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

John Ho, in the New York Labor and Employment Law Report, writes that in difficult economic times, employers may resort more to the use of so-called independent contractors, to avoid all personnel/administrative costs affiliated with bringing statutory employees on board.  I agree that this will continue to be a flashpoint in the coming year, but one that hearkens back to longstanding problems for putative employers.

He notes that different statutes have different tests.  There are two things, however, that remain constant throughout all of these different statutory tests--control and proof of an independently established business.  I know, in New Jersey, which uses the A-B-C test, the "C" element, i.e. independent business, is the one that most employers get into trouble on.  The putative contractor must be shown to be in his own business, such as evidencing that the business is incorporated, having liability insurance, business cards, advertising and, most importantly, doing work for more than just one employer. 

If there is not a spread of work done for a number of different employers, a Department of Labor and its sub-divisions, such as Unemployment, and Wage-Hour,  will, in knee-jerk fashion, assert that the person or persons are employees.  That leads not only to demand for payment of back-due premiums, but also, more dangerously, assessment of penalties, which could, under many state constructs, be escalated geometrically.

John's piece can be viewed at  http://www.nylaborandemploymentlawreport.com/articles/wage-and-hour/ 

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It appears that the U.S. Department of Labor and the Internal Revenue Service are planning to escalate their efforts, i.e. audits/inspections, focusing on (some might say, targeting) employers for their allegedly improper classification of individuals as independent contractors rather than employees. Concomitant to this will be an aggressive and enhanced use of penalties, both to foster compliance and, of equal importance, revenue generation.

The U.S. Government Accountability Office has issued a report, finding that misclassification of individuals as independent contractors is not a per sec violation of the law, but noting that such actions are often linked to violations of the labor and tax laws. With that said, re-classification of individuals to employees means that unemployment contributions have to be paid on them, the same for workers’ compensation premiums and, more importantly, overtime has to be paid if they work over forty hours. Independent contractors do not get overtime.

The report chided the Department of Labor for not having its investigators look for evidence of contractor misclassification when they conducted normal wage-hour audits. Although the investigators might have inquired about the “presence” of independent contractors or discover misclassification issues through worker interviews, they failed to, as a rule,. review employer records evidencing payments to people labeled as “independent contractors.”

The Wage Hour Division of the USDOL conducted 24,500 Fair Labor Standards Act cases in 2008, but only 131 focused on misclassification. The vast majority of those cases were triggered by employee complaints.

Heightened enforcement is everywhere, spreading like a flu we are all reading about. Proper classification of someone as an independent contractor, a “true” independent contractor, is often confusing, with many shades of gray. More confusion is engendered by the particular State the employer does business in and the particular law (e.g. unemployment, Title VII, workers’ compensation) that is implicated. Self-audits, internal audits focusing on the various factors that are always examined (i.e. control, independently established business) are a very good inoculation against this very expensive flu bug.

 

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In Somers v. Converged Access Inc., Massachusetts' highest court ruled that an employee misclassified as an independent contractor can seek damages from an employer even if the employer can show that the employee would have been paid less if properly classified. Sounds unbelievable, but nevertheless is still the case!

Somers alleged that he should have been classified as an employee and received benefits accordingly. The lower court granted summary judgment to Covered Access, Inc. on all counts.  Although it found that there was an issue of material fact as to whether Somers was misclassified, the court held that to be academic because Somers was paid much more as an independent contractor than he would have been as an employee.

Interestingly, the Massachusetts Supreme Court took the case on its own initiative. The Supreme Court rejected the lower court's finding that if an employee is found to be misclassified as an independent contractor, the employee's pay must be treated as his base wage, as though he were an employee, for the purpose of calculating damages. Indeed, in a blow to employers, the Supreme Court stated “[a]n employee misclassified as an independent contractor, as a matter of law, is an employee; his contract rate is his wage rate; and his 'damages incurred' equal the value of wages and benefits he should have received as an employee, but did not.”

The decision should be a warning to employers to make sure your independent contractors truly are independent, because if a person is misclassified as an independent contractor, he can still seek damages even if as an employee he would have been paid less. Like Ripley said, believe it or not!

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The reach of wage hour laws extends even into topless go-go bars, as a recent case has, perhaps humorously, demonstrated. In a case entitled Chaves v. King Arthur’s Lounge Inc. a Massachusetts court has ruled that so-called exotic dancers who performed in a local strip club were employees, not independent contractors. Thus, they were due, at least, the state minimum wages and overtime compensation from their employer.

The nightclub, King Arthur’s Lounge, had contended that the dancers were not employees and thus not entitled to minimum wage and overtime. The state court judge not only rejected this argument, she also certified the lawsuit as a class action.

To add insult to injury, not only did the club not pay any compensation to the dancers, it also actually charged each of the dancers the sum of $35 per night for the “opportunity” to dance and earn tips from patrons. The employer defended by claiming that its primary business was selling food and liquor; the judge noted that the employer sought to posit its use of the dancers as “a form of entertainment it provides for its patrons, akin to the televisions and pool tables in a sports bar.”

The judge quickly rejected that attempt, ruling that “a court would need to be blind to human instinct to decide that live nude entertainment was equivalent to the wallpaper of routinely-televised matches, games, tournaments and sports talk.” She also concluded that “the dancers were an integral part of the company’s business and were therefore more likely to be employees than independent contractors.” The judge continued, holding that “in an age of electronic and Internet access to a wide variety of adult media, exotic dancing is unlikely to offer a commercial opportunity – over the long term—that would rise to an independently established trade for occupation.”

This case highlights the fact that every employer must carefully evaluate the circumstances of their engagement of individuals to perform services for them. If the services are, as herein, an integral component of the employer’s business, or if too much control is exerted by the employer, or the individual does not perform these services for anyone else, then that individual is likely an employee, not an independent contractor.

The fact that they may dance around a pole does not change this analysis.
 

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In these economic times, employers are classifying more workers as independent contractors in an effort to save costs, but employers should be warned that companies adopting this strategy may be abusing classification rules-and State and Federal entities are noticing.

In June, eight attorneys general sent a letter to FedEx Corp. expressing concern about the company's practice of classifying drivers as independent contractors. This warning follows the 2008 misclassification ruling by the California Supreme Court that cost the company $26.8 million.

The Montana Supreme Court also recently ruled against a company for misclassifying its staff of exotic dancers. In May, the court held in Smith v. TCAD Inc. that the dancers were employees and were entitled to wages for all hours worked, plus overtime.

Similarly, the U.S. Court of Appeals for the Second Circuit, addressed the issue in the 2008 ruling Salamon v. Our Lady of Victory Hospital. In this case, the doctor plaintiff had presented a genuine issue of material fact as to her employment status. The court vacated summary judgment in favor of the hospital, which had argued that the doctor was an independent contractor, not an employee, and could not therefore make a claim for sex discrimination under Title VII.

Even Congress is weighing in. According to Rep. James McDermott, Congress is introducing a bill that would amend the Internal Revenue Code of 1986 “to modify the rules relating to the treatment of individuals as independent contractors or employees.”

All this scrutiny means it's paramount for employers to ensure that they are properly classifying their workers.

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Nokia has agreed to settle a Fair Labor Standards Act suit action in which the workers charged they were misclassified as independent contractors and not paid proper overtime. In this suit, filed in federal court in Texas, the plaintiffs had tried to recover unpaid back wages, attorneys’ fees and costs, based on a theory that they consistently worked in excess of forty hours per week.

The plaintiffs had worked for a staffing company and they were assigned by the staffing agency to work as engineers at a field support center. They were charged with the responsibility of providing telephone support to field technicians and installers who installed Nokia equipment at cellular locations all across the nation.

The plaintiffs alleged that they were, in fact, “employees,” because they claimed they worked solely for Nokia, on Nokia premises and used Nokia equipment. The plaintiffs, who were paid by the staffing company, also alleged that the staffing entity misclassified them. Nokia defended by asserting that it had negotiated contracts with these staffing companies and those contracts set forth the rates that Nokia would pay for certain services.

The plaintiffs tried to make this a nationwide class action, trying to draw in support centers in Texas, California and New Jersey as sites of allegedly aggrieved workers. In September 2007, a judge denied the motion to conditionally certify a class, concluding that the named plaintiffs did not prove that they were similarly situated due to the fact that Nokia, as a corporate policy, had not mandated a common pay procedure or arrangement or practice that adversely impacted the plaintiffs.

This was a potentially very explosive case and Nokia, in my view, wisely chose to settle. If workers are found to be employees, rather than independent contractors, a virtual Pandora’s Box opens for the employer. These “new” employees can not only seek overtime compensation, but they also may lay claims to certain company benefits (e.g. stock option plans) that are only allowed to be enjoyed by employees.

Independent contractor audits are tough to succeed upon and are more and more the focus of state administrative agencies, because such audits produce (often) significant revenue for a State in terms of back due unemployment contributions. The putative independent contractor must be in a recognized business and free from control. The above shows certain evidences of control, which might have undermined the defense at a trial..
 

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We all know Blackwater as the company that has been given one billion dollars in federal contracts to do work in Iraq.  There have already been numerous allegations concerning the activities of Blackwater agents and their tactics.  Now, it appears that this company may have, on a widespread scale, been violating labor law by classifying individuals as independent contractors when they should have been deemed employees.

Blackwater classified its security guards as independent contractors.  As they were not deemed employees by the company, the company was able to qualify for small business contracts without competing with other qualified bidders.  This is the essence of the allegation made by Congressman Henry Waxman (D-Calif).  The company claimed that it did not sufficiently control the activities of the guards in Iraq and Afghanistan for them to be labeled employees.  Not only does this contradict what a Blackwater lawyer had argued in a wrongful death case, when he was seeking money damages for their estates, it also strikes me as a position without foundation.

In order to establish the element of "control," which then shows someone is an employee, it is not necessary for the putative employer to control every aspect of the individual's work day.  It is enough if a general umbrella of control, actual or potential, exists over the employee(s).  It appears to me, based on the little that is now public, that Blackwater did exercise sufficient general control over these people and its claim that "all" that it did was to pay them seems bland.

At stake are millions of dollars in taxes to the IRS and probably millions of dollars in overtime monies to the employees.  It is very tough to establish a true independent contractor relationship and the framework of these relationships seems to be the antithesis of such a relationship.

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Federal Express is facing a looming legal battle over whether it can classify its drivers as independent contractors or as employees, as the company’s Ground Package division faces a nationwide class action suit by truck drivers, who are suing under the Employment Retirement Income Security Act (ERISA) for allegedly misclassifying the employees as contractors.

The drivers are seeking benefits under several plans for which they were not eligible, because they were designated as independent contractors when hired by Federal Express. The class of plaintiffs includes more than 20,000 current and former drivers, who had signed operating contracts declaring them to be contractors. The lawsuit claims that FedEx had control over the workers as employees, which would not allow them to be designated as independent contractors. If the drivers are deemed to be employees, they would be eligible for a variety of rights and benefits, including: overtime compensation, retirement benefits, and health insurance. Indeed, a finding of employee status for these drivers would be dramatically expensive for FedEx.

Federal Express also faces a separate legal battle with its California-based drivers. Following a California appellate court decision, which determined that FedEx single-route drivers were in fact, employees, FedEx has elected not to renew driver single-route contracts, and would only work with multiple-route contractors. Not surprisingly, the drivers have now alleged retaliation. FedEx has offered its single-route drivers various incentives to either take up more routes or to sell their routes. This case is significant because at least 75% of FedEx’s 12,000 drivers are single-route contractors; therefore, any rulings could have adverse affects on FedEx, and the industry as a whole.

Class actions suits involving drivers are becoming a rapidly growing area of litigation, as there are currently 35 pending rulings on class certification for drivers under both state and federal laws, as more and more drivers are challenging their employment classification status. It is incumbent upon companies in all industries to make sure that they understand when an individual is an employee and those (often limited) circumstances when individuals are “really” independent contractors. This FedEx litigation highlights the problems and the potential exposures for misclassification of employees as “independent contractors.”

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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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