Many business owners started their careers punching a time clock, but after climbing the ladder to success, it’s easy to forget the satisfaction of clocking a few extra hours or the significance of the overtime pay that came along with it. However, the recent increase in class-action lawsuits for alleged violations of wage and hour laws has become an exasperating reminder for many employers.
Such cases now account for nearly 85 percent of all employment class-action lawsuits, and legal experts don’t see the trend ending anytime soon. Allegations include employers’ failure to pay minimum wage, unpaid overtime and inaccurate “exempt” or “nonexempt” employee classifications. Exempt employees are not eligible for overtime pay regardless of extra hours worked, while nonexempt, or hourly, employees can earn overtime.
Maybe it’s the time intensive reporting associated with wage and hour laws or because the Fair Labor Standards Act was enacted during the Great Depression and no longer reflects the way people work (Today’s constant connectivity and the expectation that we are accessible and responsive 24/7 doesn’t exactly accommodate eight-hour shifts or uninterrupted lunch breaks).
Whatever the reason, wage and hour law violations are one of the most common noncompliance issues for companies, and infractions can be costly. According to one recent report, the average settlement per case is nearly $13 million.
To prevent costly litigation, companies should ensure their practices and their employees comply with state and federal wage and hour laws. Here are a few tips:
- Conducting regular audits can help ensure that the various positions within a company are properly classified as exempt or nonexempt. Audits can also validate that the wage associated with a particular position is fair. Business managers who are not familiar with the nuances associated with each classification’s criteria should defer to in-house human resource experts or engage a firm that specializes in HR to help conduct a thorough audit.
- Educate employees on the rationale for each position’s classification. Some employees have a notion that exempt positions are more significant. Managers should emphasize that all employees are looked upon with the same level of respect, but exempt and nonexempt classifications are required to comply with federal and state employment laws.
- Ensure managers understand the distinctions between exempt and nonexempt. Nonexempt employees should receive uninterrupted meal and rest breaks and are eligible for overtime. If managers don’t acknowledge job classifications, they may maintain unrealistic expectations or be intolerant of an employee’s required work schedule.
- Establish a company policy that defines overtime and outlines procedures for requesting overtime. Does responding to an afterhours email or answering a phone call constitute overtime? If so, is the employee’s supervisor aware of this overtime? Best practices suggest that employees sign a weekly time card to verify clocked hours and supervisors pre-approved overtime.
- Use a time management system to electronically track and verify employee hours. Advanced systems can even flag and calculate overtime before it occurs so managers can make quick, cost-saving staffing decisions. Effective time management technologies can also automatically compile data, such as overtime, into accurate and detailed reports.
- A day’s work doesn’t always fit neatly into eight hours. However, when chronic overtime becomes a costly issue, employers should evaluate the situation. What’s the reason for all the overtime? Is the employee managing his or her time well? Would hiring another employee save the company money and save an employee from burnout?
You don’t have to earn minimum wage, punch a time clock or calculate your take-home pay based on overtime hours to be impacted by wage and hour laws. These laws govern when and how your employees work every day. Stay current on the laws and make sure your company is compliant. If you don’t, it could cost you a pretty penny.
John Allen, is president and COO of G&A Partners, a Texas-based HR and administrative services company that manages human resources, benefits, payroll, accounting and risk management for growing businesses. For more information about the company, visit www.gnapartners.com.
While there are benefits to classifying a worker as an independent contractor, such as not having to pay overtime or worker’s compensation, you can face severe penalties for misclassification including back pay and litigation.
“You want to make sure you are correct on the facts of the law when you establish an independent contractor relationship,” says David McLaughlin, a partner with Ropers Majeski Kohn & Bentley.
There are several legal factors that determine how a worker should be classified.
“Employers and principals should be careful to examine the facts of each relationship and then apply the law to those facts,” McLaughlin says. “In other words, it might be time for a gut check on these factors.”
Smart Business spoke with McLaughlin about the consequences of misclassifying workers and how to play it safe to avoid the potential financial Armageddon of misclassification.
Why is it important for employers to correctly classify workers?
Both California and federal agencies are cracking down on independent contractor misclassifications. There’s a new California law imposing a penalty of up to $25,000 for each violation where a worker is willfully misclassified. The Department of Labor and the IRS are going to start sharing information as part of a misclassification initiative to try to catch more violations. If you have a worker who is not characterized as an employee then the employer or principal does not have to pay payroll taxes, overtime, meal and rest periods, unemployment insurance, disability or social security. So there is a benefit to an employer having an independent contractor, but if you fall into a misclassification situation then you may face a wage claim and penalties.
How does an employer know if a worker is an employee or independent contractor?
The definition of an independent contractor in the Labor Code is any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished. There are slightly different tests depending on which agency is pursuing the misclassification. When the case is in Superior Court of California, the main consideration is control plus 11 other factors. The key is the right to control the worker both in regard to the work done and the manner and means by which it is performed.
Other factors are: Whether the person performing the services is engaged in an occupation of business distinct from that of the principal; whether or not the work is part of the regular business of the principal or alleged employer; whether the principal or worker supplies the instrumentalities, tools and the place for the person doing the work; the alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers; whether the service rendered requires a special skill; the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; the alleged employee’s opportunity for profit or loss depending on his or her managerial skill; the length of time for which the services are to be performed; the degree of permanence of the working relationship; and the method of payment, whether by the time or by the job. Whether the parties believe that they’re creating an employer-employee relationship may have some bearing on the question, but it is not determinative.
The analysis is not black or white. Each of these factors should be considered but they need not be unanimously established. The existence and degree of each factor is a question of fact. The legal conclusion to be drawn from those facts, however, is a question of law, which a judge can decide.
What is the impact of an employer getting a worker to sign an independent contractor agreement?
The contract or contractor’s agreement is not determinative of whether that person is in fact an independent contractor. It’s one of the factors considered and it’s probably one of the easiest things you can do to satisfy part of the test. A contractor’s agreement will have little value if the employer or principal controls the manner and means to get the work done.
What are the risks of misclassifying employees as contractors?
The misclassification of a worker can expose employers to a wage and hour claim and attorney fees to defend that claim. Employers have exposure to waiting time penalties related to wage claims. Business owners also have exposure to other workers who are similarly situated, leading to a potential class action lawsuit.
In addition, there is exposure to stiffer monetary penalties for willful misclassification. These penalties may include a requirement that the employer publicize on its website a court or agency finding that the employer committed a serious violation of the law and which invites other misclassified employees to contact the appropriate labor agency.
California and federal interest in identifying independent contractor misclassification creates danger for principals using independent contractors. Now, more than ever, it is critical for employers and principals to carefully evaluate independent contractors to confirm they are properly classified. Reclassifying workers to employees has many dangers. California businesses that are considering this should seek legal counsel to help with understanding and navigating the potential risks and ramifications.
David McLaughlin is a partner with Ropers Majeski Kohn & Bentley. Reach him at (650) 780-1717 or email@example.com.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Governments are looking to find new sources of revenue to hold their heads above water during troubling economic times or just to generate more income, and they are becoming more active in tracking down multistate and even multilocal tax liabilities.
“The states are becoming more and more active in making certain that the taxes they can charge are indeed charging,” says Chuck Zellmer, attorney for McDonald Hopkins LLC.
“They are becoming very active assessing and collecting taxes, contacting clients on a regular basis. I think what you'll see is even going down to the municipalities because some of them have different tax rates, they’re collecting the tax or not, and businesses just don’t think that way right now. Businesses are cognizant that they've got to collect sales taxes but not necessarily on a multistate level.
“Then you have the whole issue of are my people in the state regularly enough that I not only have to pay taxes for the sales in the state, but do I have to pay income taxes, do I have a franchise tax, and all the other taxes that go with having an employee in the state,” Zellmer says.
In the past, businesses have conducted themselves by having independent contractors in other states instead of employees. However, the government is looking at that very hard. Zellmer recommends conferring with your attorney since even some of the more sophisticated clients ? because they think they have sophisticated independent contractor agreements ? aren’t necessarily going to meet the standards the government is pushing these days.
“The independent contractor question is one that is going to be on the front burner for a while until the government settles some questions ? the trend seems to be pushing toward making it the exception when there is an independent contractor relationship,” he says.
Chuck Zellmer is manager of the Business Law Department for McDonald Hopkins LLC. Based in Cleveland, he focuses his practice on business counseling, real estate and succession planning for business clients in a variety of industries on personnel, contract and other issues encountered in daily operations, transactions and strategic planning.