Fisher & Phillips recently participated in a closed-door meeting with U.S. Wage and Hour Division officials in Washington, D.C. to discuss the Labor Department's "Hotel and Motel Resort Pilot Initiative."  There appears to be no specific strategy or plan as yet for this investigative program, but it is scheduled to begin in the agency's next fiscal year, which commences on October 1, 2010.  It is definite that the Division will target Hospitality employers on two fronts – compliance with both H2B requirements and the Fair Labor Standards Act.

The Division informed us that it considers Hospitality to be a "high risk" industry.  However, when we inquired as to what measures they used to make that determination, the officials had little to share.  They identified principally two industry characteristics they seem to be relying upon: 

•   Hospitality employers hire large numbers of H2B workers and younger employees, both of which groups they believe consist of individuals who are "vulnerable" and are unlikely to complain about violations; and

•   As we said in an earlier post, Hospitality is what the Labor Department calls a "fissured industry", by which it means arrangements it sees as resulting in a dilution of both the employment relationship and the responsibility for compliance.

Officials could not state with any certainty that they have received a statistically-significant higher number of complaints or violations in the industry.  Instead, they indicate that one purpose of the audits will be to find out whether there are large numbers of violations. 

The Division made it clear that it will:

◊   Target H2B users for review;

◊   Likely conduct these inspections in certain geographic areas that are not yet specified;

◊   Investigate all employers on the property – including separately owned and operated restaurants, cafes, and the like;

◊   Audit staffing companies supplying workers to the Hospitality industry; and

◊   Scrutinize whether the employers are in compliance with their H2B certifications (if applicable) and are complying with the Fair Labor Standards Act (including its child-labor limitations).

The time to prepare is NOW – this initiative could begin in just a few months.  You should consider conducting an internal compliance audit immediately, before the Labor Department selects your property for an audit.

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)