ADEA, Civil Rights Laws, etc. • State: Unemployment Compensation Law, Workers’ Compensation Act, PHRC, etc.
Why Do Companies Misclassify? • Cost Reduction Strategy • Classifying a traditional employee as an independent contractor can result in savings because employers avoid the obligation to: ▫ Carry unemployment and workers’ compensation insurance ▫ Make Social Security and Medicare tax contributions ▫ Provide health benefits ▫ Pay minimum wage and compensate for overtime ▫ Abide by certain requirements of the anti-discrimination and medical leave laws Note: Contractors may be able to bring “discrimination-like” claims under alternative legal theories
Test • Focus on CONTROL ▫ Although the employee vs. independent contractor test varies across contexts – the fundamental determinative factor is control. • Control = The employer retains the power to determine not only what work should be done by the individual, but also the manner in which the work is completed.
Factors that Affect S tatus Factor Independent Contractor Employee 1. Monitoring Independently completes work Employer directs and supervises work 2. Training Brings skills to the job Employer provides training 3. Benefits Employer provides no benefits Employer provides benefits (health, retirement, etc.) 4. Tools Owns tools Employer furnishes tools 5. Duration of Relationship Discrete project Longstanding/Extended 6. Form of Payment Paid by the job Paid weekly/monthly 7. Hours Sets personal schedule Employer sets hours 8. Exclusivity Free to contract with various Works only for the employer entities / Power to reject work 9. Discipline Employer’s only recourse is Power to discipline like other termination of the agreement employees 10. Taxes No withholding/Form-1099 Withholding, pays employment taxes/Form W-2 11. Written Contract Performing under written Generally, no employment contract that sets forth IC contract relationship
Factors that Affect S tatus - Notes The “exclusivity” factor is critically important The Pennsylvania Unemployment Commission and courts place emphasis on this factor A written agreement, although indicative of the parties’ intent, will not necessarily control where the other factors point strongly in one direction
Penalties for Misclassification • Back pay for minimum wage and overtime violations, as well as statutory damages and attorney’s fees • Loss of liability protections under Pennsylvania’s Workers’ Compensation Law • Criminal charges
Real World Examples • On March 5, 2014, Bimbo Bakeries (makers of Thomas’ English Muffins, Entenmann’s baked goods, etc.) entered into a settlement agreement with its delivery drivers to pay $905,000. The underlying suit alleged that Bimbo misclassified the drivers as independent contractors and failed to pay proper overtime, minimum wage and benefits. • In July of 2011, an Essington auto-parts company was forced to pay more than $256,000 in back wages to misclassified delivery drivers for violating overtime pay laws. • In 2012, Honghua America LLC was forced to pay $687,469 in overtime back wages to employees at its equipment manufacturing facility. Honghua had misclassified the employees as independent contractors in order to avoid paying them overtime. The employees were primarily engaged in the manufacturing of oil and gas exploration and production equipment. • Manufacturer’s Rep Case
Tips – Independent Contractor S tatus • Review how you classify your employees taking into account the above factors • Focus on control – does the individual really have the power to control how and when the work is completed • When in doubt – PUT IT IN WRITING ▫ Although a written contract is not completely determinative, it helps prove the intent of the parties
Independent Contractors as “ S tatutory Employees” • Certain workers who qualify as independent contractors for FLSA purposes may nevertheless be treated as “statutory employees” for certain employment tax purposes.
“ S tatutory Employee” – 4 Categories 1. A driver who distributes beverages (other than m ilk) or m eat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on com m ission. 2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company. 3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. 4. A full-tim e traveling salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other sim ilar establishm ents. The goods sold m ust be m erchandise for resale or supplies for use in the buyer's business operation. The work perform ed for you m ust be the salesperson's principal business activity.
S ocial S ecurity and Medicare Taxes • You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply: 1. The service contract states or implies that substantially all the services are to be performed personally by the contractor. 2. The contractor does not have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation, such as a car or truck). 3. The services are performed on a continuing basis for the same payer.
Federal Unemployment Tax (FUTA) • The test for withholding FUTA tax is the same as that applied in the social security and Medicare context. • BUT : Only category 1 or 4 individuals are treated as employees for FUTA purposes. ▫ Note: Generally, these are the relevant categories for manufacturers
Penalties for Misclassifying • If you misclassify an employee you will be held liable for employment taxes for that worker and possibly subjected to penalties • If this situation arises immediately contact an attorney because they may be able to raise “reasonable basis” arguments on your behalf in order to avoid liability
#2: Exempt vs. Non-Exempt Employees
The Law • Federal: Fair Labor Standards Act • State: Minimum Wage Act
Importance of Proper Classification • Properly classifying employees as exempt or non-exempt is the cornerstone of complying with the FLSA. • Misclassification is one of the most common grounds for lawsuits against employers. • Misclassification is a hot area for DOL enforcement
Non-Exempt – General Rules • “Blue-Collar” workers are non-exempt employees under the FLSA ▫ The employees that “work with their hands” • Examples: Laborers, mechanics, electricians, line workers, etc.
FLS A – Exempt Employees A. Executive B. Administrative C. Professional D. Computer Professionals E. Outside Salespersons • Note: Exem pt status hinges on an em ployee’s job duties not on the paym ent of a salary or job title
FLS A – Exempt Employees • All exempt employees must be paid on a “salary basis.” • Employee must receive a fixed, predetermined, amount of compensation each work week, regardless of the quality or quantity of work performed. • The minimum amount required by the FLSA is $455/ week.
A. Executive • Primary duty = managing the enterprise or a recognized subdivision • Customarily and regularly directs 2+ full-time employees • Power to hire/ fire or participate in decisions • Examples = Managers, department heads, officers
What constitutes “ managing? ” • Interviewing, selecting, and training employees • Setting and adjusting pay and work hours • Maintaining production or sales records • Appraising employee productivity and efficiency • Handling employee complaints and grievances • Disciplining employees • Planning and apportioning work among employees
“ Managing” cont… • Determining the techniques to be used; the type of materials, supplies, machinery, equipment or tools to be used; or the merchandise to be bought, stocked and sold • Providing for the safety and security of employees or property • Planning and controlling the budget • Monitoring or implementing legal compliance measures
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