MISCLASSIFYING WORKERS AND ITS IMPLICATIONS UNDER CURRENT CALIFORNIA LABOR LAW. Vickie V. Grasu Vandeventer Black LLP

MISCLASSIFYING WORKERS AND ITS IMPLICATIONS UNDER CURRENT CALIFORNIA LABOR LAW Vickie V. Grasu Vandeventer Black LLP www.vanblk.com June 18, 2013

Wage and Hour Law Wage and Hour Litigation has exploded in recent years. For the reporting year ending on March 31, 2012, 7,064 Federal Fair Labor Standards Act (FLSA) cases had been filed, reaching a new record high. New FLSA Suits Hit Record High in 2012, Report Says, Law360 Employment Law, (July 23, 2012). Companies are more likely to be sued for wage hour violations than for discrimination, harassment or any other type of employment claim.

Three Ways Employers Misclassify Workers 1. Employee Versus Independent Contractor 2. Exempt Versus Nonexempt 3. Paid Employees Versus Unpaid Interns/Trainees

Misclassifying Workers As Independent Contractors Rather Than Employees Determination of whether a worker is an employee versus an independent contractor is highly fact specific No hard and fast rules

Misclassifying Workers As Independent Contractors Rather Than Employees California Law governing wages and hours: California Labor Code and Wage Orders of the Industrial Welfare Commission California Agencies most involved with the determination of independent contractor status: 1. Division of Labor Standards Enforcement (DLSE) 2. Contractors State Licensing Board (CSLB) 3. Employment Development Department (EDD) 4. Division of Workers Compensation (DWC) 5. Franchise Tax Board (FTB)

Misclassifying Workers As Independent Contractors Rather Than Employees DLSE Enforces wage and hour laws CA Labor Code Section 1194 provides a right to sue for unpaid minimum wages or overtime compensation. Employer Employer is defined as any person who directly or indirectly, employs or exercises control over the wages, hours or working conditions of any person. Employ means to engage, suffer, or permit to work. 8 Cal.C. Regs Section 11140, Sec. 2.

Misclassifying Workers As Independent Contractors Rather Than Employees Employee Employee means to any person employed by an employer. 8 Cal.C. Regs Section 11140, Sec. 2. Statutory Employee in Construction Industry There is a rebuttable presumption that where a worker performs services that require a license pursuant to Business and Professions Code Section 7000, et seq., (Contractors State License Law) or performs services for a person who is required to obtain such a license, the worker is an employee and not an independent contractor. CA Labor Code Section 2750.5. CA Labor Code Section 2750.5 makes an unlicensed subcontractor the general contractor s employee the general contractor is also an employer of persons the unlicensed subcontractor employs. General contractor, licensed or unlicensed, who hires an unlicensed subcontractor is responsible for wages owed to the subcontractor s employees. Sanders Const. Co., Inc. v. Cerda (2009) 175 Cal.App.4 th 430, 4340435.

Misclassifying Workers As Independent Contractors Rather Than Employees Independent Contractor To rebut the employee presumption the determination of whether a worker is an employee or independent contractor depends on a variety of factors. Rebutting statutory employee status in construction industry The following factors support an independent contractor status: 1. The individual has the right to control and directs how the services contracted for are accomplished; 2. The individual is customarily engaged in an independently established business; and 3. The individual s independent contractor status is bona fide and not a subterfuge to avoid employee status. CA Labor Code Section 2750.5. In addition to these factors, the individual must have a valid contractor s license to perform the work.

Misclassifying Workers As Independent Contractors Rather Than Employees Independent Contractor Multi Factor or economic realities test adopted by the California Supreme Court case S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal. 3d 341. Most important factor: Whether the employer CONTROLS the worker both as to the work done and the manner and means in which it is performed.

Misclassifying Workers As Independent Contractors Rather Than Employees Additional factors: 1. Whether worker is engaged in an occupation or business distinct from that of the employer; 2. Whether or not the work is part of the regular business of the employer; 3. Whether the worker or employer supplies the instrumentalities, tools, and the place for the person doing the work; 4. Worker s investment in the equipment or materials required by his or her task; 5. Whether the services rendered requires a special skill; 6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision; 7. The worker s opportunity for profit or loss depending on his or her managerial skill; 8. The length of time for which the services are to be performed; 9. The degree of permanence of the working relationship; 10. The method of payment by time or job; and 11. Whether or not the parties believe they are creating an employer employee relationship has some bearing.

Misclassifying Workers As Independent Contractors Rather Than Employees The FLSA Economic Reality Test The employer employee relationship under the FLSA is tested by economic reality. U.S. Dept. of Labor, Wage & Hour Div., Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA)(2009). Merely labeling the worker an independent contractor will not be determinative of whether the worker is an employee under the Act. Rutherford Food Corp. v. McComb., (1947) 331 U.S. 722. Factors considered in determining employee status: 1. Degree of control; 2. Investment in facilities; 3. Opportunity for profit and loss; 4. Permanency of the relationship; 5. Specialized skill; and 6. Whether services rendered are integral part of employer s business. Donovan v. Surewway Cleaners, (9th Cir 1981) 656 F. 2d 1368.

Misclassifying Workers As Independent Contractors Rather Than Employees IRS Independent Contractor Test Eight part test organized into three main groups: 1. Behavioral control 2. Financial control 3. Relationship of the parties. IRS Publication 15 A, 2013 Edition General rule: An individual is an independent contractor if the person for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Misclassifying Workers As Independent Contractors Rather Than Employees NOT determinative of independent contractor status: Written agreement purporting to establish an independent contractor relationship Worker issued a 1099 form rather than a W 2 form

Misclassifying Workers As Independent Contractors Rather Than Employees Recent Case Law In re Seacon Logix, Inc. A California Superior Court recently ruled that truck drivers were employees, not independent contractors, irrespective of the signed agreement labeling them as independent contractors. Four Port of Long Beach truck drivers working for Seacon Logix filed wage claims with the Long Beach office of the DLSE. Labor Commissioner s decision required Seacon Logix to pay for violations including unlawful withholding of wages, interest, waiting penalties Seacon Logix appealed the hearing decision with the Superior Court The Superior Court upheld the Labor Commissioner s hearing decision found that the company exerted sufficient control over the drivers and their workday. Employer controls truck driving activities if, for example: Instructs driver about loading the truck, what loads to deliver and when, provides specific travel routes, provides the trucks, pays all maintenance and fuel costs for the truck and instructs driver on maintaining and parking.

Misclassifying Workers As Independent Contractors Rather Than Employees This case highlights the critical need for labor law enforcement, particularly where misclassification cheats hardworking men and women like these port truck drivers out of the full pay to which they were entitled.this is wage theft and we will do everything in our power to stop it. California Labor Commissioner Julie A. Su.

Misclassifying Workers As Independent Contractors Rather Than Employees Independent Contractors Employers do not have to: Comply with wage and hour laws; Minimum wage or overtime Meal periods and rest breaks Reimburse workers for business expenses; Pay payroll taxes; Cover independent contractors under workers compensation insurance; unemployment insurance, disability insurance, or social security.

Misclassifying Employees As Exempt From Overtime Most frequently litigated area of wage hour law is overtime pay. Under CA law, employers must pay one and a half times an employee s regular rate if he or she works more than 40 hours per week or more than 8 hours per day; and double the regular rate for work in excess of 12 hours per day. CA Labor Code Section 510(a). Under the FSLA law employees must be paid time and a half their regular rate of pay for any hours worked over 40 hours per work week. 29 U.S.C. Sec. 207(a)(1). The law presumes every employee is entitled to overtime pay if the employee works more than 40 hours a week/8 hours per day. The burden is on the employer to show that any particular employee is exempt from this requirement. Magana v. Northern Mariana Islands (9th Cir. 1997) 107 F.3d 1436. California law more protective of employees Federal law makes it harder to establish employee s exempt status.

Misclassifying Employees As Exempt From Overtime What makes an employee exempt or nonexempt form overtime pay is generally: (1) which DUTIES the employee actually performs, and (2) whether the employee is paid on a SALARY BASIS.

Misclassifying Employees As Exempt From Overtime Employees Exempt Under California Law Persons employed in an ADMINISTRATIVE, EXECUTIVE or PROFESSIONAL capacity are exempt from both the minimum wage and overtime provisions under California law. CA Labor Code Section 515(a) To be exempt, an employee must: 1. be primarily engaged in duties that meet the test of the exemption ; and An employee is primarily engaged in exempt duties only if more than one half of the employee s work time is devoted to such duties. CA Labor Code Section 515(e ). 2. customarily and regularly exercise discretion and independent judgment in performing those duties ; and 3. earn a monthly salary equivalent to no less than two times the state minimum wage for full time employment. CA Labor Code Section 515(a).

Misclassifying Employees As Exempt From Overtime Executive Employee Exemption Primary duties and responsibilities involve management of the enterprise Customarily and regularly direct the work of two or more other employees; Have the authority to hire and fire, or to make recommendation; Primarily engaged in (more than 50% of work time) duties which meet the test of the exemption. CA Labor Code Section 515(a). Discretion and judgment Customarily and regularly exercise discretionary power and independent judgment.

Misclassifying Employees As Exempt From Overtime Employee meets the FLSA s executive exemption if: Compensated on a salary level of at least $455 per week; and Primary duty is management of the enterprise in which the employee is employed, or of a customarily recognized department; and Customarily and regularly directs the work of two or more other fulltime employees; and The employee has the authority to hire or fire other employees, or the employee s suggestions and recommendations on hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight. 29 CFR Section 541.100.

Misclassifying Employees As Exempt From Overtime Executive Employee Exemption Primary duty prong most litigated Employees who have some supervisory authority may not meet the exemption because such supervision is not their primary duty. Even if the employee (i.e., Foreman, Leads or Shift Managers) supervises the work of two or more employees and has hiring and firing power, if the employee spends the majority of his or her time doing manual work, then management is not the employee s primary duty and the employee is not exempt from overtime pay.

Misclassifying Employees As Exempt From Overtime Administrative Employee Exemption Primarily engaged (more than 50% of work time) In duties that meet the test of the exemption ; and Primary duties are directly related to management policies or general business operations of the employer, as distinguished from production employees whose primary duty is producing the goods or services that the employer produces. Customarily and regularly exercise discretion and independent judgment; and Earn a monthly salary of at least twice the minimum wage for full time employment. CA Labor Code Section 515(a).

Misclassifying Employees As Exempt From Overtime Employee meets the FLSA s administrative exemption if: Compensated on a salary or fee level of at least $455 per week; and Primary duty is the performance of office or non manual work directly related to the management or general business operations of the employer or the employer s customers; and Primary duty includes the exercise of discretion and independent judgment respecting matters of significance. 29 CFR Section 541.200.

Misclassifying Employees As Exempt From Overtime Professional Employee Exemption Licensed or Certified professional and primarily engaged in: Law Medicine Dentistry Optometry Architecture Engineering Teaching or accounting Primarily engaged in an occupation recognized as a learned or artistic profession

Misclassifying Employees As Exempt From Overtime Professional Employee Exemption Spends 50% or more of his or her time in the licensed or certified profession; Customarily and regularly exercises discretion and independent judgment in performing duties in the licensed or certified profession; and Earns a monthly salary equivalent to at least twice the state minimum wage for full time employment. 8 Cal.C. Regs Section 11010

Misclassifying Employees As Exempt From Overtime Employee meets the FLSA s professional exemption if: Compensated on a salary or fee basis at a rate of at least $455 per week; and Primary duty is the performance of work requiring either: Knowledge of an advanced type (work that is intellectual in character and requires the consistent exercise of discretion and judgment) in a field of science or learning customarily acquired be a prolonged course of specialized intellectual instruction; or Invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. 29 CFR Section 541.300.

Misclassifying Employees As Exempt From Overtime Other Exemptions from Overtime Pay Requirements Interstate truck drivers hours of service regulated by federal law and are exempt from CA regulations. Collings v. Overnite Transp. Co. (2003) 105 Cal.App.4 th 171, 180. Federal law Motor carrier employees engaged in interstate commerce and subject to the maximum hour regulations of the Secretary of Transportation. 29 USC Sec. 213(b)(1); 49 CFR Sec. 395.1 et seq. (driving hours of interstate truck drivers). California law provides overtime exemption for drivers transporting hazardous materials within California. 13 Cal.C.Regs. Sec. 1212.5(b).

Paid Employees Versus Unpaid Interns/Trainees No state statute or regulation in California which expressly exempts individuals participating in an internship from the minimum wage and overtime requirements. Internships in the for profit private sector will generally be viewed as employment and interns/trainees are entitled to protections of the FLSA including minimum wage and overtime. Unpaid internships in the public sector and for non profit charitable organizations are permissible.

Paid Employees Versus Unpaid Interns/Trainees The DLSE has followed federal interpretations which recognize the special status of trainees and interns who perform work as part of an EDUCATIONAL or VOCATIONAL PROGRAM. Determination of whether a trainee/intern is exempt from FLSA is fact specific depends on the circumstances surrounding the worker s duties Simply labeling the individual intern or trainee does not suffice.

Paid Employees Versus Unpaid Interns/Trainees Six Factor Intern Test Internships viewed as employment unless ALL of the six factors are met: 1. The training is similar to that which would be given in a vocational school; 2. The training is for the benefit of the trainee/intern; 3. The trainee/intern do not displace regular employees; 4. The employer that provides the training derives no immediate advantage from the activities of the trainees/intern; 5. The trainees/interns are not necessarily entitled to a job at the completion of the training period; and 6. The employer and the trainees/intern understand that the trainees/interns are not entitled to wages for the time spent training. Wall v. Portland Terminal Co. (1947) 330 U.S. 148.

Paid Employees Versus Unpaid Interns/Trainees Recent Case law Glatt v. Fox Searchlight Pictures ( Black Swan Intern Case ) Recent Court Ruling No Free Labor Lawsuit filed in New York by film unpaid interns against 20 th Century Fox claiming they performed work that paid employees should have performed. Performed menial work that had little or no educational value. Court considered the totality of circumstances and found that the Black Swan interns were employees entitled to pay for their work on the film under the Fair Labor Standards Act and New York Labor law. Ruling re affirms that unpaid internships are not lawful unless they are part of a training program, and are not lawful if the interns work provides a direct benefit to the company, not to the intern.

Liabilities and Penalties For Misclassifying Workers Are Significant Employer May be Liable For: 1. Wages due and owing minimum wage, meal and rest breaks or overtime pay; 2. Other forms of compensation such as commissions, bonuses, benefits and vacation pay; 3. Unpaid payroll taxes, unemployment, disability insurance and workers compensation 4. Penalties; Waiting time penalties for failure to pay final wages and overtime (up to 30 days) For willful or repeated violations in misclassifying workers as independent contractors $5,000 to $15,000 for each violation found willful $10,000 to 25,000 if there is a pattern or practice of willful misclassifications 5. Interest; An employee who sues civilly to recover unpaid minimum wages or overtime is entitled to interest Labor Code Sec. 1194(a). Interest accrues from day the wages were due rate of 10% per year 6. Attorneys fees and court costs; A successful employee plaintiff in a wage claim action may seek an award of reasonable attorney fees and court costs. CA Labor Code Section 218.5 & 1194(a).

Thank you! Vickie V. Grasu Vandeventer Black LLP www.vanblk.com