New Jersey Labor and Employment Lawyer & Attorney : Fox Rothschild LLP Law Firm : Serving Essex County, Sussex County, Roseland, New Jersey

The line between who is an employee and who is an independent contractor is often a difficult one to draw, with significant (adverse) consequences for employers if they err in their designation. Different state and federal agencies have different standards for distinguishing between employees and independent contractors. Under any statutory scheme, however, there are two crucial areas. The first focus is control. The second is a determination on whether or not the contractor has his own business.

Independence. To qualify as an employee, an employer must exercise control over the person. Control means dictating the means and methods by which work is done, as opposed to just requiring a particular result. If an electrician comes into a house to install a fixture, the home owner does not tell the electrician to use particular tools, but rather just wants the fixture properly installed (i.e. the result). The electrician himself chooses how he will do the job and at the end of it he gives the home owner a bill to pay. An employee, however, is given direction as to how to accomplish the task. That shows control. More evidence of control is the manner of payment. If the person is paid by the hour or on a salary, as opposed to a lump sum for the project, that evidences that the putative employer is not paying for just a result, but is controlling the means by which the result is obtained. If the company supplies health insurance, paid vacation hours, or personal days to someone claimed to be an “independent contractor,” that is almost a dead giveaway to an agency (e.g. Department of Labor) that the person is in reality an employee.

Business ownership. The next crucial focus is whether the contractor has his own business. This may be established in a number of ways, such as the possession of business cards, advertising in the Yellow Pages or elsewhere, the filing of a Schedule C, self-employment tax return, or proof of incorporation and conducting the business like a corporation. The burden of proof is on the employer who wants to prove that is contractor is not its employee and it may prove difficult securing, for example, someone’s tax return so it can be turned over to the governmental agency conducting the audit or investigation. One good, impressive method for showing a true, independent business is for the company to make out the checks to the other “corporation” and not to the person, as an individual.

Another issue is the exclusivity of the arrangement. If a person is working solely or virtually solely for one company and derives the vast percentage of his income/compensation from that one company, that evidences an employer-employee relationship. To the contrary, independent contractors may work for dozens, if not hundreds of companies in a given year.

Exposure. An audit by a state Department of Labor typically occurs when an individual applies for unemployment compensation. As there have been no unemployment contributions made for the independent contractor (or others similar to him), this may often trigger a complete audit of all employees and can end in huge fines for a company and payment of unemployment contributions in arrears. If the contractor has worked more than forty hours, there may be exposure for overtime under the Fair Labor Standards Act and/or state wage-hour laws. Obviously, the specter of an IRS audit, and demand for FICA and social security taxes for the employee(s), also looms on the horizon.

The Answer? A well-drafted independent contractor agreement may help. A carefully drafted document will contain all the provisions that demonstrate, on paper, that an individual is an independent contractor not an employee. Even the best drafted document, however, will not help if the actual circumstances vary from what is on the paper. As most audits go awry for the employer on the independent business part of the test, the employer must be constantly on guard to ensure that its contractors have evidence that establishes the fact that they truly have a “business.” If not, it is the employer who may well get “the business” from governmental agencies in unanticipated audits.

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The new (e.g. almost three years) Fair Labor Standards Act (“FLSA”) regulations on exempt status differ in some significant aspects from the old, but still leave employers with numerous, problematic decisions as to which employees are/are not overtime eligible. If the employer guesses wrong, the possibility for a single plaintiff lawsuit or, more disturbingly, a class action is created, with considerable exposure. There are, however, ameliorative steps that can and should be taken.

The FLSA expressly exempts three major categories of employee from overtime requirements: executive employees, administrative employees and professional employees. Whether an employee is exempt depends on: 1) his duties and responsibilities; and, 2) payment of a statutorily prescribed salary. The salary component of the test is fairly easily met. The new regulations set the salary threshold below at $455 per week ($23,660/year), significantly up from the antediluvian $250/week.

The final executive duties test requires employees to be involved in supervising two or more employees and have authority to hire or fire or where the suggestions of such employees in such areas as hiring, firing, advancement, promotion or other change in status are given particular weight. The previous requirement that an employee “customarily and regularly exercises discretionary powers” is now gone. The regulations give specific guidance as to how to determine whether an employee’s suggestions are in fact given “particular weight.”

The final administrative duties test retains the requirement that an employee have a “primary duty” of “performing office or non-manual work related to the management or general business operations of the employer or the employer’s customers,” and, regretfully, retains the “discretion and independent judgment” language of the prior regulation. The DOL proposal was to replace the “discretion and independent judgment” requirement with a requirement that the employee hold “a position of responsibility” with the employer or perform work requiring a high level of skill or training. That would have made the job of classifying employees as “administrative” far easier, but now, employers must still make fine-line determinations of whether employees are using skill and experience, as opposed to discretion and independent judgment. Thus, the revision removes few of the gray areas that have surrounded this exemption for many years.

The proposed professional duties test would have recognized exempt “learned professionals” as certain employees who gain sophisticated, professional-type knowledge and skills not only through formal education, but through alternative means such as a combination of job experience and education. This proposal did not survive, although there remains a small window to fit an employee within this exemption under a “combination” theory. The biggest field of battle on this issue will be in the computer field, where job titles number in the thousands and many employees acquire high level, important positions without always having a degree in “computer science.”

In my experience, I have often seen the firing of a single employee (for the right reasons!) lead to a complaint to the state/federal Department of Labor, triggering an audit that could lead to significant exposure if employees have been incorrectly classified. The best way to avoid such a contingency is to be proactive and ascertain for yourself and your organization the accuracy of your current classification of employees through an “internal audit.” In such an audit, the duties of various employees are matched up against the new regulations (and case law) with conclusions drawn. If the employee is deemed non-exempt, the next thorny decision is whether to pay he/them the back pay theoretically owed. The most important lesson learned from such an audit, however, is what to do going forward to be in compliance---and then breathe a little easier about this sticky, oftentimes gray area of law!

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It is always possible for one person to sue their employer for wages or alleged back due overtime. What is far more pernicious and what is, regretfully, happening far too often over the last several years, is a so-called “class action.” In a class action, a group of employees, ranging anywhere from a handful to several thousand, sue their employer, sometimes in a class that encompasses the entire nation. In that scenario, the stakes are geometrically multiplied.

Importantly, FLSA collective actions differ in one dramatic way from class actions filed under other federal or state laws. In FLSA cases, the employee(s) must opt in, meaning that they must affirmatively sign a document evidencing that they wish to be a part of the lawsuit. In other class actions, the employee is presumed to be a part of the class and if he wishes to refrain from the litigation, he must opt out. The difference between the FLSA and other laws can often work to the employer’s advantage, especially if the employer believes that it has arguably broken the law, because of the statutory framework. There is a two-year statute of limitations (with limited exceptions) for FLSA overtime claims; an action for opt-in plaintiffs only commences when they sign a written consent to become a party and file it with the court.

The most crucial element is the necessity that the employees be deemed “similarly situated” for purposes of a collective action. Employees are “similarly situated” for purposes of FLSA collective wage suits if they are subject to a common policy, plan or design, that stretches across company departments or locations. If there is no commonality, there is no collectiveness and the action will be dismissed. On the other hand, “similarly situated” does not mean “identically situated.”

Part of the process by which a court will certify a class occurs in the so-called “notice stage.” In this preliminary stage, the trial court will make an initial decision as to whether notice of the action should be given to other potential class members and will make that decision based on any existing commonality (or lack thereof). Certification at this point is seen as a “conditional certification” and is based on a fairly lenient standard. This certification also begins the process of court-authorized notice.

The crucial, proactive strategy is to quickly and at an early stage of the litigation assess: 1) whether a common policy or practice exists which would likely militate a finding that a collective action is appropriate; and, 2) determine if the policy/practice at issue is illegal or questionable. If so, the prudent course is to change the offending practice or policy and then allow the course of the litigation to continue. The change in improper policy stops the clock from running, as it terminates any valid claims from that point forward. Remember---an individual’s own lawsuit does not start until he signs the consent and opts in. If the issue is an alleged misclassification of employees as exempt, a careful and objective internal audit of the positions at issue should ensue because these classification decisions are fact sensitive and are coupled with an overlay of highly nuanced federal regulations. In addition, classification decisions carry numerous implications besides whether the employees should receive overtime.

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