DoL Updates Independent Contractor Classification

Say it with me: AI #2015-1. What is that, you ask? That’s the U. S. Department of Labor‘s (DoL) latest guidance on how to classify independent contractors (ICs). And if you’re a company who works with ICs, you’re not going to like this guidance any more than you liked the latest Fair Labor Standards Act (FLSA) update. This AI, or Administrator’s Interpretation, is a fuzzy one at best, and promises to cloud what had once been one of the most clear AIs. At worst, this AI promises to force some companies to reclassify some of their vendors from IC to EE (employee), and non-exempt EEs at that–meaning overtime-eligible.

As of July 15, 2015, the DoL narrowed the IC classification. As written, it looks as though more workers may be entitled to overtime and must be reclassified as employees. One portion of the AI is key, and that is the part that de-emphasizes the degree to which a business controls an individual’s work. Now, companies need to focus on the “economic realities test,” which reveals whether an individual is economically dependent on them or whether that person is truly in business for h/herself.

Classification Challenge

It’s no secret that many companies have mis-classified employees as ICs currently and in the past. This new guidance will at least force a re-evaluation of IC relationships so companies have an opportunity to get things straight. It will also force some new recordkeeping habits. For instance, now, at the beginning of a vendor relationship, business licenses should be shown, if not copied and kept in the vendor file, if vendors are to be paid on a 1099 basis.

The challenge for companies is the narrow focus on “economic dependence.” As written, the elements of the “economic realities test” seem understandable, but read carefully, you can see that there are no bright-line rules on which anyone can rely. The same person could be considered an IC or an EE simply based on the business at hand. The AI restricts the use of ICs to very few specific situations. No single factor listed in the AI can be relied on to tip the balance of classification one way or the other. As a result, executives (or even in-house counsels) will not always know what factor the DoL or a reviewing court will deem most important.

Economic Realities Test–Six Factors

The DoL has laid out six factors that need to be considered when conducting the economic realities test:

  1. The extent to which the work performed is an integral part of the company’s business.
  2. The vendor’s opportunity for profit or loss depending upon h/her managerial skills.
  3. The extent of the relative investments of the company and the vendor.
  4. Whether the work performed requires special skills and initiative.
  5. The permanency of the relationship.
  6. The degree of control exercised or retained by the company.

As guidance, the DoL writes, “In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative. The ‘control’ factor, for example, should not be given undue weight.”

“The factors should not be applied as a checklist,” the DoL continued, “but rather the outcome must be determined by a qualitative rather than a quantitative analysis.”

Qualitative rather than quantitative. What does that mean? It means you have to look at the task being performed and you have to ask yourself if what’s being performed is an employee function. Take, for example, a freelance carpenter who’s highly skilled. Say she has been contracted by a construction firm, but the carpenter does not independently exercise her skills. She doesn’t determine the sequence of work or order materials or think about bidding for the next job; rather, she is told what work to perform, where, and in what sequence. This carpenter, though highly skilled, is merely performing skilled labor. She isn’t thinking independently, and she’s not demonstrating the skill and initiative of an IC  (e.g. managerial or business skills). As such, she is an employee (and a non-exempt one at that).

In contrast, the DoL notes that “a highly skilled carpenter who provides a specialized service for a variety of construction companies (for example, custom, hand-crafted cabinets that are made-to-order) may be demonstrating the skill and initiative of an IC if the carpenter markets her services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.”

Monitor Classifications

So, who should be responsible for monitoring the IC classifications? Human Resources? Finance? Executive secretary? Someone is going to have to own this issue. Moving forward, the DoL expects companies to make clear which department is responsible to understand the law, know which contractors have been engaged, and monitor compliance. Companies will have to maintain basic records based on the IC determination process, and the facts used to make the determination should be clear.

What should be kept on record? Copies of business licenses, business cards, tax records (1099s, not their filings), project work plans showing limited engagements, and correspondence from the contractor.

Key Points

  • The DoL believes most work should be performed by employees and IC should be used sparingly.
  • Entering into IC agreements or hiring a business entity (rather than a person) does not necessarily protect you from liability under the FLSA.
  • Before engaging the services of any non-employee, carefully review the type and scope of work to be performed.
  • When entering into agreements with other service providers, ensure that you obtain appropriate indemnification provisions to protect your company from wage-and-hour claims of service provider’s workers.

Other things to consider:

  • Avoid giving contractors rights or access that cut against contractor determination, e.g. internal e-mail accounts, server access, invitations to employee functions.
  • Periodically audit existing contractors to ensure they have not inadvertently become employees. (If an otherwise valid contractor arrangement becomes economically dependent on the work, then the relationship may convert to an employee entitled to overtime).

Disclaimer: I am not a licensed attorney. My blogs are based on my own experiences, interviews (where credited), and loads of research, and do not represent legal advice.

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DoL Updates Independent Contractor Classification

Proposed Changes to FLSA (a.k.a. Fair Labor Standards Act or Wage & Hour)

The U. S. Department of Labor’s Wage and Hour Division finally released its 295-page long Notice of Proposed Rulemaking (NPR) that proposes changes to the executive, professional, highly-compensated, and administrative employee exemptions from the Fair Labor Standards Act (FLSA) overtime requirements. The release, which was posted June 30, 2015, was accompanied by a Fact Sheet and Frequently Asked Questions (FAQ) list.

Employers should be aware of the following key sections:

SALARY TEST CHANGES

There are basically two changes that stand out. One is the weekly salary that must be paid for an employee to qualify for the executive, professional, or administrative exemptions from the FLSA overtime rule. The other is the annual compensation that must be paid for an employee to qualify for the highly-compensated exemption.

Since the last update in 2004, the current salary threshold for the executive, professional, and administrative exemptions is $455 a week, which translates into $23,660 a year. The proposed minimum weekly salary is set at the 40th percentile of weekly earnings for all full-time salaried employees. Since the Final Rule is expected to be issued in 2016, the projected new figure is $970 a week ($50,440 a year). Yes, that’s more than double the current threshold.

The effect? A dramatically increased number of salaried employees will qualify for overtime pay. In fact, in his editorial about the proposed rule, President Obama noted that approximately five million employees in the United States will qualify for overtime pay if the proposed rule is adopted.

The surprise in the NPR is the proposal to automatically increase the minimum weekly salary requirement each year based on data from the Bureau of Labor Statistics. This marks the first time since FLSA was passed in 1938 that such a requirement has been suggested. How to index the figures has not yet been chosen. Two different indexing methods have been studied and the Department is soliciting comments on the process.

Similarly, the Department has proposed to increase the minimum annual compensation for the highly-compensated employee exemption. Currently, the figure is $100,00. The proposed figure is, in 2016 dollars, $122,148.  This figure, too, is proposed to be increased annually based on the same index that would apply to the weekly salary requirement.

NO DUTIES TEST CHANGES

Though Duties Test changes were predicted for the executive, professional, and administrative exemptions, even adoption of a California-style requirement that 50 percent of an exempt employee’s time each week be devoted to performing exempt tasks, no changes are forthcoming. Rather, the Department is soliciting comments about the respective Duties Tests. No specific regulatory changes have been proposed at this time.

What will the Department do regarding the Duties Tests? There are two trains of thought: by not proposing changes, commentators believe the Department may have foreclosed its ability to make regulatory changes without further notice and comment; and, the solicitation for comments may indicate that the Department is considering issuing a second round of proposed amendments and opening up a second comment period at a more opportune time.


GOING FORWARD

In the next few days, the NPR is expected to be formally published in the Federal Register, and President Obama is scheduled to publicly comment on July 1st. The Federal Register will provide the timeframe during which written comments will be accepted, which should be at least 60 days. Comments may be submitted at regulations.gov.

Disclaimer: I am not a licensed attorney. My blogs are based on my own experiences, interviews (where credited), and loads of research, and do not represent legal advice.

Proposed Changes to FLSA (a.k.a. Fair Labor Standards Act or Wage & Hour)

Supreme Court Frees up Federal Agencies’ Rights to Reinterpret Regulations at Will

In case you haven’t heard, the U. S. Supreme Court unanimously upheld federal agencies’ rights to not have to go through formal rule-making to make changes to rules that interpret regulations. On March 9, 2015, the high court concluded that the U. S. Department of Labor (DOL) acted properly in issuing an “administrator interpretation” that reclassifies mortgage loan officers as overtime-eligible under the Fair Labor Standards Act (FLSA). (Perez vs. Mortgage Bankers Association, No. 13-1041).

Justice Sonya Sotomayor wrote the majority opinion that was backed by Justices Samuel Alito, Antonin Scalia, and Clarence Thomas who each wrote supporting opinions. In short, Justice Sotomayor concluded that the U. S. Court of Appeals for the District of Columbia’s Circuit’s decision in Paralyzed Veterans of America vs. D. C. Arena, 117 F.3d 579 (D. C. Cir. 1997), which states that an agency cannot significantly modify a previously issue definitive interpretation of a rule without public notice and comment is “contrary to the clear text of the” rule-making provisions of the Administrative Procedure Act (APA).

What Does This Mean?

With this ruling, agencies such as the National Labor Relations Board, Equal Opportunity Commission, and the Department of Labor will be given a wide berth to formally proclaim and put into action rules outside the normal agency rule-making procedures of notice, rebuttal time, and comment considerations from constituent groups. John Meyers, an attorney with Barnes & Thornburg in Atlanta, told Society for Human Resource Management’s SHRM Online that, “We can expect the current administration to use this ruling to back up its authority to pass new or change existing precedents.”

Attorney Tammy McCutchen with Littler in Washington, D. C., and was the DOL Wage & Hour Division Administrator from 2001-2004 said she was not surprised by the decision, that it was a pretty straightforward statutory interpretation. The ruling “should give the DOL the confidence to issue more interpretations of its own regulations through administrator interpretations.”

The Changes in Overtime Eligibility

In 1999 and 2001, the DOL issued interpretive opinions that mortgage loan officers did not fall under the FLSA overtime pay requirement. In 2006, however, a new interpretive rule said those officers were exempt, and employers did not have to pay them overtime.

In 2010, the rule changed again, when the DOL issued an interpretive rule stating that the 2006 rule adopted an incorrect interpretation of a 2004 regulation that what jobs qualified for exemptions from the overtime rule. Once again, mortgage loan officers qualified for overtime pay.

The Mortgage Bankers Association sued with the argument that the department violated the APA by failing to provide public notice and an opportunity to comment on the 2010 interpretive rule before issuance. The District Court agreed with the government’s argument that the plain text of the APA exempts agency interpretive rules from notice and comment rule-making.

The U. S. Court of Appeals for the D. C. Circuit reversed the ruling, relying on Paralyzed Veterans decision.

The High Court agreed to hear the case on June 16, 2014, with oral arguments on December 1st.

Opinions Most Interesting

McCutchen said the “most interesting” part of the decisions was the concurring decisions by Alito, Scalia, and Thomas. They agree that the D. C. Circuit Court cannot create procedural hurdles to an executive agency changing interpretations of their regulations by requiring notice and comment rule-making when these requirements to not exist in the APA.

“They also recognize the problem of unchecked executive agencies issuing interpretations of their own regulations–without notice to the public, but which really do bind the public–and to which courts must defer under prior Supreme Court precedent.”

“The concurring justices seem sympathetic to the evil the D. C. Circuit was trying to address, although they agree the D. C. Circuit’s approach was not consistent with the APA.”

“Instead,” McCutchen said, “The three justices suggest that the court should reconsider prior cases requiring deference to an agency’s interpretation of its own regulations.”

In the words of Justice Scalia, “I would, therefore, restore the balance originally struck by the APA with respect with an agency’s interpretation of its own regulations…The agency is free to interpret its own regulations with or without notice and comment; but courts will decide–with no deference to the agency–whether that interpretation is correct.

Disclaimer I am not a licensed attorney. My blogs are based on my own experiences, interviews (where credited), and loads of research, and do not represent legal advice. 

Supreme Court Frees up Federal Agencies’ Rights to Reinterpret Regulations at Will

15 Employment and Labor Resolutions for 2015, part 3 of 3

This is the last installment of the resolutions I suggest you take, as noted by Constangy, Brooks, to keep your human resources department, and business as a whole, healthy and well away from the inside of a courtroom or mediation center. The last five resolutions are:

11. Are your non-competes enforceable? And are you using them judiciously? Laws on the enforceability of non-compete agreements vary from state to state. If your agreements have not been reviewed in a while, this would be a good time to have them reviewed to ensure that they’ll do you any good if you need them. You may also need to review your territorial or customer restrictions to ensure that they are serving your current business needs, as opposed to the needs you had 10 years ago.

It’s also a good idea to take into account how your non-competes are being used, even if they are generally in compliance with the law. A national sandwich chain recently had a public relations nightmare after it came to light that some restaurants were requiring hourly, minimum wage delivery employees to sign non-competes.

12. Keep on monitoring the “legal pot” issue. A patchwork of state and local laws is developing that permits medical or recreational use of marijuana. Right now, it’s still all right under federal law for employers to ban marijuana use, even in states where it’s legal, because use of marijuana violates federal law. But that doesn’t mean you couldn’t run afoul of state law. This issue is developing quickly, so keep watching, and be ready to make appropriate adjustments to your substance abuse policy depending on what happens.

13. Make sure you’re ready for the Affordable Care Act. Review your current compliance with your benefits counsel and consultants. If you have collective bargaining agreements coming up for re-negotiation or renewal, consider building in some sort of “flexibility mechanism” to deal with the huge uncertainty that the ACA is generating. As examples of the moving target that the ACA has become, the Supreme Court agreed in November to hear a case challenging the subsidies to states that did not set up their own insurance exchanges. (A decision is expected this summer). And just this week, the Republicans in Congress introduced two bills designed to mitigate parts of the employer mandate.

14. Review your contracts with staffing services and true independent contractors. This is a good time to examine your contracts with staffing providers and genuine independent contractors to be as certain as possible that you have properly allocated risks and responsibilities, including insurance obligations, indemnification rights and obligations, compliance with wage and hour and other recordkeeping obligations, employee supervision, employee safety, discrimination or other required training, benefits compliance, anti-discrimination compliance, and recordkeeping obligations and procedures. (If you aren’t sure whether your “independent contractors” are true independent contractors, then go back to Resolution Nos. 1 and 6).

15. Review your alternative dispute resolution policy, or consider adopting one. If you already have an arbitration agreement, is it drafted, published, and executed through agreements with employees in a manner to be enforced by a court? The NLRB still refuses to recognize arbitration agreements that eliminate the possibility of class or collective arbitration, but the Board’s position has been rejected in three federal circuits. The courts generally favor arbitration agreements, so if you do not have one, it might be worth consideration. For employers with collective bargaining agreements, consider whether you should negotiate to obtain grievance and arbitration provisions that would help to meet the NLRB’s new standard for post-arbitration deferral.

Disclaimer I am not a licensed attorney. My blogs are based on my own experiences, interviews (where credited), and loads of research, and do not represent legal advice.

15 Employment and Labor Resolutions for 2015, part 3 of 3

15 Employment and Labor Resolutions for 2015, part 2 of 3

In the second part of the series of resolutions everyone should make to keep their human resource department running smoothly — and legally, we have five more entries:

 6. Audit your wage-hour compliance. Unintentional overtime and wage-hour law violations have a new name in many quarters: “wage theft.” Federal and state agencies and plaintiff’s lawyers, sometimes encouraged by labor unions and their affiliate groups, are saying “show me the money” and finding it. In addition, the U.S. Department of Labor has said that it will attempt to narrow the white-collar exemptions this year. (Although the DOL says the changes will not be drastic, they are expected to be drastic). Among other things, a good wage-hour audit will include ensuring that lower-wage employees are getting at least the applicable minimum wage; that employees are not being required or “pressured” to work off the clock, or “winked at” when they do so; that the employees classified as “exempt” really are; and that any “independent contractors” really are (see also Resolution No. 1). Be sure that the review includes compliance with applicable state and local minimum wage laws, too. Many states now have a higher minimum wage than the Fair Labor Standards Act rate.

7. Update your EEO/no-harassment policies, and get that training done! In just the past year, the EEOC has taken the position that pregnancy and related conditions (including lactation) must be reasonably accommodated. The EEOC and the Office of Federal Contract Compliance Programs, which enforces the affirmative action laws that apply to federal contractors, both agree that “gender identity” is a protected category and that discrimination based on sexual orientation or gender identity violates Title VII. Do your policies reflect this? Do your employees know the new rules? Do victims of harassment and discrimination know that they have recourse?

8. Review your use of criminal background and credit information in hiring decisions. Many state and local laws prohibit employers from asking about criminal history on employment applications, and the EEOC has taken an aggressive position on the use of criminal or credit information in making employment decisions. You can still get this information, but are you getting it properly? If you find that an individual has a criminal or credit problem, are you making the required “individualized analysis” that takes into account, among other things, the nature of the conviction, the years that have passed, and the particular position for which the individual is applying? Did you grab some “canned” rules from a website, or are your rules customized to fit your industry, your workforce, and the people you serve?

9. If you’re a federal contractor, make sure you are up to date on all of the OFCCP’s new requirements. For example, the new requirement that you prohibit discrimination or harassment based on gender identity. The new minimum wage (applicable to some, but not all, federal contractors). The new scheduling letter and itemized listing. The proposed rule prohibiting employers from requiring that employees avoid discussing their pay. The rule requiring employers to “air their dirty linen” by disclosing certain violations of federal labor and employment laws. The new rule on disability discrimination/accommodation and veterans. (“Perform compensation analysis” is another good resolution if you haven’t done one lately).

10. Make sure you’re in compliance with the new injury and illness reporting requirements under the Occupational Safety and Health Act, which took effect on January 1. (Reported on this new rule back in September).

 Check back next week for the last installment of the 15 resolutions.

Disclaimer I am not a licensed attorney. My blogs are based on my own experiences, interviews (where credited), and loads of research and do not represent legal advice.

15 Employment and Labor Resolutions for 2015, part 2 of 3

15 Employment and Labor Resolutions for 2015, part 1 of 3

Now that the new year is well under way and we have all had an opportunity to settle in and organize ourselves for the coming year, I thought I should share some critical chores that need to be attended to keep you safely out of any legal twists.

Here are your first five resolutions as shared by Constangy, Brooks:

1. Make sure your “independent contractors” are really independent contractors. “Independent contractors” are under scrutiny by the Internal Revenue Service, the U.S. Department of Labor, the National Labor Relations Board, state and local agencies, plaintiffs’ lawyers, and union organizers. A mis-classification can cost you back taxes, back pay (including overtime), and back benefits, as well as penalties and interest. If you determine the manner in which an independent contractor performs his duties, including where and when the duties are performed, then the person is an employee.

2. Review your email policies. The NLRB recently found that employees generally have a right to use employer email systems during non-working time in support of union organizing and concerted activity. The Board’s decision means that many employer email use policies, as currently drafted, would probably be found to violate the National Labor Relations Act if an unfair labor practice charge were filed or a union tried to organize employees and argued that the employer’s email policy interfered with the organizing efforts. In light of the new “quickie election” rule that the NLRB issued last month, both union and non-union employers would be well advised to review their email policies and revise as needed. (The “quickie election” rule is scheduled to take effect on April 14, but the U.S. Chamber of Commerce and other employer groups, including the Society for Human Resources Management, filed suit on Monday seeking to block the rule.)

3. Review your policies on social media, confidentiality, and “courtesy.” The NLRB is going after garden-variety employer policies, taking the position that the policies interfere with and have a chilling effect on employees’ rights to engage in concerted activity. Among the commonplace policies under attack are those requiring that information about the company or employees be kept confidential; policies requiring that employees treat each other with courtesy, respect, and civility; and even some policies requiring that employees not disclose confidential and proprietary information. As with the email policies, a non-compliant policy could result in an unfair labor practice charge or the setting aside of an employer victory in a union election.

4. Review your severance agreements. The U.S. Equal Employment Opportunity Commission has taken the position that certain standard provisions in employee separation agreements unlawfully interfere with employee rights to bring or cooperate in the investigation of discrimination charges before the EEOC, and has filed suit against some employers using agreements with terms that the EEOC doesn’t like. One of the lawsuits has already been dismissed, but the court in that case did not make a ruling as to whether the EEOC’s position had merit. Even if you decide to take your chances with your current agreement, it’s not a bad idea to consider toning down provisions that you know the EEOC will find objectionable.

5. Review your leave policies and their administration. It’s not just the Family and Medical Leave Act anymore, although that’s enough in itself. You’ve probably seen that a number of states most recently, Massachusetts have enacted paid sick leave laws. Do your leave policies comply with the laws of the all the jurisdictions where you operate? And what do you do when an employee reaches the end of a sick leave or disability leave period? If you automatically terminate, then you could be in violation of the Americans with Disabilities Act as well as state or local disability rights laws.

This is a lot to take in, I know, but the reviews must be done by either your counsel (who specializes in labor law) or by an experienced human resource professional. Check in next week for another five HR resolutions.

Disclaimer I am not a licensed attorney. My blogs are based on my own experiences, interviews (where credited), and loads of research, and do not represent legal advice.
15 Employment and Labor Resolutions for 2015, part 1 of 3

OFCCP Releases Final Rule on LGBT Non-discrimination

The Office of Federal Contract Compliance Programs announced this month that it is issuing a Final Rule that implements President Obama’s Executive Order that prohibits federal contractors from discriminating on the basis of sexual orientation and gender identity.

This Final Rule will be effective 120 days after publication in the Federal Register (which has not yet occurred) and will apply to federal contracts entered into or modified on or after that date.

What does the Final Rule change?

The EO Clause has been changed to include “sexual orientation” and “gender identity.” Those contractors who incorporate the EO clause by reference, however, will not need to physically alter their subcontracts or purchase orders.

Contractors must notify applicants and employees of their non-discrimination policy by posting the “EEO is the Law” poster. Presumably, the government will be updating this poster to include these two new categories.

Contractors are also obligated to expressly state in job advertisements that all qualified candidates will receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, or national origin. The Final Rule provides that employers can satisfy this requirement by including that verbiage or simply indicating that the company is an “equal opportunity employer.”

Although employees hired outside of the United States are not covered by the regulations, if a contractor is not able to obtain a visa of entry for an employee or potential employee to a country in which it is doing business, the regulations require the contractor to notify both the OFCCP and the U.S. Department of State if the contractor believes that the refusal of the visa is due to the individual’s protected characteristic. This requirement now applies to sexual orientation and gender identity status. 

Affirmative Action Plan Placement Goals Changes

The section of the regulations regarding Placement Goals in AAPs has also been updated. Contractors are prohibited from extending preferences on the basis of race, color, religion, sex, sexual orientation, gender identity, or national origin due to specific placement goals.

What is not affected by the Final Rule?

The Final Rule does not change contractors’ reporting and information collection requirements, so contractors are not required to survey or report on the number of LGBT applicants or employees. The required components of Affirmative Action Plans are also not affected.

What should contractors do to comply?

The Final Rule simply adds sexual orientation and gender identity to the sections of the regulation where the other protected categories are listed, so the affect on federal contractors is limited. Contractors should, however, begin the process of determining whether and when they need to do the following:

• Update the EO Clause in subcontracts and purchase orders;

• Amend the EEO and AA policy to include sexual orientation and gender identity;

• Obtain new “EEO is the Law” posters;

• Modify their EEO tagline on job solicitations; and

• Train appropriate personnel on the new protections.

In addition, the OFCCP has issued FAQs regarding its interpretation of the Final Rule. These will probably be updated periodically as contractors pose questions to the OFCCP.

Why no proposed rule?

The OFCCP bypassed the Notice of Proposed Rule-making and comment period. They stated that the “Executive Order was very clear about the steps the Department of Labor was required to take and left no discretion regarding how to proceed. In such cases, principles of administrative law allow an agency to publish final rules without prior notice and comment when the agency only makes a required change to conform a regulation to the enabling authority and does not have any discretion in doing so.”

If you have any questions regarding this Final Rule, please contact a board certified labor attorney.

OFCCP Releases Final Rule on LGBT Non-discrimination