1 Are You My Employee? Proper Classification of Exempt Employees and Independent Contractors Elizabeth Wells Skaggs and Richard A. Hooker January 19, 2012 Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright 2012, Varnum LLP. All rights reserved.
2 The Law at Issue FLSA = Fair Labor Standards Act of 1938 Regulates: Minimum wages Overtime pay Child labor Similar state laws Michigan: Minimum Wage Act (MMWA)
3 Two Critical Issues Hours worked : Whether employees are paid for all time worked and breaks properly administered Classification: Whether employees are properly classified as exempt, independent contractors, or unpaid interns, or whether they are entitled to minimum wage and overtime pay
4 Our Focus Today: CLASSIFICATION ISSUES
5 Why Should Employers be Concerned? Dramatic increase in popularity of lawsuits Number of wage-hour cases filed per year have tripled in the past decade Now most popular of all employment-type suits
6 Why Should Employers be Concerned? Increased popularity due to: Collective actions Double damages Attorney fees Complex rules no bright line test Tough economy Jury appeal Court hostility to other types of cases
7 Recent Litigation Targets for Classification Issues Retail Information Technology Banks/financial institutions Pharmaceutical industry Hospitals and healthcare Next target:??
8 E.g. OvertimeAdvocate.com
9 E.g. HospitalOvertime.com
10 E.g. HospitalOvertime.com
11 E.g. HospitalOvertime.com
12 E.g. Millercohen.com
13 E.g. Millercohen.com
14 Why Should Employers be Concerned? Increased DOL Enforcement Significant increase in DOL enforcement activity in recent years Continued focus on low-wage industries such as janitorial, construction, hotel/motel industries New focus on fissured industries that rely on sub-contracting, independent contracting, etc.: construction, transportation, food processing, professional and service industries
15 Why Should Employers be Concerned? New DOL initiatives Partnering with ABA to refer complaining employees to private attorneys Partnering with IRS on misclassification of independent contractors Proposed rule requiring employers to analyze and document decision to classify jobs as exempt before doing so
16 Why Should Employers be Concerned? Recent Verdicts/Settlements $44 million, Merrill Lynch (misclassification of financial advisors) $42 million, Staples (misclassification of assistant store managers) $9 million, Top Dot Mortgage (misclassification of loan officers) $2.25 million, 3P Delivery (treating truck drivers as independent contractors)
17 Exemption Issues Exempt employees Executive Administrative Professional Computer professional Outside sales Highly compensated
18 Exemption Issues Must have exempt duties as their primary duty salary alone not enough
19 Exemption Issues Exempt employees Generally must be paid at least $455/week ($23,660 annually) on a salaried basis If an employee doesn t qualify for an exemption must be paid overtime
20 Exemption Issues Executive Exemption Supervise at least two full-time employees or equivalents Primary duty managing a department or subdivision Hiring/firing authority (or suggestions given particular weight)
21 Exemption Issues Administrative Exemption Office or non-manual work Related to management or general business operations Exercises discretion and independent judgment with respect to matters of significance
22 Exemption Issues Professional Exemption Learned Professional Advanced knowledge in field of science or learning Customarily acquired through a prolonged course of study Creative Professional Work requiring invention, originality, or talent Recognized field of artistic or creative endeavor
23 Exemption Issues Computer Professional Exemption Salary of $455/week or hourly rate of $27.63 Computer analyst/programmer/software engineer Application of systems analysis techniques and procedures or the design, development, and creation of computer programs
24 Exemption Issues Outside Sales Exemption Making sales/obtaining orders Away from the employer s place of business No salary requirement
25 Exemption Issues Highly Compensated Employee Exemption Office or non-manual work $100,000+ annually Perform at least one duty of the other exemptions
26 Exemption Issues Other Miscellaneous Exemptions Seasonal/recreational establishments Commissioned sales employees Farmworkers on small farm Fishing Casual babysitters Companions for the elderly Several others
27 Exemption Issues Exempt from Overtime Only Agricultural employees Drivers, drivers helpers, loaders, mechanics Salesmen, mechanics of auto dealerships Live-in domestic employees Local delivery drivers and drivers helpers Many others
28 Independent Contractor Issues Independent Contractors Increasingly being scrutinized by DOL Several factors relevant: Permanency of relationship Amount of contractor s investment in facilities and equipment Amount of control exerted over contractor
29 Independent Contractor Issues Right of control factors: When, where and how to work Who must perform the work Whose tools, equipment and supplies must be used, where they must be purchased and who owns them after project completed. In what sequence must work be performed
30 Independent Contractor Issues Additional relevant factors: Contractor s opportunities for profit/loss Initiative and judgment in open market competition with others Degree of independence in business organization and operation Recognized trade or industry? Special skills required?
31 Independent Contractor Issues Additional relevant factors: Nature of work performed integral vs. ancillary to principal s business Contractor independently established trade or business? Method of payment hourly wage or project fee Fringe benefits? Expense reimbursement? Liability upon termination of contract
32 Independent Contractor Issues Additional factors: Extent of contractor s reliance on principal for its/his/her livelihood Freedom to contract with others for same services Freedom to hire personnel for project Freedom to subcontract
33 Independent Contractor Issues Other potential pitfalls of misclassification: IRS withholding violations Unemployment Insurance liability Fair employment laws Workers Compensation laws ERISA Plan inclusion / nondiscrimination FMLA, USERRA & INA Class actions for larger, multi-state entities
34 Independent Contractor Issues Recommendations: Written contracting agreement, including: Contractor representations and warranties Limited term with no automatic renewal Provisions reflecting other test factors Indemnification provision
35 Independent Contractor Issues Additional recommendations When in doubt, employ or contract with a temporary agency Eliminate the term 1099 employee from your business vocabulary.
36 Other Classification Issues Student interns can be unpaid in private, for-profit sector only if Primarily for benefit of intern, not employer Does not displace regular employees No entitlement to job at end Clear understanding it will be unpaid Volunteers/unpaid interns more permissible in state/local governments, non-profits
37 Strategies for Compliance and Litigation Avoidance Part 1: Wage Hour Audit Part 2: Corrective action Part 3: Training Part 4: Monitoring
38 Strategies for Compliance and Litigation Avoidance Part 1: Wage Hour Audit Step 1: Data collection Step 2: Analysis Step 3: Conclusion and recommendation
39 Strategies for Compliance and Litigation Avoidance Step 1: Data Collection Policies Job descriptions Performance evaluations Payroll forms Employee interviews Employee surveys Written contracts for independent contractors
40 Strategies for Compliance and Litigation Avoidance Step 2: Analysis Job duties Salary deductions ( docking ) Focus on duties performed for exempt employees If an independent contractor, focus on nature of relationship If unpaid intern, who is getting the primary benefit?
41 Strategies for Compliance and Litigation Avoidance Step 3: Conclusion and Recommendation Non-problem areas Problem areas (needing correction) Potential problem areas (needing further analysis)
42 Strategies for Compliance and Litigation Avoidance Part 2: Corrective Action Policy revisions Update/revise job descriptions Update/revise performance evaluation instruments Job reclassification Reimbursement for unpaid time Written contracts for independent contractors Contract with a temp agency
43 Strategies for Compliance and Litigation Avoidance Job Reclassification Exempt to non-exempt Independent contractor to employee Unpaid intern to employee
44 Strategies for Compliance and Litigation Avoidance Reimbursement for Unpaid Time Off-the-clock time Overtime Liquidated damages Releases unlikely to be enforceable need DOL or court approval
45 Strategies for Compliance and Litigation Avoidance Part 3: Training on wage-hour issues Meals/breaks Pre-work and post-work At home work On call Overtime Time recording Deductions from salary Policy violations Process for using independent contractors
46 Strategies for Compliance and Litigation Avoidance Part 4: Monitoring Complaint procedure Observation Periodic reminders Periodic audits
47 Questions & Answers
48 This seminar is not a substitute for a specific legal consultation and is not intended to be used as legal advice. All participants must recognize that their questions and comments presented in the course of the seminar are not subject to attorney-client privilege. All responses given are intended to be general in nature and may not be appropriate for any particular situation or employer.