Look for New Overtime Rules in 2019

As announced here, the U.S. Department of labor will issue a Notice of Proposed Rulemaking (NPRM) in early 2019 to determine the updated base salary level for exempt executive, administrative and professional employees.  As a reminder, the proposal will replace the Obama administration’s proposed minimum salary level of $47,476 and update the current minimum salary of $23,660.

At this point, the new rules are a year away.  However, for most employers, the problems created by the white color exemptions are already here.  Let me explain.

The standard rule under the FLSA is that all employees must be paid minimum wage and overtime.  The FLSA and state wage and hour laws have carved out some exemptions from this general rule.  One of these exemptions is for what are known as “white collar” employees.  To be exempt under the white collar exemptions, employees must satisfy three criteria:

• First, they must be paid on a salary basis, and that salary must not be reduced based on the quality or quantity of the employee’s work;
• Second, the employee must be paid at least a minimum salary level, which is currently $455 per week or $23,660 annually; and
• Third, the employee’s primary job duties must involve the kind of work associated with exempt executive, administrative, or professional employees (the “duties test”).

When employers are fined under a wage and hour audit or find themselves the subject of a wage and hour lawsuit, more often than not it is because they failed to pay their exempt employees their salary for any week in which the exempt employee performed work, or because their exempt employees were improperly classified as exempt to begin with.  These risks are present now.

As we saw in 2016, over the coming year employees will be paying attention to this issue, and employers will be under greater scrutiny.  Proactively auditing your exempt employees now to determine whether they are properly classified as exempt and ensuring you are paying them on a salary basis will leave you in a much better position to address the minimum salary levels when the DOL releases the NPRM.  We can help.

California Adopts a New Independent Contractor Test

Earlier this week, the California Supreme Court brought the independent contractor dilemma back into the news when it issued a decision in the matter of Dynamex Operations West, Inc. v. Superior Court of Los Angeles. In a monster, 82-page decision, the California Supreme Court adopted a new standard for determining whether workers should be classified as employees or independent contractors for the purposes of the wage orders.  As a reminder, the wage orders impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.

The California Supreme Court determined that the “suffer or permit to work” definition of “employ” must be “interpreted broadly to treat as “employees,” and thereby provide the wage order’s protection to, all workers who would ordinarily be viewed as working in the hiring business.”  In other words, the Court created a presumption that all workers are employees.  Employers seeking to classify workers as independent contractors must now establish that the classification is proper under the “ABC” test adopted by the Court and already in use in other jurisdictions (including Massachusetts).

Under the “ABC” test, a worker may properly be considered an independent contractor only if each of the following factors is met:

(A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B)the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The “ABC” test is virtually impossible to meet for any company with workers providing services that are within the company’s usual course of business.  While this will be particularly relevant for businesses operating in the “gig economy,” it is important for all businesses to understand the importance of properly classifying workers, and to understand the consequences of misclassifying independent contractors.

Where the Court’s decision is limited to wage claims arising from wage orders, it is possible that some California businesses will have workers who must be classified as independent contractors for purposes of the wage orders, but not for other laws.  As such, we recommend reviewing any independent contractor classification with an attorney to avoid misclassification headaches.

And, if you’re curious as to how courts in another jurisdiction enforce the “ABC” test, look no further than our March 7, 2018 blog entry, found here.

Understanding Your EMAC Supplement Determination

Now that the first quarter of 2018 has concluded, employers are receiving “EMAC Supplement Determination” notifications from the Massachusetts Department of Unemployment Assistance (DUA).  Many employers have been unpleasantly surprised by the size of the penalty and want to understand their options.

To help you evaluate your options, we offer the following today:   a refresher on the law,  and an explanation of the reasons an employer may elect to appeal. Detail on what to expect if you choose to appeal will be addressed in a second article next week.

A Summary of the Employer Medical Assistance Contribution (“EMAC”) Supplement

The EMAC Supplement, which went into effect on January 1, 2018, requires that an employer with 6 or more employees working in Massachusetts pay a contribution for each employee who receives health insurance coverage through the MassHealth Agency or ConnectorCare.

The EMAC relies on the definition of “employee” set out in Massachusetts’ unemployment insurance laws.  This means that any regular employee, regardless of full or part-time status, contributes to an employer’s count.  Depending on the length of employment, temporary/seasonal workers may also need to be included.  To be clear, an employee should be included in an employer’s count, and may subject the employer to an EMAC penalty, even where the employee is not qualified for employer-provided benefits under the Affordable Care Act.

The employer will pay a penalty for each employee who receives health insurance through either the MassHealth agency (the Office of Medicaid) or ConnectorCare (available where the household income is less than 300% of the federal poverty line) for fourteen or more consecutive days in the quarter.  The contribution is 5% of annual wages for each non-disabled employee.  Wages are capped at $15,000, rather than actual wages, making the maximum penalty $750 per affected employee per year.

The penalty does not apply for any employee who receives coverage through the MassHealth agency either:  a) on the basis of permanent and total disability, or b) as a secondary payer where the employee is enrolled in the company-sponsored insurance.  Premium assistance does not trigger the penalty.

Note, too, that most individuals who are otherwise eligible for MassHealth will be required to take their employer’s plan if the plan meets the basic coverage criteria and the employer pays at least 50% of the premium. Therefore, if your company pays at least 50% of premiums, you will generally not be subject to the fines.

What We Believe Are Appropriate Bases for an Appeal

At the outset, please note that although we believe that an appeal is appropriate in the circumstances outlined below; this is based on our legal interpretation of the statute and guidance published to date by DUA. We do not know how DUA will handle these appeals, and cannot make any guarantees related to the success of an appeal on any of the grounds set forth below.  What we do know is that this is the first opportunity employers have to challenge the way in which DUA is assessing these penalties, and appealing is the only avenue employers have to contest these assessments.

When considering an appeal, an employer may want to challenge (1) the correctness of the DUA’s decision to find the employer liable for a supplemental payment; and/or (2) the amount of the supplemental payment.  Below, we review a variety of legitimate bases for appeal and also discuss bases we believe will be unsuccessful.

The Employer Should Not be Liable Because…

…The employer is not subject to the law.  A Massachusetts employer, including a not-for-profit employer, with 6 or more employees working in Massachusetts, is subject to the EMAC supplement.  Any regular employee, regardless of full or part-time status, contributes to an employer’s count.  Depending on the length of employment, temporary/seasonal workers may also need to be included.  The employee count is determined each quarter by calculating the average number of employees who worked during or received wages for the pay period that includes the twelfth day of each month of the applicable quarter.  If the employer had fewer than 6 employees for the first quarter of 2018, the employer should not be subject to any EMAC penalties for that quarter.

…The employee does not work in Massachusetts.  An employee is considered to work in Massachusetts if he/she:  a) performs work entirely in Massachusetts; b) performs work in and out of Massachusetts, but the work out of state is incidental to the work within the state.  If the employer’s EMAC Supplement Determination includes employees who do not work within Massachusetts, the employer may wish to appeal the penalties for the out of state employees.

…The employee did not have MassHealth coverage for the required minimum period.  To subject the employer to a penalty, the employee must have received his/her insurance coverage from MassHealth for a continuous period of at least 56 days in the quarter.  If an employee enrolled in or unenrolled from the employer’s coverage during the quarter, this basis for appeal may be considered.

…The employee receives coverage through MassHealth either:  a) on the basis of permanent and total disability, or b) as a secondary payer where the employee is enrolled in the company-sponsored insurance.

…The employer provides affordable coverage.  Employers that offer affordable coverage to their employees should not be assessed an EMAC penalty for any benefit-eligible employee.  MassHealth/Affordable Care Act rules makes these employees ineligible for subsidized coverage.

The Amount of the Penalty is Incorrect

Assuming employer liability is appropriate, you may appeal based on incorrect calculations of the penalty.  The penalty is 5% of annual wages for each non-disabled employee.  Wages are capped at $15,000, rather than actual wages, making the maximum penalty $750 per affected employee per year.

We have learned from this first round of determination notices that, for employees whose actual wages exceed the wage cap, the DUA appears to be front-loading the penalty rather than spreading it evenly among the quarters.  For example, for an employee with $10,000 of actual taxable wages in Q1, the employer was assessed $500.  Hypothetically, the employer would incur a $250 penalty in Q2 and $0 in Q3 and Q4.

Inappropriate Bases for an Appeal

While certainly frustrating and costly, many of the penalties assessed are likely to be valid.  Before you spend time, effort, and money filing an appeal, be sure you’re contesting for one of the reasons recognized by the law, as listed above.

Many employers (logically) believe that they are not subject to the penalty for an employee who is not eligible for company benefits based on hours worked or tenure.  Unfortunately, an employer is subject to the penalty for any part or full-time regular employee who works in Massachusetts regardless of the rules of company benefit eligibility.

Similarly, employers believe that they are not subject to the penalty for an employee who was eligible for benefits, but declined them.  The employee’s rejection of employer coverage does not, in and of itself, provide a basis for appeal.  As explained above, there may be a basis for appeal if the offered coverage was affordable.

Considering an Appeal?  You Must Act Fast. 

First and foremost, the employer must request a hearing in writing delivered to the DUA. The request should identify the reasons for the appeal, setting forth the reasons why the employer claims the determination is erroneous.

The request for a hearing must be filed not more than ten calendar (not business) days after the employer’s “receipt of notice” of the determination.  Most employers receive DUA communications through UI Online.  For these employers, the “Date of Determination” listed on the bill is the date the DUA will presume the employer received the notice.  There are limited exceptions to this, which include communications posted after 5pm, on weekends, or state or federal holidays.  If the employer receives communications via regular mail, the date of receipt is assumed to be three days after the determination notice was mailed.  If the third day falls on a state or federal holiday, Saturday, or Sunday, the notice will be presumed to have been received on the next business day.

Despite the fact that the penalty and appeal process is new for both the DUA and employers, the DUA has indicated that it will not make exceptions and will not consider appeals submitted outside this 10-day timeframe.

To begin the appeal process, an employer should deliver its request to:

EMAC Supplement Program – Appeals
Department of Unemployment Assistance
Charles F. Hurley Building
19 Staniford Street
Boston, MA 02114

You Filed Your Request for an Appeal.  Now What?

First, be aware that your payment obligations are not suspended while the appeal is pending.  Employers who appeal are still responsible to submitting payments in a timely manner.  The DUA will charge interest on unpaid penalties at a rate of 12% per quarter.  The DUA has indicated that it will refund penalties paid if the employer prevails on appeal.

Second, begin preparation for the hearing.  Our next communication will help you do this by answering the many questions you may have, including:

• What will the hearing process entail?
• When will the hearing occur?
• Who will preside over the hearing?
• Who has the burden of proof?
• Will witnesses be called?
• What rules of evidence are followed?
• Must the employer be represented by an attorney?

What Should Employers Do?

Because this law and this process are new, it’s impossible for us to know how the DUA will respond to appeals.  We certainly hope the DUA will give due consideration to all legitimate and timely filed appeals; but we cannot know for certain.  However, if employers don’t appeal, the DUA will go unchallenged and will have no reason to ensure its enforcement aligns with the law.  This is employers’ first opportunity to assert influence.

If you’re questioning whether to appeal, we can help you weigh your options.  If you have already appealed, or plan to appeal, we can assist in generating your appeal or preparing for your hearing.  You can reach us at questions@foleylawpractice.com or (508) 548-4888.

This Spring the EEOC Is Hot on Disability Discrimination

In January, the EEOC announced that Lowe’s Home Centers agreed to pay $55,000 to settle a disability discrimination lawsuit.  According to the EEOC, Lowe’s failed to reasonably accommodate a department manager with a disability that substantially limits the use of his right arm.  The employee was promoted to a department manager in 2008, and Lowe’s was aware of his disability at the time he was promoted.  During his employment, the employee was unable to use power equipment that required the use of two hands, but he was able to delegate such tasks to employees under his supervision.  In 2015, Lowe’s notified the employee that they could no longer provide him with a reasonable accommodation and demoted him to a non-supervisory associate position.

So where did Lowe’s go wrong?

The EEOC’s announcement is light on justifications put forth by Lowe’s, but based on similar questions that are posed to me on a regular basis, I can place some guesses.

The American’s with Disabilities Act requires employers to provide reasonable accommodation to qualified individuals with disabilities, except when such accommodation would impose an undue hardship.  A reasonable accommodation is a modification or an adjustment to a job or the work environment that will enable a qualified applicant or employee with a disability to participate in the application process or to perform essential job functions.  

By all accounts, the manager had been performing the essential functions of his position with accommodation for several years.  In a situation like this, where an employer is looking to change a longstanding accommodation, it is important for a few things to happen:

1. Make sure the need for the change is well documented.  Circumstances can change over time, as can job duties and requirements.  While it is possible that an accommodation that was reasonable for several years could stop being so; the EEOC, courts, and your employees will look at such a change skeptically.  Documentation of a legitimate, nondiscriminatory business reason justifying why the accommodation is no longer reasonable is a must.
2. Even if Lowe’s could show that the previous accommodation was no longer reasonable, the ADA still requires employers to engage in an interactive dialogue with the disabled employee to identify possible accommodations that would allow the employee to perform the essential job functions.  This conversation appears to be conspicuously missing in this case.
3. In the case of a disability, demotion or termination should only occur if the employee cannot perform the essential job functions with or without accommodation, or if the employer can show that reasonable accommodations that would allow the employee to remain in the job would impose an undue hardship on the employer.  It is important to remember that undue hardship is not always easy to show; and in a large national company like Lowe’s, the employer would be expected to make accommodations requiring greater effort or expense than would be required of a smaller employer.  Again, there is no indication here that the employee could not perform the essential functions of his position, or that continuing to accommodate the employee would have imposed an undue hardship on Lowe’s.

Employers looking to remain outside of the EEOC’s cross-hairs should take note of Lowe’s missteps.  Remember to engage in the interactive dialogue with any employee requesting accommodation for a disability, and document, document, document.  These two steps, combined with pumping the brakes on premature employment actions will go a long way toward avoiding an unpleasant rendezvous with the EEOC.

WWYLD 04/24/18 – Is the Company Obligated to Accommodate a Request for Light Duty?

“Are we required to accommodate this request?”  It’s probably the question I’m asked the most, in one variation or another.  Whether an accommodation is or is not required depends on the specific facts, including, but not limited to:  the nature of the request, the job, the size of the employer, and the employer’s past practices.  In this week’s WWYLD, we focus on how precedent impacts the answer to the “are we required to accommodate” question.

Question:  An employee brought a note that he can return from leave to light duty.  Are we required to accommodate?  We allow only 2 light duty workers at one time and we don’t normally accommodate light duty work for an injury/illness that is not job-related. 

You’re not automatically required to accommodate light duty.  Anytime an employee requests a modification to a position on the basis of a disability, you’re required to:  a)  engage in an interactive process with the employee; and b)  review each requested accommodation on a case-by-cases basis to determine whether it can be provided without posing an undue hardship on the company.

The Americans with Disabilities Act (“ADA”) requires that each request for an accommodation be evaluated based on the specific facts surrounding the request.  Because this case-by-case consideration is required, it is generally impermissible to adopt bright-line rules related to the number of accommodations allowed.  Employers should generally avoid policies that state that disability-related leaves will be automatically denied after X duration (though some recent case law is showing a tide change here) or that light duty will be automatically denied after X number of employees have asked.

That is not to say that an employer must approve each light duty request, but that each request must be considered on its own merit.  Maybe light duty poses a hardship in one department but not another.  Or, maybe it’s easier to accommodate light duty in one job than in another job.  The result might still be that that company can only accommodate two requests for light duty at one time because the third would pose an undue hardship.  But, we’re arriving at the answer using a different, and legally-compliant, methodology.

Let’s turn to the differentiation between workers’ compensation and non-workers’ compensation-related requests.  Because of associated cost benefits, employers are often inclined to treat workers’ compensation accommodations differently than non-workers’ compensation accommodations.  Employers will often allow an employee on leave for a work-related injury to take many months off.  But, would seek to terminate an employee on non-workers’ compensation leave shortly after the legally protected period.  Similarly, employers will often go out of their way to return a workers’ compensation employee to work – accommodating restrictions without question.  But, the employer would not desire to accommodate the non-workers’ compensation employee in the same way.  It seems logical, because one has associated costs the other does not.  But, it poses a great deal of legal risk.  To not run afoul of discrimination laws, employers must treat employees on leave the same, regardless of whether the leave is or is not related to a workplace injury or illness.  And, employers must treat employees requesting accommodations the same, regardless of whether the restrictions are related to a workplace injury or illness.  If an employer were to allow an employee injured on the job to remain on leave for 2 years, the employer has opened the door for another employee to be entitled to a 2-year leave.  If the employer allows light duty for a workers’ compensation employee, the employer would then have to allow light duty for a non-workers’ compensation employee or risk a claim of disability discrimination and retaliation.

The interactive process can be intimidating and confusing.  We can guide you through each step.  Please reach out at (508) 548-4888 or info@foleylawpractice.com

The DOL Has Brought Back Opinion Letters

During the Obama administration, the DOL stopped providing opinion letters in favor of adopting “Administrator Interpretations.”  But, now they are back.

In January, the DOL reissued 17 previously withdrawn opinion letters; and last week, the U.S. Department of Labor (DOL) issued two opinion letters – the first since 2009.

Opinion letters can be a great benefit to employers.  First, they address specific questions submitted to the DOL by employers and provide important compliance guidance.  It is essentially the DOL and Wage and Hour Division (WHD) providing employers with guidance on how they believe employers should be complying with the laws.

Second, opinion letters can provide an affirmative defense to employers in litigation. In order to take advantage of the affirmative defense, the opinion letter must fully outline the facts involved in its opinions and explain and justify its interpretations.  The employer must also show that their acts conformed with opinion letter’s guidance.

So What Do These Opinion Letters Say?

The first letter addresses whether a request for FMLA that includes a 15-minute break provided each hour due to a continuing a serious health condition, must be paid.  The DOL noted that although short rest breaks up to 20 minutes in length are ordinarily compensable, because the FMLA-protected breaks are given to accommodate the
employee’s serious health condition, the breaks predominantly benefit the employee and need not be paid.  The DOL concluded that employees covered by the FMLA must, however, receive the same number of paid breaks as their peers.

In the second letter, the Wage and Hour Division (WHD) addressed travel time for non-exempt employees who travel on the weekend.  The letter focuses on how to determine travel time pay for employees who have no regular work schedule.

Links to the DOL’s new opinion letters are located here and here.

Wisconsin Further Confines Employers’ Use of Restrictive Covenants, including Non-Solicitation Agreements

Employers operating in Wisconsin are likely familiar with Wisconsin’s restrictive covenant statute which is quite…well…restrictive on employers.  While the statute has been in place for decades, a recent decision by the Wisconsin Supreme Court places even further limitations on the language and circumstances of these agreements.

Background

Under Wisconsin law, an agreement by an employee to “not compete with his or her employer” during or after employment is only enforceable “if the restrictions imposed are reasonably necessary for the protection of the employer or principal.”  And, any covenant that imposes an “unreasonable restraint” is void, even portions that would otherwise be legal.

For decades, a five-part test has been used by the Wisconsin courts to determine whether a restrictive covenant is reasonable.  To be reasonable, the restraint must:

1. Be necessary for the protection of the employer;
2. Provide a reasonable time limit;
3. Provide a reasonable territorial limit;
4. Not be harsh or oppressive as to the employee; and
5. Not be contrary to public policy

Extension of the Law to Non-Solicitation Agreements

In Manitowoc Co. v Lanning,[1] the court reviewed not a noncompete agreement, but a non-solicitation agreement.  Lanning’s employment agreement contained the following:  “I agree that…for a period of two years from the date [of termination], I will not (either directly or indirectly) solicit, induce or encourage any employee(s) to terminate their employment…or to accept employment with any competitor, supplier or customer…”

In Lanning, the Wisconsin Supreme Court first reviewed whether Wisconsin’s restrictive covenant statute extends beyond non-compete agreements to non-solicitation agreements, or non-solicitation of employees.  Because the statute indicates that “any covenant” that imposes an unreasonable restraint is invalid, the Court reasoned for the first time that a non-solicitation agreement would be subject to the law.  The Court then applied the five-factor test outlined above and determined that the agreement was unreasonable and, as a result, wholly unenforceable.  In particular the Court found the use of the term “any and all employees” of the 13,000 member company overly broad. The $1 million award was vacated, which alleged Lanning had recruited 9 employees to his new employer.

What Should You Do in the Wake of Lanning?

• If you operate in the state of Wisconsin and you utilize restrictive covenants, carefully review the language of your existing agreements. It is likely they will not comply with the narrow non-solicitation analysis the Court employed.
• Updating agreements with current employees to be binding post Lanning is tricky: changes must be backed by consideration — each party must give something and get something.
• Consider the interests your company must necessarily protect and ensure the restrictive language is tailored, specifically to the employee, to address those interests. Even agreements that contain limits on time and territory could be deemed unnecessary for the protection of the employer.  For example, Lanning’s agreement was found to be unreasonably restrictive because it prohibited him from recruiting any and all employees and was not limited to a specific group of employees.
• Remember: you do not have to abandon valuable restrictive covenants and non-solicitation agreements altogether. Agreements personalized to your company’s needs, the employee, and the Wisconsin law can be valid and useful protections.

We stand ready to help you evaluate, update, and re-execute your restrictive covenants.  We can be reached at questions@foleylawpractice.com or 844-204-0505.

[1] 2018 WI 6

Leave Under the ADA Not a Guarantee

The Americans with Disabilities Act (ADA) Is Not a Leave Act, Or Is It?

 

This week the US Supreme Court let stand a decision from America’s heartland that has been closely watched. The Severson case arose from an employee with a back issue who had surgery at the end of his FMLA leave and was unable to return to work for another three months.  He was terminated. Severson sued, claiming his rights under the ADA were violated when he was not allowed extra leave.  The Seventh Circuit US Court of Appeals which covers Illinois, Indiana and Wisconsin disagreed. The Court found that ADA is an anti-discrimination statute, not a medical leave law.

 

What does this mean for employers? The Circuit Courts are split and a ruling from the Supreme Court would have been helpful. Unless and until that occurs, we recommend employers continue to utilize a case by case analysis in determining if leave is a reasonable accommodation under the ADA.  The interactive process with the employee and analysis of undue burden is the best practice for each instance. The trend favoring employees in these cases may be waning, but the risks in denying accommodation across the board are tremendous. Stay the course: treat the ADA as proscribed by law.

 

If you have any questions on ADA and FMLA leaves, please contact us.  It can be tricky business. questions@foleylawpractice.com

 

 

WWYLD – 4/10/18 – The DOL’s New Approach for Tip Pooling

Just a few days ago, the Department of Labor (“DOL”) issued a bulletin that speaks to the DOL’s changed position with regard tip pooling.  As readers with tipped employees know, tip pooling is the practice of sharing tips amongst employees.

Historically, the Fair Labor Standards Act (“FLSA”) stated that tip pooling was only permissible if:

• Employees were paid below minimum wage; and
• Employers claimed a tip credit; and
• The tips were distributed only to “customarily and regularly” tipped employees

But, in July of 2017, the DOL indicated that it would not enforce its regulations prohibiting tip pooling amongst employees who are paid minimum wage.  The DOL indicated this non-enforcement policy would be taken while new regulations were drafted and adopted.  In late March 2018, Congress amended the language of the FLSA to align with the DOL’s position.

As part of the Consolidated Appropriations Act, 2018, Congress amended the FLSA so that it is now permissible to pool tips among employees, even if those employees’ hourly wages meet or exceed the federal minimum wage.  The amendment also allows for non-customarily tipped employees, like cooks and dishwashers, to participate in tip pooling.  Managers and supervisors remain barred from accepting tips or participating in tip pools. 

Note that this addresses changes to federal law only.  Some states have state-specific laws related to tipped employees.  Depending on the state(s) in which you operate, you’ll need to ensure you’re complying with your state’s law.

With that background, let’s turn to a related WWYLD question.

Question:  We run a small restaurant with few employees.  We keep our overhead costs low so that we can provide the highest quality food to our customers.  I’m the owner, but also the chef and the manager.  I sometimes serve customers as well.  Because we share duties, can we share tips? 

Answer:  Some of your employees may be able to share tips, but as the owner/manager, you are prohibited from participating in a tip pool.  The DOL has stated that any individual who meets the following criteria is a “manager” or “supervisor” and cannot participate in a tip pool:

• An individual whose primary duty is management of the enterprise;
• An individual who customarily and regularly directs the work of two or more other employees; and
• An individual who has influence over or authority to hire/fire/promote other employees.

Though you are prohibited from participating in a tip pool, you could consider implementing a “house” or “administrative” charge.  Generally, these charges are set percentages that are automatically added to a customer’s bill.  The funds from these charges can be used for multiple purposes, but are often used to supplement the wages of employees otherwise prohibited from receiving tips/participating in tip pools.  Courts have found that such charges are permissible so long as customers clearly understand that the charges do not equate to a tip.

WWYLD 4/5/18 – Is the Worker an Independent Contractor or Employee?

Yesterday, Tim Kenneally wrote about the interaction of the federal and state laws.  As Tim explained, anytime both federal and state laws apply, the law that affords the employee the most protection is the law that controls.  In Tim’s blog, the applicable laws addressed exempt versus non-exempt classifications.  But, there are many, many situations in which federal and state laws differ, including leaves of absence, overtime, meals & breaks, COBRA, final pay, and workers’ compensation.  It’s the employer’s obligation to know which laws apply; and, it can be daunting.

A recent question about independent contract classification provides another great example of federal and state laws interacting.  The Federal DOL recently retracted some Obama-era guidance that had employers erring on the side of caution and categorizing workers as employees.  But, many states have state-specific laws with regard to independent contractor classification.  In today’s example, we review two states:  Wisconsin and Massachusetts.  You don’t operate in either state?  I urge you to read on nonetheless as the concept remains important:  many states have tests that limit the classification of a worker as an independent contract.

Question:  Are there some rules that outline what it means to be a contractor versus an employee? Are there guidelines for what a contractor is/is not and what an employee is/ is not?

Determination of the working relationship is a pretty hot topic right now.  Some big-name companies like FedEx, Amazon, and Uber have been sued for alleged improper classification of individuals as independent contractors.  Unfortunately for our purposes, most of these cases have either settled (so, we don’t know how a court would rule), been dismissed on technicalities, or remain unresolved.  To add complexity, in 2015 and 2016 the Department of Labor provided some specific guidance on independent contractors.  But, just a few months ago that guidance was retracted by the current administration.  This is all to say that it’s not a straightforward answer.  Each relationship should be assessed on a situation by situation basis.

Federal Law
At a federal level, both the Department of Labor (DOL) and the Internal Revenue Service (IRS) provide rules for determining the worker’s relationship.

DOL

The Department of Labor uses the Fair Labor Standards Act (FLSA) definition of employ very broadly to include “to suffer or permit to work.” This is one of the broadest definitions of employment under the law. When applying the FLSA’s vague definition, workers who are economically dependent upon the business of the employer, regardless of skill level, are considered to be employees, and most workers could be employees.  On the other hand, independent contractors are workers with economic independence who are in business for themselves. There are a number of “economic realities” factors that guide the DOL’s assessment of whether an individual should be appropriately classified as an independent contractor. Permanency of the relationship; control; and whether the services rendered are part of the principal’s business are some of the factors.

IRS

Three categories are relevant in determining whether the individual would be more appropriately categorized as an employee or independent contractor by the IRS:

• Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?  Greater company control indicates an employer/employee relationship
• Financial: Are the business aspects of the worker’s job controlled by the payer (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?  Greater payer control indicates an employer/employee relationship
• Type of Relationship:
  • Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)?  Such things would indicate an employer/employee relationship
  • Will the relationship continue?  An ongoing relationship would indicate an employer/employee relationship
  • Is the work performed a key aspect of the business?  If the individual is performing work that is a key aspect of the business, an employee/employer relationship may be more appropriate.  For example, if a landscape company needs lawnmowing, the individual doing the mowing would be an employee.  But, if the owner of several retail shops needs someone to mow the lawns outside the shops, they would hire the mower as an independent contractor, not an employee.  This is because the landscape company is in the business of maintaining lawns.  But, the retails shops are in the retail business, not the lawnmowing business.

The guidance tells us that all of the above factors should be considered:  “There is no magic or set number of factors that makes the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.  The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”

The 3-category analysis is used now rather than the 20-factor test employed by the IRS for many years.

Wisconsin
Unlike the federal law’s broad reliance on any number of factors, Wisconsin gives us specifics.  Under WI law, to be properly classified as an independent contractor, all nine of the following factors must be met.  The individual must:

1. Maintain a separate business
2. Obtain a Federal Employer Identification Number or has filed business or self-employment income tax returns with the IRS based on the work or service in the previous year.
3. Operate under specific contracts
4. Be responsible for operating expenses under the contract
5. Be responsible for satisfactory performance of the work under the contracts
6. Be paid per contract, per job, by commission or by competitive bid
7. Be subject to profit or loss in performing the work under the contracts
8. Have recurring business liabilities and obligations
9. Be in a position to succeed or fail if business expenses exceed income

 

The WI department of workforce development provides concise descriptions of each factor and also provides links to cases that further explain the factors.  The information is available here:  https://dwd.wisconsin.gov/worker_classification/wc/ninepart/

Massachusetts
Massachusetts favors the employee status and uses a three prong-test.  To be classified as an independent contractor, all three parts must be answered with a “yes.”  If any one part is “no,” the individual should be categorized as an employee.

1. Is the worker free from the Company’s control and direction in performing the service both under a contract and in fact?  To be free from an employer’s direction and control, a worker’s activities and duties must actually be carried out with independence and autonomy.  For example, an independent contractor completes the job using his or her own approach without instruction and also dictates the hours that he or she will work on the job.
2. Does the worker provide a service that is outside the Company’s usual course of business?  Typically, a worker who performs the same type of work that is part of the normal service delivered by the employer may not be treated as an independent contractor.
3. Is the worker customarily engaged in an independent trade, occupation or profession?  The particular service to be performed must be “similar in nature” to the independently established trade of the worker.  An independent contractor must represent his or herself to the public as “being in business” to perform the same or similar services that he or she is performing for the company.

Let’s Summarize:

• Each time you form a working relationship, perform an individualized assessment of the relationship.
• Consider the factors outlined by both federal and state laws.
• The law that affords the most protections to the worker applies. Here, that would mean that if the worker would be categorized as an employee under either federal or state law, the worker must be categorized as an employee.
• If you have questions on how to classify workers, we can help. We offer a Position Classification Audit service to identify potential pitfalls of independent contractors and wage and hour issues. It is an efficient and easy way to protect your business. If you would like more information about this service or any other questions, please contact (508) 548-4888 or info@foleylawpractice.com