Recent U.S. Labor Department enforcement activities, along with its collaborations with other governments and agencies, demonstrate its continued emphasis upon rooting-out the erroneous classification of workers as independent contractors.  And if U.S. Labor Secretary nominee Thomas Perez is eventually confirmed, officials can be expected to pursue the matter at least as aggressively as they have up to now.

Our Forbes.com article summarizes some important points to keep in mind with respect to the federal Fair Labor Standards Act status of "contract laborers", "freelancers", "casual workers", "contract employees", or independent contractors by any other name.

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Now that the election is behind us, employers should consider what they might anticipate in the field of wage-hour law, which is already one of the largest sources of employment-law claims.  While the nature and number of the possible developments are practically unlimited, some of the foreseeable ones include these:

♦   The push to increase the minimum wage under the federal Fair Labor Standards Act, which was at fever-pitch before going dormant as the election season approached, will now re-emerge.  There will be similar efforts under many analogous state and local laws and ordinances.

This will probably include proposals to increase the FLSA's cash-wage requirement for tipped employees for whom employers take that law's tip-credit.  The public-relations approach will be that this increases "the minimum wage for tipped workers", despite the fact that the FLSA minimum wage for tipped employees is already the same as it is for everyone else.

 ♦   Analogous moves might well seek to increase the salary amount required for some of the FLSA's exemptions from minimum-wage and overtime, as well as to impose paid-leave requirements.  Recall the March bill introduced by Iowa Senator Tom Harkin which proposed both, including requiring most employers of at least 15 employees to accrue an hour of paid "sick time" for every 30 hours an employee works, up to at least 56 hours each calendar year.

Another possible measure might involve an attempt to raise the FLSA overtime-pay multiple from its current 1.5 times the regular rate to 2.0 times that rate.  This might be joined with reducing the threshold number of hours for FLSA overtime from 40 hours in a workweek to, say, 35 hours.  Similar FLSA amendments were proposed in the late 70s and early 80s, during another period of high unemployment and persistent economic stagnation.  A further impetus this time around might be the already-burgeoning rates of part-time employment, taken in conjunction with what could be a further trend toward part-time work driven by looming Affordable Care Act requirements.

 ♦   Aggressive government enforcement at federal and state levels is likely to expand.  There will be an even-more-intensified focus upon whether workers treated as independent contractors should instead be viewed as employees.  Employers should expect further national or regional enforcement initiatives undertaken with respect to entire industries.  These initiatives will include (among others) those directed at what the U.S. Labor Department has called "low wage" sectors, such as hospitality businesses and food retailing, retailing in general, some healthcare segments, landscaping, some construction segments, temporary-help agencies, daycare/homecare, agriculture, janitorial services, garment manufacturing, and guard services.

 ♦   Following a noisy notice-and-comment period that ended in March, proposals that would essentially spell the end of the FLSA exemptions for companions and live-in domestic-service workers suddenly dropped from view as the election season commenced.  These provisions will probably be released in their final form in the not-too-distant future.

Another distinct possibility is the revival of the so-called "Right to Know" regulations, which USDOL said would require "notification of workers' status as employees or some other status such as independent contractors, and whether that worker is entitled to the protections of the FLSA."  USDOL further said that the proposal would "also explore requiring employers to provide a wage statement each pay period to their employees," apparently so as to convey to employees "how their pay is computed."  The reach of these provisions would likely be even broader than USDOL has so far disclosed.

 ♦   The "wage theft" movement toward increasingly-draconian penalties and punishments will move forward with renewed energy, especially at the state and local levels.  For proponents of these measures, wage-law violations are unrelated to the multi-jurisdiction, patchwork nature of differing, obscure, sometimes-conflicting, ambiguous and ill-defined, rapidly-changing requirements that are proliferating across the nation.  No, as this publication [Editor's Note:  Link Apparently Taken Down] illustrates, in their eyes employers are instead "dishonest", unscrupulous scofflaws who are "stealing" money from workers.  Employers who remain disengaged on this front and who acquiesce in these pejorative campaigns do so at their peril.

It has never been more important for employers to remain vigilant, informed, and assertive about all of these matters.  It is also essential that each employer ensure right now that it is in compliance with all applicable wage-hour requirements.

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For at least three years now, the U.S. Labor Department and the U.S. Internal Revenue Service (along with a host of analogous state and local agencies) have been on the alert for instances in which workers are erroneously considered to be independent contractors rather than employees.  The popular euphemism for these situations is "misclassification" (although this term is also used to describe the different problem of incorrectly treating employees as being exempt from minimum-wage and/or overtime requirements).

What's The Big Deal?

In significant part, this increased attention began with a straightforward motivation:  Government revenue collections have steadily declined in the sluggish economy, so officials at all levels are keenly interested in plugging any leaks.  As USDOL recently put it in a press release, "misclassification generates substantial losses to the U.S. Treasury and the Social Security and Medicare funds, as well as to state Unemployment Insurance and workers' compensation funds."

For its own part, USDOL has been hard at work ferreting-out "misclassification" under the Fair Labor Standards Act and the similar federal wage laws it enforces.  In just the last few weeks, for example, it has announced:

♦   A $105,000 overtime assessment against a Texas employer that had considered workers to be independent contractors for their first 90 days with the company; and

♦   A $101,000 demand against a Virginia employer that had considered individuals performing work on a government-funded construction contract to be independent contractors or to be subcontractors.

Numerous other USDOL "misclassification" investigations, and many private FLSA lawsuits challenging independent-contractor status, are underway across the country.

As we have also highlighted, some states have joined forces with USDOL.  And while North Carolina has not yet signed-on as far as we know, Gov. Beverly Perdue's August 22 Executive Order creating a "Task Force on Employee Misclassification" suggests that it might soon do so.  Among other things, the Task Force is responsible for:

♦   Identifying sectors of the economy where this occurs most frequently,

♦   Encouraging communication and cooperation between relevant state agencies,

♦   Considering regulatory changes likely to enhance legal enforcement efforts, and (perhaps most significantly),

♦   Identifying "ways to increase the filing of complaints by employees and other members of the public against noncompliant employers . . .."  [Emphasis added].

It's Smart To Think Ahead

All of this demonstrates yet again that organizations whose operating models are built even in part upon "contract labor", "freelancers", the oxymoronic term "contract employees", or independent contractors by any other name simply cannot afford to ignore the current enforcement climate.  The wise course is to evaluate without delay what the prospects are that such workers can be shown to be true independent contractors under each legal test that might be applied.

Perhaps the very first question should be whether the circumstances of the arrangement lend themselves to independent-contractorship at all.  In some situations, it will be unlikely that this status could be successfully defended, taking into account such things as the organization's need to control the worker's activities and all the other operational and managerial considerations involved in meeting the organization's objectives.

Even if the chances seem more favorable, management will want to be sure that is has done everything it can to strengthen its position.

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The U.S. Labor Department continues to expand the number of jurisdictions and agencies with which it is collaborating to end what it has called "the business practice of misclassifying employees [as independent contractors] in order to avoid providing employment protections."  The most recent additions are the Colorado Department of Labor and Employment and the Louisiana Workforce Commission.

The list of those with whom USDOL has memoranda of understanding also includes:

◊   California, Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington,

◊   State labor officials in Hawaii, Illinois, and Montana, and

◊   New York's Attorney General.

The Colorado memorandum (link to copy below) exemplifies the nature of this cooperation.  Among other things, the state's Labor Department and USDOL pledge to:

◊   Conduct joint investigations periodically,

◊   Coordinate enforcement activities and provide mutual assistance,

◊   Refer potential violations of statutes enforced by the other,

◊   Develop "methodologies" for exchanging investigative leads and complaints, and

◊   Otherwise share information "as appropriate".

Companies and other organizations might as well assume that any investigation of independent-contractor status by one of these participants will result in the disclosures and referrals the memoranda call for.  Keep in mind also that USDOL has entered into a similar arrangement with the U.S. Internal Revenue Service.

This attention to the "misclassification" issue is unlikely to subside anytime soon.  For instance, there is reason to believe that USDOL's focus upon large homebuilders last fall is now turning outward to many of those companies' subcontractors and vendors.

The wise move for every organization relying even in part upon a contingent of independent contractors continues to be this:  Evaluate right now whether there is any vulnerability to a successful claim that those workers are instead employees.

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USDOL-Colorado DOLE Agreement.pdf (79.04 kb)

We wrote previously about the announcement of a cooperative alliance between the U.S. Labor Department and the U.S. Internal Revenue Service aimed at ending what the Secretary of Labor called "the business practice of misclassifying employees [as independent contractors] in order to avoid providing employment protections."

If that news was not enough to get everyone's attention, the terms of the "Memorandum of Understanding" between these agencies (link to copy below; copy courtesy of CCH) should cause all employers to take notice.  DOL and IRS have agreed to implement their agreement "through enhanced information sharing and other collaboration" led by a "joint IRS-DOL team".

Some Of The Details

Among other things, DOL will "refer to the IRS .  .  . Wage and Hour Division investigation information and other data that DOL believes may raise Internal Revenue employment tax compliance issues related to misclassification."  DOL will also share "Wage and Hour Division training materials and opportunities with the IRS .  .  .."

For its part, IRS "will evaluate and classify employment tax referrals provided by the DOL and .  .  . [will] conduct examinations to determine compliance with employment tax laws."  And in at least some instances IRS is prepared to "share the employment tax referrals provided by the DOL with state and municipal taxing agencies .  .  .."

The two agencies have also committed to "coordinate national outreach activities."  This will include such steps as "joint national press releases" and "joint messages to national stakeholder organizations."  The Memorandum does not identify any of these "stakeholder organizations", but one may hazard an educated guess as to what the identities of at least some of them might be.

The administration's "transparency" mantra has been suspended where the Memorandum is concerned.  For example, the document asserts "a need for the government to provide information to other law enforcement bodies without making a public disclosure."  DOL and IRS say that they intend to preserve their "legal privileges or other legal protections against disclosure" to outsiders, and they contend that information exchanges between them will not be a "public disclosure" under the federal Freedom of Information Act.

Points To Consider

The many take-aways include these:

◊   Once again, every company or other organization relying even in part upon a contingent of independent contractors should immediately evaluate whether there is any vulnerability to a successful claim that those workers are instead employees.

◊   Every such company or other organization being investigated by DOL should assume that information provided about independent contractors will be given to IRS and, potentially at least, to analogous state or local agencies and officials.

◊   Employers must of course abide by their legal obligations in DOL and IRS investigations and audits.  But, within those parameters, management should be careful in deciding (i) what documents and other information to provide, and (ii) how, under what circumstances, and with what caveats to disclose them.  DOL and IRS say that they intend to protect certain confidential or private information and trade secrets that are covered by federal laws and regulations.  However, an employer cannot be sure whether DOL or IRS will agree with the employer (or even with one another) that each document or item of information is protected against disclosure to some other person or entity, or that a court will agree with DOL's or IRS's views in some later third-party legal action to compel disclosure.  And the best of intentions cannot preclude an erroneous, mistaken, or inadvertent release of information to the public.

◊   While the Memorandum's principal focus appears to be worker misclassification, it does not say that the collaboration is restricted to this topic.  For instance, the "joint outreach" is said also to encompass "other issues of mutual interest."

DOL IRS Memodandum of Understanding.pdf (216.50 kb)

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The U.S. Labor Department announced today that it has entered into a cooperative alliance with the U.S. Internal Revenue Service and others aimed at ending "the business practice of misclassifying employees [as independent contractors] in order to avoid providing employment protections."  As the IRS's involvement might suggest, this collaboration has as much to do with enhancing the inflow of tax revenues and other sums to various governments as it does with "employee protections".

The arrangements' other signatories include:

◊   Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington,

◊   State labor officials in Hawaii, Illinois, and Montana, and

◊   New York's Attorney General.

The Labor Department says that these arrangements will permit it to "share information and coordinate law enforcement with" the participants.

None of this should be a surprise, arising as it does from a federal "Misclassification Initiative" that began to gather steam last year.  Nevertheless, every company or other organization with an operational model based even in part upon a contingent of independent contractors should anticipate renewed enforcement energy, activity, and assertiveness.  Management should immediately evaluate whether there might be any vulnerability to a successful claim that those workers are instead employees, including for purposes of federal and state wage-hour laws.

And where the federal Fair Labor Standards Act is concerned, remember that its definition of "employee" has been characterized as being the broadest among all federal employment laws.  In considering a worker's FLSA status, think through the answers to questions like these:

◊   Are the individual's services an integral part of the organization's activities?
 
◊   Does the individual have any significant investment in facilities or equipment?

◊   Does the individual have an opportunity for profit and loss in a business sense?

◊   Does the individual exercise a businessperson's initiative, judgment, or foresight?

◊   Is the relationship is permanent or indefinite, rather than for a determinable time?

◊   Does the individual have meaningful and predominant control over the work's details?

◊   How much control does the organization retain over the work's details?

Fisher & Phillips' 2010 article published in the Bureau of National Affairs' Daily Labor Report (linked below) provides additional perspective on the independent-contractor question.

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Independent Contractor Article 05 20 10.pdf (62.50 kb)

News that some of the nation's preeminent homebuilders have received information demands from the U.S. Labor Department under the federal Fair Labor Standards Act has drawn a variety of unhappy reactions.  But whatever one thinks about the wisdom, appropriateness, timing, or manner of DOL's move, the fact is that the administration has had the construction industry in its FLSA sights for some time now.

As we reported in May 2010, even then DOL had identified construction as being among what it calls "fissured" industries.  Officials use this term to refer to business arrangements that in DOL's view cloud the realities of the employment relationship so as to dilute the responsibility for FLSA compliance.

It is therefore likely that one important purpose of DOL's homebuilder initiative is to develop a baseline of industry- and company-specific structural information that is relevant to FLSA compliance.  For instance, investigators will no doubt be looking into whether ostensibly-separate corporations, partnerships, sole-proprietorships, and the like serving as different components in or layers of construction projects are truly independent businesses, or whether they are instead so integrated with one another as to be a single, overall enterprise.

DOL will also be delving into the extent to which even truly distinct and separate entities nevertheless collaborate about or exercise control over the workers on construction projects.  It will be doing this to judge whether each such entity is a "joint employer" of some or all of those workers so as to share individual and collective responsibility for complying with the FLSA where those workers are concerned.  This can be the case if, for example, a worker's efforts simultaneously benefit those entities under circumstances in which:

◊   There is an arrangement between or among the entities to share or interchange the worker's services;

◊   One entity is acting directly or indirectly in the interests of one or more others in relation to the worker; or

◊   The entities "are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with" one or more others.

See 29 C.F.R. Part 791.  Courts tend to evaluate the joint-employment question under factors that mostly boil down to variations on these themes.

Obviously, DOL will also be investigating whether the targeted employers have been following the FLSA's minimum-wage, overtime, recordkeeping, and child-labor requirements and restrictions.  This will include evaluations of whether these employers have erroneously treated some employees as being exempt or have misclassified employees as being "independent contractors".

Construction contractors subject to federal prevailing-wage and fringe-benefits requirements should also assume that investigators will be alert for any non-compliance with the Davis-Bacon Act or the Contract Work Hours And Safety Standards Act.

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Lurking in Senate and House "misclassification" bills are expansive changes in the Fair Labor Standards Act's civil money penalties.  The impact of these revisions would extend far beyond U.S. Labor Department investigations involving independent-contractor status.

Today, the FLSA permits DOL to impose a civil penalty of up to $1,100 for each violation of the minimum-wage or overtime provisions, but only if the violation was either repeated or willful.  The law currently authorizes penalties for "each such violation".  DOL tends to apply these on a per-employee basis, and the total fines can be more than the wage underpayments.  If the pending proposals are adopted, the potential exposure will broaden substantially.

For one thing, fines of up to $1,100 could be imposed for violations that are neither repeated nor willful.  That is, infractions would be punishable in this way even if the employer had never before violated the FLSA and had the best of intentions.  Furthermore, any question about the proper multiplier would be resolved:  The employer would be exposed to the penalty "for each employee or other individual who was the subject of" a violation.  If violations were repeated or willful, then the per-person penalty ceiling would jump to $5,000.

And for the first time, civil penalties would apply to violations of DOL's recordkeeping requirements.  The DOL investigator says that employees' time records are not accurate, but you say they are?  Can't meet an investigator's demand to get two years' worth of payroll records from Los Angeles to Nashville within 72 hours?  Don't have the time, staff, or resources to "make such extension, recomputation, or transcription of the records" a DOL investigator says you must?  Didn't put a "symbol, letter or other notation" on the pay records to show that certain employees were paid in a particular way (even though it was obvious how they were paid)?  Employees sometimes forgot to punch in or out?  Didn't record the birthdate of every employee under 19 years old?  Numerous situations could put an employer to the choice between paying or fighting substantial fines, even if the recordkeeping violation resulted in no FLSA wage underpayments or child-labor problems.

When one's chosen tool is a hammer, everything looks like a nail.  This will be particularly apt here, where the law calls for penalties collected to be used to fund more DOL enforcement.  Employers should do all they can to avoid having these changes swept through under the radar.

UPDATE (05/14/10):   Fisher & Phillips has now called these proposed changes to the attention of Georgia Senator Johnny Isakson, a member of the Senate's Committee on Health, Education, Labor and Pensions.

Letter To Senator J. Isakson.pdf (131.87 kb)

If your organization's operational model includes an "independent contractor" contingent, it is more important than ever to ensure that this status can be successfully defended.  Enforcement officials are gearing up to challenge the classification across a variety of fronts.

Efforts continue at the federal and state levels to pass new laws affecting whether and when independent-contractor status will be valid.  But a leading indicator of things to come appears in the U.S. Labor Department's FY 2011 budget report.

In the Labor Department's view, misclassifying individuals as independent contractors "denie[s] access to critical benefits and protections to which they may be entitled as regular employees" and "generates substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds."  The Labor Department seeks "a joint Labor-Treasury initiative to strengthen and coordinate Federal and State efforts to enforce statutory prohibitions, [and to] identify, and deter misclassification of employees as independent contractors."

The Labor Department plans targeted investigations and stepped-up litigation.  It also envisions competitive grants made to states for similar initiatives which are designed to "reward the States that are most successful at detecting and prosecuting employers that fail to pay their fair share of taxes due to misclassification."  The Labor Department also favors legislation that would compel employers to prove that independent contractors are classified correctly and would impose federal Fair Labor Standards Act penalties for misclassifying workers.

The FLSA definition of "employee" has been characterized as the broadest of all federal employment laws.  What a worker is called, whether he or she would be considered an employee under other laws (like tax laws), and whether the individual has signed an independent-contractor agreement do not in themselves determine whether the person is truly an independent contractor for FLSA purposes.  Relevant questions include these:

•  Are the individual's services an integral part of the organization's activities?

•  Does the individual have any significant investment in facilities or equipment?

•  Does the individual have an opportunity for profit and loss other than just working hard?

•  Does the individual exercise a businessperson's initiative, judgment, or foresight?

•  Is the relationship is permanent or indefinite, rather than for a determinable time?

•  Does the individual have meaningful and predominant control over the work's details? 

If the answers leave you feeling uncertain about the status of your independent contractors, it's time to take a hard look at things.

UPDATE 05/24/10:  Fisher & Phillips recently published an article on this topic in the Bureau of National Affairs Daily Labor Report.  Click below to read the article.

Misclassification Article 05 20 10.pdf (62.50 kb)