Pitfalls of Misclassifying “Contract Labor”

By Vicki | June 4, 2010

If you are a business owner or manager, you may have had this great idea at one time: “I can save my company lots of money if I hire ‘contract labor’ instead of employees to do this job.”

The hope of every business person is that hiring a contract laborer will allow the company to avoid the headaches that accompany being an employer.

Employer anticipate a savings by not paying the employer’s portion of federal payroll taxes, worker’s compensation premiums, retirement and health benefits, as well the cost savings of avoiding state and federal unemployment taxes. Also, refusing to put another employee on the payroll is believed to help prevent the liability for discrimination and overtime wages.

Unfortunately, if you decide to take a bite of this poisonous fruit that the serpent is offering and hire a contract laborer, you could face regrets and costs much greater than anything you incur by accepting the responsibilities of being an employer.

You can’t just choose to classify a worker as a contract laborer when he is performing work for you. Chances are very high that all of the people who perform work for your business are actually your employees, whether you call them that or not and even if they agree to the arrangement. The IRS and the Department of Labor will see this as the tax dodge that it really is.

There is someone called an “independent contractor”, but he performs work for your company as well as others. You exercise no control over where, when and how the specific job for which you hired him gets done. This could be your lawyer, your accountant, your plumber, or other workers who are usually self-employed or employed by another company and are not economically dependent on you.

But if you dictate the manner and means by which work is done for you, provide training, supervise the worker, set the hours, provide the tools and equipment or make a profit off of the labors of the worker, he is an employee and cannot be classified as contract labor.

If you misclassify an employee as an independent contractor, there are already significant penalties, and those may soon increase.

A bill was filed in both houses of the United States Congress on April 22, 2010, aimed at insuring that workers are classified as employees, making them eligible for the legal protections and tax benefits provided to employees by law.

If passed, the Employee Misclassification Act will require employers to keep records of every worker classified as an independent contractor along with the analysis of the reasons that the worker was classified that way.

If you are wrong in that analysis, the Act will also increase the penalties for employers who misclassify their workers, including double damages for any violation.

Even if this new legislation doesn’t pass, regulators in President Obama’s executive branch are already on the lookout for companies who misclassify workers as contractors rather than employees.

The United States Department of Labor has increased its resources, investigators and emphasis on enforcement against employers who misclassify workers as contractors. The DOL estimated in 2000 that 30% of companies are guilty of this error.

The DOL’s 2011 proposed budget adds $25 million and 100 investigators just to focus on the “Misclassification Initiative”.

In addition, the IRS announced in February that it will audit 6000 businesses at random over the next three years to determine if any of them have misclassified employees as contractors. So you could get investigated by two federal agencies who have the power to impose significant penalties on your company.

Industries that often have problems with misclassifying their employees include the home health industry, construction, trucking, shipping and delivery, security, spas, technology and media companies. Even a group of strippers sued their club owner in 2009 for making them “pay for the pole” and earn only tips, when the women claimed they were regular employees who were due hourly wages and overtime.

So as a responsible business owner or manager, what can you do to avoid being one of those companies that faces federal enforcement of the regulations prohibiting you from classifying an employee as an independent contractor?

Topics: Compensation | No Comments »

Wage Issues Keep Biting Employers

By Vicki | May 12, 2010

In the human resources and employment law trade journals that I regularly read, the headlines proclaim repeatedly that employers are paying their employees incorrectly and getting in legal hot water because of those mistakes. The penalties range from the expensive for any small business owner to the absurd for Wal-Mart.

At the lower end of the spectrum is the nearly $90,000 that a Houston landscaping company paid in February to settle an audit by the Department of Labor for misclassifying office staff and others as exempt from overtime and minimum wage laws. The company also got in trouble because they apparently weren’t paying workers for the time spent loading and unloading materials and tools at the start and end of each workday. These activities generated overtime hours for the workers, but they weren’t paid overtime. In addition, the DOL found recordkeeping problems.

At the high end of the scale, this month Wal-Mart agreed to pay as much as $86 million for a wage and hour class-action suit in California involving about 232,000 former and current employees who weren’t paid correctly for overtime and vacations. This is separate from a 2008 agreement that Wal-Mart made to settle 63 other wage-related suits for $640 million.

Whether you are a large or small employer, you must pay your employees correctly to avoid costly litigation by the Department of Labor, or worse, the employees and their attorneys looking for double damages and attorneys fees.

I have written other blog entries on paying overtime correctly (click here and here), keeping proper compensation records (click here), the new enforcement efforts by the DOL (click here) and the pitfalls of compensation mistakes (click here). I don’t want to sound like a broken record, but I constantly find companies who still don’t take wage and hour issues seriously and who haven’t conducted an audit to determine if they are paying their employees correctly (when in doubt, pay hourly and overtime). Please invest the time and effort to correct these issues now so that your company will not face costly overtime litigation.

Topics: Compensation | No Comments »

There Are Better Ways to Enforce A Dress Code

By Vicki | March 23, 2010

Why do these kinds of cases only happen in Texas? In a head-scratching act of stupidity, the president of hatmaking company near Wichita Falls, Crowell Contract and Design, pulled a female employee’s pants down in front of her coworkers.

The Equal Employment Opportunity Commission was not amused. It sued on the female employee’s behalf, claiming that the president created a sexually hostile work environment. The company had to pay $21,500 to the employee to settle the case, as well as agreeing to provide training to all of its employees on preventing sexual harassment. The EEOC characterized the action of the president as an abuse of power.

I’m guessing that at the time of the incident, the president of the company probably thought of it as a prank, not an abuse of power. I know that I have been tempted to do the same thing when walking behind teenagers in the mall wearing baggy jeans that show their boxer shorts (I never thought I would be pleased to see tight, skinny jeans make a comeback)! But as an adult, I have always resisted following through on that temptation. That’s what responsible people do.

Although the reports of the Crowell settlement don’t explain the company president’s motivation, I’m guessing he thought his employee’s pants were too baggy. The reports do say that he had previously threatened several times to pull her pants down.

Maybe the president didn’t know that in Texas, employers are free to write dress codes and enforce them based on the company’s expectations of professionalism and community standards. If he didn’t like baggy pants, he could have prohibited his employees from wearing them. As long as your dress code doesn’t single out one gender or one race and discriminate against that group, it is not illegal.

His “prank” appears to me as a passive/aggressive way of handling a pretty simple dress code problem. If the president of the company thought his employee was inappropriately dressed, he should have verbally warned her that her clothes violated the company dress code and sent her home to change clothes. If she continued to wear the baggy pants, he should have given her a written warning, a suspension and then fired her. That is the standard progressive discipline policy that every savvy employer in this country understands and enforces.

The president unwisely resorted to a fraternity prank instead of good management. It was an expensive decision. It reminds me of an incident a few years ago when a Dallas producer on the Barney show (purple singing dragon, remember?) decided that he would discipline a female employee by spanking her! Maybe he had worked in children’s television too long. That one resulted in a sexual harassment suit also.

Come on, Texas! We can do better.

Topics: Discrimination | No Comments »

What is the Maximum Leave an Employee Can Take?

By Vicki | March 11, 2010

Sears Roebuck & Co. recently settled with the Equal Employment Opportunity Commission a class-action lawsuit for $6.2 million, the largest monetary award for a single Americans With Disabilities Act (”ADA”) suit in EEOC history.

The accusation against Sears was that the company discriminated against the disabled because it had an inflexible policy that allowed injured employees to take off of work for one year before they were automatically terminated for exhausting all leave. The EEOC said that this apparently neutral policy did not provide injured employees with reasonable accommodations in violation of their ADA rights.

With this suit, the EEOC is signaling an end to maximum leave policies. So if an employee has a serious health condition and uses all of his Family and Medical Leave but still cannot return to work, the employer now has to determine whether it would be a reasonable accommodation to allow the employee to miss more work. This is the EEOC position even though the courts have held that regular attendance is an essential function of most jobs and that indefinite, open-ended leave requests are not reasonable.

Texas courts have long held that maximum leave policies, neutrally applied regardless of whether the employee suffered an on-the-job injury, had a heart attack or wants to extend her maternity leave, are valid in Texas. The EEOC is undercutting those holdings in an attempt to impose a different standard (or no standard at all). From the settlement with Sears, the EEOC apparently wants all employers to follow these steps when an employee has been on leave and is unable to return at the prearranged time:

What this means to even a small employer (15 or more names on the payroll) is that there will be no bright-line cutoff to an employee’s leave. If the EEOC’s position prevails, employers will have to hold all jobs open indefinitely for an employee who must take time off for an injury or illness.

At this point, my only advice is to wait and see how the courts react to the EEOC’s position. The Sears suit was a pretrial settlement, so we don’t know how this unreasonable position of the EEOC will hold up in court.

In Texas, it is still the law that an employer can enforce a neutral leave of absence policy by automatically terminating an employee who has exceeded the maximum leave offered. Just be aware that that law could change at any time if courts begin to side with the EEOC.

Topics: Attendence, Discrimination, Medical | No Comments »

EEOC Ordered to Pay Employer’s Attorneys’ Fees

By Vicki | March 1, 2010

Many employers have felt victimized by the federal government’s sometimes overzealous enforcement efforts on behalf of employees against the companies they work for. For example, the current trend regarding any compensation mistake by the employer is to label it “wage theft” and prosecute the employer like a common purse snatcher. (Click here for more information on “wage theft” enforcement efforts).

Obviously, some businesses do discriminate and some purposefully fail to pay required overtime. But the company is not always the bad guy and it is nice to know that occasionally a judge will side with the company instead of the government.

This happened recently in Iowa, where a trucking company had spent $8.5 million in attorneys’ fees, expenses and costs to defend itself against allegations by the Equal Employment Opportunity Commission that the company had a pattern and practice of sexual harassment. The federal judge dismissed the EEOC’s suit against trucking company after the company filed a motion for summary judgment. The female judge also issued scalding criticism of the EEOC’s pursuit of the case.

To punish the EEOC, the judge used her discretion to award money to the prevailing party to cover attorneys’ fees, which in this case was the trucking company. She ordered the EEOC to pay $4.56 million to the company to help with some of their legal fees.

For someone who always represents employers and who constantly has to tell them that the chance of getting reimbursed for attorneys’ fees is slim to none, I found this case as a small glimmer of hope that the small business owners whom I represent could receive justice in an egregious case like this one. However, I must point out that no matter how nice the $4.5 million judgment against the EEOC seems, there are two caveats to consider: (1) the company spent $8.5 million defending itself against these scurrilous claims and will only get half of that back; and (2) the EEOC has already said it will appeal the $4.5 million attorneys’ fee award, meaning the trucking company is not through spending money on legal proceedings yet.

For most of us small business owners, the idea of spending $8.5 million in defending our companies is laughable. Most of us couldn’t spend 1/100th of that on attorneys without bankrupting ourselves.  That’s why I harp so often on preventative measures that an employer can take to avoid employee litigation. It is far better to never be sued at all than to win a very costly victory like the Iowa trucking company did.

Topics: Compensation, Discrimination | No Comments »

Attempting to Prevent Workplace Violence

By Vicki | February 18, 2010

Amy Bishop, a 42-year-old biology professor at the University of Alabama-Huntsville (UAH), walked into a biology faculty meeting on Friday, February 12, and according to eyewitnesses, opened fire on her colleagues, killing three and wounding three others. She is charged with capital murder and the death penalty may be sought. Obviously this a nightmare for the victims’ families and friends, the university and the community of Huntsville.

As the shock of this gruesome event settled in to my brain, the questions about workplace violence prevention arose. Could this horrific mass shooting have been prevented by policies, background checks, or alert coworkers? The question is unanswerable, of course, but trying to answer it is the only way we can learn something from this tragedy.

One method that an employer can use to prevent workplace violence is to thoroughly check the criminal and employment background of any prospective employee. There is speculation about Amy Bishop’s background, including suspicion that she was involved in the killing of her own brother and in sending of a mail bomb to a former boss. However, no criminal convictions were recorded in these incidents so they would have been of no help to a human resources professional trying to check Bishop’s background.

A much clearer sign of a potential problem was her guilty plea to misdemeanor assault and disorderly conduct in 2002 for punching a woman in the head at an IHOP after the victim took the last booster seat just as Bishop arrived with her children. The victim told officers that Bishop started a profanity-filled argument and at one point shouted, “I am Dr. Amy Bishop”. Some of the news stories now say that Bishop was put on probation and ordered to take anger management classes. If so, a criminal record would exist. Any employer who finds violent crimes on a prospective employee’s criminal record, even if they are misdemeanors, should think carefully about whether that applicant’s abilities are worth the risk to others in the workplace.

A thorough reference check with Bishop’s past employers might have revealed some personality issues that could have raised red flags. Granted, many past employers will only give out dates of employment, rate of pay and job titles. But if a prospective employer will fax to the former employer a release signed by the applicant absolving the former employer of any liability for giving out real information during the reference check, the conversation will usually be much more revealing.

In Bishop’s case, UAH might have discovered that Bishop, as one FBI profiler said, was “wired in a way that any rejection, either real or imaginary, is seen as an insult against her very existence and self-esteem. Her narcissistic ego was impugned and threatened.” People like Bishop, who have a tendency to blame others whenever things go wrong in their lives, who show anger often and who retaliate aggressively, may have left an indelible impression on past employers. The trick is to get them to relate those personality problems to you as a prospective employer so you can reject that applicant before he or she becomes an irritant, or worse, an aggressor, in your workplace.

Of course, as an employment attorney, I would be remiss if I didn’t point out that the Americans with Disabilities Act protects those with mental illnesses from discrimination in hiring if the applicant is qualified and can perform the job with or without reasonable accommodation. However, you will not know that the applicant has a mental illness from just a  reference check. You simply will have identified some negative behaviors that are unacceptable in your workplace. This is always a good reason to pass over that applicant in favor of someone equally well qualified who doesn’t have poor reports from past employers.

Finally, after you have hired an employee, your best protection from violence occurring in your workplace is a policy that makes it very clear that even threats of violence are prohibited and may cost an employee her job. Training of all employees, but particularly supervisors, to recognize and identify certain suspicious behavior can be helpful. Granted, in academia as in other work environments, the line between eccentricity and madness may be a very thin one. But no one should be allowed to make specific threats, carry a weapon (even in a car in the company parking lot), or physically fight with a coworker without the employer taking serious disciplinary action, including possible termination.

The truth is that no employer can make a workplace 100% safe from someone as irrational and violent as Amy Bishop appears to be. However, that doesn’t give you license as an employer to fail to do everything you can to prevent such an occurrence in your workplace.

Topics: Hiring | No Comments »

Protect Your Business From Embezzlement

By Vicki | February 17, 2010

There was an insignificant story in the Amarillo newspaper last week about a former credit union employee who was sentenced to 30 months in federal prison for stealing $221,000 from her employer over a seven-year period. At least it seemed insignificant, based on the placement in the paper. But to her employer, I know it was very significant.

I’ve advised many employers in the Panhandle of Texas who have lost money to thieving employees. It has happened to large companies, small businesses, non-profits and for profits. I’ve dealt with embezzlement at banks, car dealerships, doctor’s offices, law offices, construction companies and charities. Each employer feels embarrassed to have been deceived, angry over the missing money (often which will not be recovered) and mistrustful of all employees from that point forward. Those reactions are understandable, since most embezzlement could have been prevented with some careful policies and practices.

Of the three factors leading to embezzlement, motivation (financial pressures), opportunity (access to company cash or accounts and a lack of corporate controls in place) and rationalization (its just a loan or my rich boss won’t miss it), opportunity is the only part of the equation that the business can control. Here are some of the ways to do this:

Topics: Hiring, Personnel Policies | No Comments »

Women Still Hitting Heads on Glass Ceiling

By Vicki | February 8, 2010

At the end of 2009, the Equal Employment Opportunity Commission (EEOC) settled a class action lawsuit against Outback Steakhouse for $19 million. What kind of claim was worth so much money? It was an old-fashioned glass ceiling sex discrimination suit.

The EEOC said that Outback denied women equal opportunities to advance within the corporation’s restaurants, particularly denying them kitchen management experience, which was considered a requirement for a move into top management.

Thousands of women were affected by this discriminatory promotion practice, according to the EEOC. So as part of the settlement, Outback agreed to set up a new management hiring system, employ a new vice-president who will oversee human resources and hire an outside consultant to look over the company’s shoulder for the next two years and make sure that the discrimination has been corrected.

Last year, Dell Computer settled a similar suit alleging systemic discrimination against women attempting to advance at the computer company. Dell agreed to pay $9.1 million to settle the glass ceiling case and agreed to bring in an outside consultant to review its compensation, hiring and promotion practices and assure that the company is providing pay equity to women.

What I find interesting about these cases is that many women, particularly younger women, assume that the glass ceiling has been shattered and that they have an equal opportunity to advance if they want to. That’s why sex discrimination suits based on systemic discrimination seem so old-fashioned. Many women my age are a bit more skeptical, as is the EEOC, which claims, “There are still too many glass ceilings left to shatter in workplaces throughout corporate America. . . . Hopefully this major settlement will remind employers about the perils of perpetuating promotion practices that keep women from advancing at work.”

What about in your own workplace? Do you have women in top management positions? Are the women you employ paid as well as the men? If not, what are the reasons for that? A little self-analysis now could keep your company from facing a sex discrimination suit in the future.

Topics: Discrimination | No Comments »

Are You “Stealing” Your Employees’ Wages?

By Vicki | February 4, 2010

If you have employees who you believe are exempt from being paid overtime or the minimum wage (and who doesn’t?), your company is vulnerable to being accused of “wage theft” by the Department of Labor and being faced with repayment of wages, liquidated (double) damages, interest, penalties and attorneys’ fees. “Wage theft” is the new inflammatory term, coined by an activist named Kim Bobo, author of Wage Theft in America, to describe any failure to pay workers in strict compliance with federal and state law.

Bobo’s thesis is that the DOL has not been properly funded in many years and has focused on helping employers comply with the laws rather than targeting those same employers for vigorous enforcement efforts and collection of the wages which have been “stolen” from low-income workers. She advocates greatly increasing the number of investigators employed by the DOL, which my earlier posts (click here and here) have said is exactly the plan that the Obama administration is following.

The areas in which an employer is most vulnerable to being investigated and prosecuted for wage theft are:

  1. MInimum wage payment.
  2. Misclassification of workers as “contract labor”.
  3. Overtime pay.

The employers in the Texas Panhandle who come to me with compensation questions are not committing wage theft. They are generally confused, or are using common sense instead of knowledge of the law, or are doing what they’ve always done in times when the government wasn’t so rabid about enforcement. They often don’t know they have done anything wrong until a disgruntled former employee complains to the DOL and an investigator comes to audit the business. Now with the present enforcement efforts, the employer is too late to correct the problems and is faced with significant costs and penalties.

So how can you make changes now to avoid an accusation of wage theft and an investigation of your pay practices?

The easiest way to avoid being investigated for the minimum wage violations is to make sure every worker is earning at least $7.25 during each pay period for every hour he spends at work, even if he is paid on commission and hasn’t really produced any sales, even if he is an agricultural worker and it is harvest time so he is working 18 hour days but barely works at all in the winter, and/or even if he is not at work, but is still on call or answering work calls on his cell phone during his personal time.

To avoid liability for misclassifying an employee as contract labor, make sure every person who performs any work for you is on the payroll and all taxes are being withheld from each paycheck. Don’t ever buy into the myth that you can choose to make a worker into a contract laborer. Anyone who performs work for you is probably an employee other than the self-employed plumber who shows up once per year to fix your sink or the lawyer who drafts your personnel policies and reviews them annually.

To avoid overtime liability, you may want to forget about the “administrative exemption” to the Fair Labor Standards Act. This is a catch-all white collar exemption that many businesses use to classify these types of employees: tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, internet and database administration; legal and regulatory compliance; and similar activities.

The problem is that just having one of these job titles is not enough. The exempt administrative employee must also have significant independent discretion and judgment, a requirement that the DOL is interpreting more and more narrowly. Now, even employees who work without much supervision will not be considered exempt if the employer has provided specific instructions on how he wants the job performed. Therefore, an administrative employee who you have always considered to be exempt in the past may not pass the DOL’s scrutiny now.

A careful employer will now get a legal opinion on each employee that he wants to exempt from the overtime and minimum wage laws. As extra protection, even if you believe that your employees are clearly exempt, have every single employee clock in and out every day so that inflated claims can never be made on the hours that a particular employee worked if your exemption determination is questioned in the future.

Topics: Compensation | 2 Comments »

2011 Budget Means More Enforcement Against Employers

By Vicki | February 3, 2010

I’ve been trying to get the word out to employers for the last several months that the executive branch of the federal government has employers who violate any of the federal employment laws in its sights (click here for an earlier blog post on enforcement efforts). Money for enforcement is pouring into federal agencies like OSHA, which enforces health and safety regulations, the Department of Labor, which enforces compensation requirements like the overtime and minimum wage laws, and the EEOC, which enforces the discrimination laws.

Within the 2011 fiscal year budget proposed by President Obama last week, there is money for the hiring of 358 more Department of Labor employees, including 177 investigators and other enforcement staff, bringing the total proposed DOL workforce to nearly 18,000.

OSHA will add 25 more employees to inspect workplaces for safety violations, meaning that 42250 businesses will be subject to these inspections in FY 2011. “Today’s budget affirms this administration’s strong commitment to vigorous enforcement,” U.S. Secretary of Labor Hilda Solis said. “We are sending a strong message throughout industry that we will not tolerate the endangerment of workers.”

The budget also supports a joint effort of the Treasury Department and the DOL to identify employers who hire “contract labor” in an effort to avoid payroll taxes and skirt the overtime and minimum wage laws. For years, employment lawyers like me have been trying to warn employers that “contract labor” is illegal and that there is a very difficult test for employers to prove that any worker is actually an independent contractor. Those employers who still misclassify employees as contract laborers could face increased possibilities of federal investigators reviewing their books, requiring repayment and charging the businesses large fines.

As an employer, it is your responsibility to assure that you are complying with all the federal laws that will be enforced even more stringently if the 2011 budget passes. You are taking a grave risk if you believe that you are in compliance just because your pay, safety or firing practices are the same as everyone else’s in your industry (who often are doing it wrong too), or if you believe you are proceeding correctly because “that is the way we have always done it,” or if you believe that your employees are not dissatisfied so you must be doing something right. Many of these laws are counter-intuitive, meaning you are probably doing them wrong even if you are using common sense! Don’t assume that you are operating within the bounds of federal employment law unless you have a legal opinion from an experienced employment attorney confirming that.

Topics: Compensation, Discrimination, Training | 1 Comment »

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