By: Dan Cohen – 3/17/15
I was delighted to learn the other day that one of my clients received a clean bill of health from the IRS concerning its treatment of certain individuals as independent contractors rather than employees. The groundwork for this result was laid well in advance of the IRS audit and involved a detailed review of the operation and duties of the individuals and the adoption of an independent contractor agreement. This document was front and center of the IRS audit, and I like to think that it was influential.
Don’t get me wrong though: merely calling an employee an independent contractor in a contract will not protect your business from an adverse determination by the IRS, the Department of Labor (“DOL”), state agencies or class action attorneys. Yes, all are stakeholders in cases of employee misclassification. Several years ago, the U.S. Government Accountability Office estimated that employee misclassification costs the federal government in excess of $2.72 Billion in lost tax revenues. This cost may actually exceed $3 Billion today. State unemployment insurance tax losses are in the hundreds of millions. Beyond that, misclassified workers often are not paid minimum wages or overtime pay, and do not typically participate in employer-based health and pension plans.
Under the Obama Administration, the IRS and DOL have signed a Memorandum of Understanding enabling the two agencies to work together and share information to reduce misclassification cases. The DOL has collected tens of millions from employers in misclassification investigations since hiring 300 additional investigators to combat the problem. Michigan is one of nearly 20 states that have created inter-agency tasks forces to strengthen enforcement mechanisms. Of course, class action litigation has resulted in several high profile misclassification findings, like the exotic dancer case in 2012.
Workers are misclassified, often by mistake, but sometimes by design. For some professions, the line between employee and independent contractor is blurred and employers make the decision that an independent contractor designation is proper. Clearly, there are huge cost savings for employers who classify their employees as independent contractors. And, most of the legislation designed to protect employees (e.g. Title VII, NLRA, the Elliott-Larson Civil Rights Act) do not apply. It is for this reason that misclassification cases are so widespread.
However, unless you can pass the IRS right to control test and the economic realities test employed by the DOL and State of Michigan (among other states), the reward may not be worth the risk. Even though the temptation may still exist, make it a point to review the two tests which can be found at “Independent Contractor (Self-Employed) or Employee?” Internal Revenue Service, October 2, 2014. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee as well as FACT SHEET 13: Am I an Employee?: Employment Relationship Under the Fair Labor Standards Act (FLSA).” Department of Labor, Wage and Hour Division, May 2014. http://www.dol.gov/whd/regs/compliance/whdfs13.htm. If you still believe the worker(s) are truly independent contractors, you should memorialize the terms and conditions of the relationship in an independent contractor agreement, establishing the workers independence, non-exclusivity, right to refuse assignments and the like.
By: Rhonda Armstrong – 8/21/14
On August 4, 2014, the U.S. Department of Labor (DOL) announced that LinkedIn agreed to settle a case, paying approximately $6 Million in unpaid overtime wages to hundreds of employees. See: http://www.dol.gov/opa/media/press/whd/whd20140940.htm. Many reports indicate that most of the workers were salespeople. The DOL charged LinkedIn with failing to record, account and pay for hours worked in a workweek as required by the Fair Labor Standards Act (FLSA). The FLSA requires “non-exempt” employees to be paid for all “hours worked” and to be paid overtime pay at a rate of time and one-half for hours worked beyond 40 hours in a workweek. The DOL’s news release indicates that the central focus of the investigation was LinkedIn’s failure to track and account for employees’ “off-the-clock” hours (e.g., work from home, taking telephone calls after hours, responding to emails after hours, etc.).
So, what can we learn from LinkedIn’s misfortune? While FLSA compliance could be a subject for a full-day seminar, here are a few pointers:
- Do not automatically assume that salespeople are not entitled to overtime. In order to be exempt from the overtime requirements of the FLSA, most salespeople must qualify as: (1) an outside salesperson (e.g., primarily makes sales/obtains orders outside of the office), (2) a commissioned retail salespersons (e.g., sells retail goods/services to the general public where more than 50% of earnings are commissions), or (3) an administrative employee (e.g., performs work directly-related to the business and exercises discretion and independent judgment on matters of importance). Otherwise, your salespeople most likely are eligible for overtime.
- Ensure employees treated as exempt are appropriately categorized. Many employers assume simply because employees are paid a salary, they qualify for a “white collar” overtime exemption. This is NOT the case! Employees must meet a certain salary level ($455/week), be paid on a “salary basis,” and meet certain duties requirements. Generally, exempt professional, administrative, and executive employees must be paid a predetermined salary that is not adjusted due to the quality or quantity of work performed. Employers may not make deductions from an exempt employee’s salary except in certain DOL-approved circumstances. Also, employers must meet certain duties tests . Employers often get into trouble by failing to conduct a fact-specific evaluation of the employee’s job (the DOL repeatedly warns that job titles, alone, are not determinative) and making impermissible salary deductions (e.g., docking for partial-day absences, short-term suspensions, etc.).
- Make sure you maintain an accurate record of all hours worked for non-exempt employees. It is important that employers accurately track when the employee starts working, when the employee stops working, and any time treated as unpaid throughout the day (e.g., lunch periods). Problems arise when employers:
o Automatically deduct time for lunch periods with no accurate record – Employers that automatically deduct for unpaid lunch periods (without requiring employees to note their time out/in on their timecard or directing employees to notify the employer of variances) will be hard-pressed to refute employee claims that they worked through lunchtime.
o Don’t pay for lunch or break periods when they should. In order to treat break-time as unpaid, a break/lunch period should be at least 30 minutes and employees must be completely relieved of their duties. So, having Jane sit and answer the phone while she’s eating lunch or requiring your employees to punch out for 15–minute morning and afternoon breaks will be indefensible.
o Turn a blind eye. This was likely the case with LinkedIn. The fact that an employee fails to report time to an employer is NOT a defense to an FLSA claim. So long as an employer knows or suspects that an employee works, yet fails to pay him/her, the employer can be on the hook.
- Publish written policies prohibiting working without authorization and/or requiring employees to appropriately account for such work. Most employers want their employees to take customer telephone calls, be responsive to customer emails, and take the extra steps do a great job. Yet, some of these same employers struggle with the right amount of “checks and balances” to make sure employee claims are supportable. For the most part, employers should have written policies in place prohibiting employees from working without authorization and requiring employees to accurately account for all hours worked in a timely fashion. Also, it is important that employers train their supervisors so they understand the importance of their role. Supervisors may have to discipline an employee for working without authorization, revoke an employee’s authorization, or even add time to a timecard that does not reflect known work during “off-hours.”
CONCLUSION: The FLSA is an extremely unforgiving law; maybe the most unforgiving of all the labor and employment laws. With stepped up enforcement efforts by the DOL, employers are wise to be proactive and audit their pay practices before the DOL comes calling.
By: Dan Cohen – 7/8/14
When President Obama was in Ann Arbor campaigning for a $10.10 minimum wage back in March, 2014, I was astonished by the passion U of M students displayed for the increase. This President can simply do no wrong in the minds of college students. It has gotten to the point where one U of M student proclaimed how she supported Mr. Obama because he filled out a bracket for March Madness and because he was “cool.” Wow, is she in for a rude awakening when she gets out into the real world. I am fit to be tied by the naivety of these young adults. Do they not understand that their summer jobs will be swallowed up by career short-order chefs and order takers at fast food restaurants?
While Mr. Obama continues his minimum wage crusade, temporarily slowed by events in Iraq, here at home, Michigan became the eighth state to enact minimum wage legislation increasing the minimum wage. Under the new law, Michigan’s minimum wage will rise to $8.15 on September 1, then to $8.50 on January 1, 2016, and then to $8.90 on January 1, 2017, before reaching $9.25 on January 1, 2018. Starting January 1, 2019, the minimum wage will be adjusted based on the average annual percentage change in the Midwestern consumer price index over a five year period. The adjustment will be capped at 3.5%, and there will be no increase if the state unemployment rate is 8.5% or higher.
By most accounts, neither the legislature nor Governor Snyder wanted an increase in minimum wage, but pushed the law through to kill the ongoing petition drive, which had gained momentum for an increase to $10.10. Clearly, the legislation was a “lesser of two evils” approach since we the people were about to jack the minimum wage up to $10.10 to “lift people out of poverty” simply because President Obama said so.
More disturbing news that came to light about the same time in the story, “Michigan losing ground on other states in education, new analysis says.” According to this article, Michigan now ranks 49th among the states in 4th grade reading improvement and dead last in 4th grade math improvement since 2003. The middle schools are not having much more success, ranking 38th and 39th in 8th grade reading and math improvement over the same time period.
Maybe before worrying so much about increasing the minimum wage, we should have stopped to think whether we can educate Michigan’s next generation of workers so employers might actually want to pay them more than the minimum wage. To me, it makes little sense to raise the minimum wage without fixing the educational system in our State. Perhaps Michigan should start looking for alternatives to its failing educational system. Governor Snyder would not have to look far for one option. Indiana Governor Mike Pence recently signed legislation making his the first state to withdraw from National Common Core education standards, which establish targets for proficiency in math and reading and purports to establish consistency and rigor in the nation’s education system. If Indiana, at 17th amongst states in educational ranking, can take such a step, maybe Michigan, with its 46th ranking, should start thinking about changes too.
I harken back to my high school days and Roger Waters lyrics,
We don’t need no education
We don’t need no thought controlled
No dark sarcasm in the class room
Teachers leave those kids alone
Another Brick in the Wall, Part 2, Pink Floyd, The Wall, 1980. I’m not really sure what Roger Waters meant with these lyrics. Was he saying, through the use of a double negative, that we really do need education? Or, was he quoting French Marxist philosopher, Louis Althusser, on how education is a form of government control of the population? I do know that Another Brick in the Wall was released during my senior year in high school, and was an anthem of sorts for all of us seniors who were preparing to go off to college and conquer the world. I did not ponder the lyrics or dissect their meaning back then.
Now, 34 years later, I do both. But, I do so out of concern for our educational system and because my two teenagers are living in that system with my oldest heads off to college in another year. Although only time will tell whether raising the minimum wage will kill jobs, create an underclass of permanent fast-food handlers, result in reduced hours or strengthen our economy, I always thought that education was the key to prosperity and that education and technical skills would pull people out of poverty. Maybe that’s just me. But, I say it is about time we accept the fact that our education system is broken and start thinking about how to fix it. Otherwise, we are simply selling ourselves short. So, forget what Roger Walters said. We do need education. Teachers don’t leave those kids alone. It’s time to get serious about education.
By: Bill Pilchak 4/10/14
There should be a motive for people who have mastered the challenges of flipping a hamburger
to move on to a more responsible position so that they contribute more to our society.
I noted President Obama’s visit to Michigan last week in an effort to increase the minimum wage to a level one can ostensibly live on ($10.00+) and the nationwide strikes of fast-food restaurants (seeking $15.00 per hour) with Shirley Megge in mind. In the late 1950’s, after her marriage evaporated, Shirley was single-handedly raising two sons under the age of three and had a job on the sales floor at Crowley’s department store. The minimum wage was $1.00 per hour then. It’s unclear whether she earned more than minimum wage, or whether she was ever a full-time employee of Crowleys. For certain she qualified for government- subsidized housing in Detroit’s Parkside “projects” adjacent to Chandler Park at Conner and Warren.
The low wages and governmental housing subsidy either weren’t enough to raise two boys or weren’t enough for Shirley. Plus, the projects were a tough environment. Shirley entered Wayne State University, got two years of education and moved on to a job at Michigan Bell Telephone Company that carried more responsibility and hence was worth more than minimum wage. Shirley got out of the projects into a house one mile away, saved money for ten years and bought a 1000 square foot “palace” in a blue-collar suburb for $16,000.
Shirley was pleased when she became a “salaried” administrative assistant. Her earnings were adequate, but didn’t allow for frills. While she strove for higher positions, her boys delivered papers to earn their own spending money. Eventually, the older son got a job at one of the first McDonald’s restaurants. He made minimum wage, which was then $1.25 an hour. The younger son found a restaurant that would hire him at age 14 to wash dishes and buss tables for below minimum wage at $1.00 per hour.
The value of what the boys learned eclipsed the small paychecks. They learned: one needs to show up when scheduled, that one needs to punch the time clock, that one must listen when instructed on a task because bosses and coworkers become irritated when one doesn’t follow rules, and procedures and instructions. Mostly, though, the work environment demonstrated that those who hustled got more responsibility, more hours, higher pay and sometimes a share of a waitress’s tips if your hustle made her money. The younger son was soon assigned more responsible tasks including back-room food preparation and all of the building maintenance. The fact that he still made less than minimum wage didn’t bother him. He was learning things that he would use for the rest of his life, and he was, after all, saving money to buy a car and for college. Apparently oblivious to the fact that the short-order cook was the defacto “boss” of the premises in the absence of the manager and that customers didn’t want to see their steak grilled by a kid, he lobbied hard and was made a cook. He went on to consistently work 38 hours a week while in high school, either at or just above minimum wage, now saving for college.
Shirley insisted her boys go to college. The older son got his degree in auto repair technology, started a business that has continuously employed the same three technicians and thus supported four families for twenty-five+ years. Perhaps you guessed that the other went on to law school and became an employment lawyer, himself supplying jobs to others.
I shudder to think what would have happened if Shirley had deigned to stay in a sales position at Crowley and locked me into a life in the projects or even a mile away. I thank God that she always had her “eyes on the prize” and set her boys’ sights the same. By doing so, she transformed her own life, eventually worked in the legal department, married a respected engineer, retired and travelled the world, and taught her boys to assume as much responsibility that they could handle.
Clogging up entry level jobs with adults who intend to stay in them, instead of using them as a stepping stone to greater responsibility and societal worth presents a significant danger to society. Nowhere is it more important to give a young person a job to teach fundamentals of going to work than in the lower socio-economic classes. Nowadays, not only does the entry-level worker learn the basics of what is expected at work, but it may be the person’s first exposure to the role that technology plays in the work world. Virtually every new experience in the work environment is a learning experience for someone who hasn’t worked before. We need a training ground for people to enter the work world. Why provide a disincentive to move on? There should be a motive for people who have mastered the challenges of flipping a hamburger to take the next step so that their efforts are worth more to our society and so that they attain as much of the American Dream as they can.
By: Bill Pilchak and Dan Cohen – 3/25/14
In 2015, an army of employees will be interested in whether
their employer is a federal subcontractor
On February 12, 2014, President Obama signed an Executive Order raising the minimum wage for federal contractors and subcontractors to $10.10 (a $2.85 increase), effective January 15, 2015. Executive agencies, likely the Department of Labor or OFCCP, are required to issue regulations by October, 2014, in order to enforce the minimum wage requirement sixty days later.
Next, on March 12, President Obama reported that he will be directing the Department of Labor to issue regulations increasing the minimum required salary amount for an individual to qualify for exempt status to $984.00 per week ($51,168 per year). “Minimum required salary” means that unless a person is paid salary at that level, they must receive overtime pay at 1 ½ the hourly rate for hours over 40 in a week. The minimum required salary had been $455. The new threshold will more than double the former minimum when the regulations take effect.
Authority For These Measures
In case you have been tuned into the current political/Constitutional controversy of the President acting unilaterally to impose law, neither move likely requires Congressional approval. Federal contractors have had numerous obligations, including Affirmative Action Plan obligations, under Executive Orders for decades. And, the minimum required salary has always been set by regulations, not Congress.
That said, every time the President acts unilaterally, Court-watchers wonder if the Supreme Court won’t reign in the “imperial Presidency.” The President’s power is supposed to stem from an Act of Congress or the Constitution itself. Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952), struck down an executive order of the President for that reason, a case most recently cited to limit President Bush’s power in international affairs in Medellin v. Texas, 552 U.S. 491 (2008). Congress has spoken on pay for government contractors and subcontractors at least four times in the Davis-Bacon Act, the Walsh-Healey Act, the Service Contract Act and the Fair Labor Standards Act.
Federal Contractor Minimum Wage
Many may yawn at the news about the minimum wage for federal contractors and subcontractors, thinking the developments have no effect for them. However, there are greater implications than most understand. Many businesses operate without appreciating that they are federal subcontractors. (Others recognize that they are, but ignore their obligations until the OFCCP comes knocking.) Federal contractors are supposed to include “flow-down” clauses in their federal contracts alerting their suppliers of their obligations. However, many do not and the OFCCP does not consider the lack of a flow-down clause to be an excuse for not complying.
“A ‘Federal subcontract’ is an agreement or arrangement with a Federal contractor either (1) for the furnishing of supplies or services or for the use of real or personal property, which is necessary to the performance of any one or more Federal contracts; or (2) under which any portion of the Federal contractor’s obligation under any contracts is performed, undertaken, or assumed. Thus, some but not all contracts with a Federal contractor will trigger coverage under the laws administered by OFCCP.”
Many (possibly most) large corporations are suppliers to the federal government. Employers may think that their goods/services are not necessary to the performance of a federal contract, but the OFCCP takes an expansive view of that. For example, a company supplying workers’ compensation coverage to a federal contractor is “necessary” to the performance of a federal contract. Moreover, once any aspect of a business has federal subcontractor status, federal subcontractor obligations spread to all facilities and departments of the business.
As noted, many businesses “lay low” until the OFCCP sends a notice, and then rush to comply. However, effective January, 2015, there will be an army of employees making less than $10.10 interested in ferreting out whether their employer is a federal subcontractor.
Employers have the remainder of 2014 to adopt a strategy, but many will assure that their lower-tier employees are paid $10.10 per hour in 2015, to avoid an OFCCP complaint and scrutiny.
Minimum Required Salary
Admittedly, $455 per week ($23,660) probably was too low, because someone with salaried responsibility (supervising employees, making decisions of consequence to the company) probably should be paid more. But, $984 ($51,168) is too high for some industries, including fast food and retail. Glassdoor.com reports that a McDonald’s store manager averages $42,128 per year, with assistant managers averaging just under $30,000. To avoid giving assistant managers a $20,000 raise, McDonalds and similar companies may reconfigure the compensation for their managers to an hourly rate that –with overtime- equates to their present income.
The Obama Administration’s Continuing Transference of Wealth
A future BLawg article may someday count up all the ways that the Obama administration has drained revenue from businesses-owners. Today, let’s limit our focus to the effect of Obama’s announcements on one McDonald’s restaurant. If McDonald’s did not reconfigure the earnings of their managers, and the three Assistant Managers got raises from $30,000 to $51,168, and the Store Manager got a raise to – say $57,000 (because she can’t be paid the same as her subordinates), the March 12 announcement takes more than $78,000 out of the profits of one store. Since most McDonalds are operated by franchisees, that amount comes out of the pocket of a local business owner. If the McDonalds was on a military base and required to pay $10.10 per hour for each of the 50 employees (equaling 25 full time employees) instead of the $7.79 average today, that takes $120,000 per year out of the profits of one store. (10.10 – 7.79 x 40 x 25 x 52).
Thus, the impact of both announcements in this hypothetical is nearly $200,000. It’s not hard to see how the Administration’s Marxist mindset squelches the start-up of new businesses. Not only does it take money out of the pockets of people who might start another enterprise, but it reduces the reward for risking one’s life savings in order to do so.
Sure, the crew and managers will get a bigger paycheck. If you think your out-of-work brother-in-law will be getting a job from someone making $51,168 a year, that might be a good thing. Personally, we have never seen that happen. Just as we have gotten used to self-check-out kiosks at Home Depot and most grocery stores, it looks like we will soon be punching in and paying for our orders at fast food kiosks where one employee does the work of three or four. McDonalds has already installed 7000 of these kiosks in its European market.
By: La Toya Palmer – 3/6/14
Should we hire an intern? I am sure if you posed the question to former President Bill Clinton; he would answer with a resounding “NOT!” Fortunately, for many students looking to gain experience in their chosen vocation, many employers would disagree with President Clinton and in fact, are gung ho to provide students with the industry experience they seek. It appears to be a win – win: or maybe, not so much.
In the not so distant past, there was an onslaught of lawsuits filed in New York (likely because of its generous statute of limitations, which adds three more years to the Fair Labor and Standards Act (“FLSA”)three-year, look-back period) by unpaid interns, some of whom worked for the infamous Saturday Night Live show (“SNL”), claiming they were owed back wages for duties performed under the mistaken classification of “intern”. As you can guess − for SNL, this was no laughing matter. Maybe this isn’t an entirely true statement; the interns that sued for back wages ended up laughing all the way to the bank. The court in New York ruled in favor of the interns and ordered SNL to pay the “interns” for back wages.