In recessionary times like these, employers often rely more heavily on independent contractors to avoid the personnel costs associated with hiring regular employees. Doing so, however, creates risks. Now is a good time to make the effort to determine whether your independent contractors are really independent contractors. Just don’t expect the answer to come easily.

The issue of who is properly classified as an independent contractor (as opposed to employee) has been giving employers headaches for decades. As the United States Supreme Court noted over 60 years ago: “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent entrepreneurial dealing.” N.L.R.B. v. Hearst Publication, 322 U.S. 111, 121 (1944). It is little wonder that even the Supreme Court is troubled by this legal issue given the difficulties involved in the analysis. For starters, courts and government agencies (both state and federal) use different legal tests to make this determination. As a result, a single set of facts can produce different legal conclusions. Moreover, none of the tests utilized relies on definitive factors. As the Internal Revenue Service (“IRS”) states on its website, “[T]here 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.”

Although the issue is old, it has continued vitality. There has been a significant increase in litigation, government enforcement and legislation over the misclassification of independent contractors in recent years. It is equally clear that the focus on independent contractor misclassification, far from slowing down, will only continue to pick up steam. The remainder of this blog summarizes some recent developments demonstrating that employers need to be very careful when using independent contractors.
 

New York State’s Joint Enforcement Task Force on Employee Misclassification (“Task Force”), formed in 2007, continues to address, among other things, the problem of employers who inappropriately classify employees as independent contractors.  According to the Task Force’s most recent Annual Report, it has uncovered approximately 12,300 instances of employee misclassification resulting in more than $157 million in unreported wages. Partly in response to the Report, Senate Labor Committee Chairman George Onorato, D-Queens, and Senate Insurance Committee Chairman Neil Breslin, D-Albany, renewed their push for passage of a bill which would, among other things, levy fines of up to $5,000 per employee for any construction company that misclassifies its workers as independent contractors. The bill also creates a presumption of employment status in the construction industry unless certain factors are established.

On August 21, 2009, the Massachusetts Supreme Judicial Court held in Somers v. Converged Access, Inc. that an employee who has been misclassified as an independent contractor is entitled, under Massachusetts law, to recover any wages and benefits he proves he was denied because of his misclassification, including holiday pay, vacation pay, and overtime. In so doing, the Court rejected the employer’s argument that it should not have to pay any damages because had it known the individual was an employee instead of an independent contractor, it would have paid him a lower hourly rate than he received as an independent contractor.

New York Attorney General Andrew M. Cuomo, Montana Attorney General Steve Bullock, and New Jersey Attorney General Anne Milgram have announced their intent to sue FedEx Ground Package Systems, Inc. (“FedEx Ground”) for violations of state labor laws stemming from the Company’s alleged misclassification of its drivers as independent contractors. The Attorneys General claim that such misclassification deprives drivers of workers’ compensation and other labor and employment legal protections received by FedEx Ground’s employees.

In Mohel v. Commissioner of Labor, a decision dated November 17, 2009, the New York Industrial Board of Appeals found that drivers of a limousine service were employees as opposed to independent contractors under the “right to control” test used by the New York State Department of Labor.

Finally, Beginning in early 2010, the IRS will launch an audit initiative that will audit the federal tax returns of 6,000 companies to assess compliance with tax and labor regulations. As part of this audit, the IRS will examine independent contractor misclassification. The initiative was prompted, in part, by advice from the United States Government Accountability Office to the IRS and United States Department of Labor to step up efforts to reduce the misclassification of independent contractors.

 

Without acknowledging that it is doing so, today the New York State Department of Labor ("DOL") changed its position on whether employers are required to use DOL’s form in order to comply with Section 195 of the Labor Law. Effective October 26, 2009, Section 195 requires employers to provide all new hires with notice of their wage rates, pay dates, and, if applicable, overtime rates. The statute also requires that employers obtain written acknowledgments from new employees confirming receipt of this information, which must conform to any "content and form" requirements established by DOL. Shortly after the effective date of the statute, DOL issued a problematic, highly controversial, one-size-fits-all form for providing that information, and mandated its use by employers for all classes of employees. Today, DOL reversed position by posting a notice on its website that states no particular form is required to comply with the statute and that DOL’s form is only a sample.   Employers may create their own forms, use the DOL sample, or adapt the DOL sample form.  The notice also states that DOL plans to come up with several different types of sample forms in the future, including a form for exempt employees.

Our August 11, 2009, posting explained New York’s new law requiring employers to formally notify new hires of their rate of pay, overtime rate (when applicable), and regular pay date, and to obtain a written acknowledgment from the employee that such information was provided. The law applies to employees hired on or after October 26, 2009. As we noted in the August 11, posting, the amendment to Section 195 of the Labor Law provides that the acknowledgement must conform to any requirements set by the Commissioner of Labor. The Commissioner has now provided those requirements by way of an informational fact sheet for employers and employees, and through a standard acknowledgement form. According to the fact sheet, use of the new form is mandatory. The form requires the individual providing the information to certify that it is accurate, and warns that a knowingly false statement is punishable as a misdemeanor.

Employers should begin using the new form immediately. While the new form will no doubt be adequate for most new hires, it may be difficult to use for new employees who have more than one position and pay rate, who receive incentive compensation in addition to their hourly rate, or whose pay rate can vary (for example based on shift differential). In particular, it may be difficult to use the new form accurately for new employees who work under collective bargaining agreements, which can contain a variety of different pay rates and overtime rates. Employers who have questions about accurately conveying information when using the new form should consult with counsel.
 

Since the Supreme Court’s decision in IBP, Inc. v. Alvarez , 546 U.S. 21 (2005), “donning and doffing” claims have been filed with increased frequency against employers in many industries. In some instances, these claims take the form of a collective and or class action. Recently, the United States District Court for the Western District of New York granted summary judgment dismissing wage and hour claims brought under the Fair Labor Standards Act (“FLSA”) and the New York Labor Law in a case defended by Bond, Schoeneck & King, PLLC (“BS&K”). Albrecht v. The Wackenhut Corp., slip op. no. 07-CV-6162 (W.D.N.Y. Sept. 24, 2009). The court’s holdings are discussed below.

 

The action was commenced on behalf of current and former security guards at the Ginna Nuclear Power Plant in Ontario, New York. The plaintiffs sought additional compensation for donning and doffing activities that allegedly occurred before and after their scheduled workdays; specifically, the time spent “arming up and clearing through security and arming down.” In ruling for the employer, the court acknowledged that under the Portal-to-Portal Act (an amendment to the FLSA), employers need not compensate employees for activities that are “preliminary to or postliminary to" their “principal” work activities. In Alvarez, the Supreme Court held that such activities are only compensable if they are “an integral and indispensable part of the principal activities.” In finding that the activities involved in the case before it were not “integral” to the performance of the guards’ principal activities, the Albrecht court analogized the tasks at issue to those found to be non-compensable by the Second Circuit in Gorman v. Consolidated Edison Corp., 488 F.3d 586 (2d Cir. 2007) and Reich v. New York City Transit Auth., 45 F.3d 646 (2d Cir. 1995). The court in Albrecht further ruled that the time spent arming up and arming down involved non-compensable preliminary or postliminary activities because the tasks could be accomplished with minimal effort and were not difficult or time consuming.

In addition, the court supported its ruling on an alternative ground. It held that to the extent the donning and doffing activities might otherwise be compensable, they were nevertheless de minimis in nature. Relying on the Second Circuit’s decision in Singh v. City of New York, 524 F.3d 361 (2d Cir. 2008), the court noted that the “continuous workday rule,” which generally requires inclusion of all time after the start of an employee’s workday, is not triggered when an employee engages in principal activities that are de minimis. The court observed that while there is no “bright line” test for determining how much time is de minimis, several courts have found time periods of fifteen minutes or less to be de minimis. The court then found that even if all of the pre- and post- shift activities alleged were considered, the time period at issue was de minimis under that standard.

The defendant in Albrecht was represented by Robert A. LaBerge and Christa R. Cook of BS&K. This is the second donning and doffing case in the past year in which BS&K has successfully represented the employer. In Delitta v. City of Mount Vernon, current and former police officers brought a similar suit which was withdrawn after limited discovery. Equally significant, the resolution did not require the City to pay any monies to the plaintiffs. BS&K attorneys Terrence M. O’Neil and John S. Ho represented the City in that case.
 

Effective July 24, 2009, the minimum salary that an employee must receive to qualify for the executive or administrative exemption from overtime pay requirements in New York increased to $543.75. It was $536.10. Because this amount differs from the exempt salary amount under the federal Fair Labor Standards Act (“FLSA”) of $455, employers in New York should evaluate their pay practices to ensure compliance with both state and federal law. The differences between federal and New York law are described below.

 

Common Minimum Wage and Overtime Requirements

Both New York law and the FLSA require employers to pay non-exempt employees a minimum wage of $7.25 per hour, and to pay one and one-half times the employee’s “regular rate” for all hours worked in excess of 40 in a work week. In addition, both New York and federal law provide for categories of “exempt” employees to whom the minimum wage and overtime requirements do not apply. The most common categories are executive, administrative, and professional employees. In order to satisfy the federal and state exemption criteria, such employees must be paid on a salaried basis, and they must also satisfy certain duties tests. The duties tests under the FLSA and New York law are very similar.

Differences in the Salary Amount and Its Consequences

But the salary amounts necessary to satisfy the salary basis of the exemptions are different. While New York now requires payment of a weekly salary of $543.75 for the executive and administrative exemptions, with no minimum salary for the professional exemption, the FLSA requires payment of only $455 per week for all three exemptions. The differing state and federal exemption amounts create three potential categories of employees: (1) employees who are non-exempt under both federal and state law; (2) employees who are exempt under both federal and state law; and (3) employees who are exempt under federal law, but not under state law because they only meet the salary test under federal law. (It is also possible to have a professional employee who is exempt under state law because it does not have a salary test for professionals, but who is not exempt under federal law because the professional is paid less than $455 per week.)

An employer’s overtime obligations toward employees in the first category – non-exempt – are the same under federal and state law: pay time and a half the regular rate for hours worked in excess of 40 in a week. An employer’s obligations to employees in the second category are also the same under both federal and state law: no overtime obligation because the employee is exempt under both laws.

But the third category of employees – exempt under federal law, but not state law – creates a complication. When an employee meets the duties test for the executive or administrative exemption, but meets only the federal salary test, New York’s General Wage Order, as interpreted by the New York State Department of Labor (“NYSDOL”) requires that the employee receive one and one-half times the state minimum wage (not the “regular rate”) for each overtime hour worked in a given work week, up to a cap of $543.75 in total wages for the work week. So, for example, an employee who meets the duties requirement of the administrative exemption but was paid a salary of $500 for a week in which she worked 50 hours would be entitled to $508.75. How do we get there? The regular rate is $10.00 per hour, yielding straight time pay of $400 for the first 40 hours of work. The overtime calculation is, however, based on the minimum wage, not the regular rate, so the employee is entitled to one and one-half times the minimum wage of $7.25 for the 10 hours of overtime, or 10 hours at $10.875 for a total of $108.75 in overtime. Adding the straight time pay of $400 yields a total of $508.75. So the employee is entitled to an additional $8.75 in overtime pay. While New York law requires payment of overtime at one and one half times the state minimum wage, it does not prohibit payment at one and one half times the regular rate, if the regular rate is higher than the state minimum wage.

Unfortunately, these calculations are rather complicated. In addition, this interpretation of the New York General Wage order is based on opinions issued by the NYSDOL years ago. New York employers are advised to carefully analyze their payment schemes for employees who are exempt under federal law, but who do not satisfy the New York salary test. Failure to pay overtime to an employee who is exempt under federal but not state law could result in potential liability for unpaid wages, liquidated damages, civil fines and reimbursement of attorney’s fees to claimants who commence litigation.
 

On August 26, 2009, Governor Paterson signed yet another  bill amending sections of the New York Labor Law.  This time, the amendments are designed to provide a greater deterrent effect to employers who violate the law.  The two amendments are described below.

 

First, Sections 198(1-a) and 663 of the Labor Law have been amended to expressly authorize the Commissioner of Labor to bring legal actions, including administrative proceedings, to collect wage underpayments and to assess liquidated damages. Liquidated damages equal to 25% of the amount of underpayments may be assessed against an employer, unless the employer can demonstrate that it had a “good faith” belief that it was complying with the law. Prior to the amendment, the employee had the burden to prove that the underpayment was willful in order to collect liquidated damages. By shifting this burden of proof from the employee to the employer, the amendment is designed to make it easier for employees to recover liquidated damages.

 

Second, Section 215 of the Labor Law, which prohibits retaliation against employees who complain about wage underpayments and other labor law violations, was also amended. The new law increases the minimum civil penalty for illegal retaliation from $200 to $1,000, increases the maximum penalty from $2,000 to $10,000, authorizes the Commissioner to order reimbursement for lost compensation, and extends liability for retaliation to partnerships and limited liability companies. 

 

The amendment also expands the categories of conduct protected against retaliation to include: (1) providing information to the Commissioner or his or her representative; (2) exercising rights afforded under the labor laws; and (3) an employer’s receipt of an adverse determination from the Commissioner involving the employee. Although these new categories were added to further protect employees from retaliation, it should be noted that state employees or employees of any municipal subdivisions or departments of the state are specifically excluded from protection under this section.

 

Both amendments take effect on November 24, 2009 and apply to violations occurring on or after that date. 

Despite our State Legislature’s distractions this summer, it continues to crank out laws which further regulate New York employers. Here are some recent changes about which employers should be aware.

On July 28, 2009, New York State Labor Law 195(1) was amended to require employers to provide all new employees hired on or after October 26, 2009 with written notice of their rates of pay and the employer’s regular pay days. See our August 11, 2009 blog post for details.

Some other notifications required by New York Law include:

 

• Terms of employment between an employer and commissioned salesperson must be in writing and signed by both parties. The agreement must include a description of how wages, salary, drawing account, commissions and all other monies earned and payable will be calculated.
• Employees must be notified in writing or by public posting of the employer’s policy on sick leave, vacation, personal leave, holidays and hours.
• Employers must notify employees of any changes in pay days prior to such changes.
• Employers must also notify employees of the date of termination and exact date of termination of employee benefits. The notice must be in writing and be given within 5 working days after termination.

Effective July 7, 2009, the New York State Human Rights Law prohibits employers from discriminating against employees who are victims of domestic violence. See our August 3, 2009 blog post for details on this new law.

Additionally, employers should keep in mind that as of July 6, 2009, the Human Rights Law provides for civil fines and penalties, payable to the State, of up to $50,000 for unlawful discriminatory acts, and up to $100,000 for willful, wanton or malicious discrimination. Our July 20, 2009 blog post describes that amendment.

Finally, an amendment to the New York State Insurance Law “mini-COBRA” provisions, creates an extension of the general continuation under a group health plan for covered employees from 18 months to 36 months following termination of employment. The law applies retroactively to insurance policies and contracts issue, renewed, modified, altered or amended on or after July 1, 2009, but does not apply to self-funded group health plans. Although New York’s mini-COBRA statute generally covers insurance plans of employers with fewer than 20 employees, this 36 month continuation period will apply to all New York group insurance policies regardless of employer size. Therefore, if federal COBRA coverage is exhausted, qualified beneficiaries can extend coverage under New York law for an additional 18-month period up to a total of 36 months following the date of the beginning of federal COBRA coverage.
 

Effective October 26, 2009, employers in New York will have to provide employees hired after that date with a written notice of their rate of pay, their overtime rate (for non-exempt employees) and their regular pay date, pursuant to an amendment to Section 195 of the New York Labor Law.  The new law, signed by Governor Patterson on July 28, 2009, also requires employers to obtain a written acknowledgement from each newly-hired employee that he or she has received the required information.  The acknowledgement must conform to standards set by the Commissioner of Labor.  At this point, the Commissioner has not yet set those standards.

Prior to the amendment, employers only had to provide notice of the regular wage rate and pay date, but not in writing, and no written acknowledgement from the employee was required.  The purpose of the new law is to enable employees to determine their overtime rate and to ensure that employees understand their regular wage rates and pay dates. 

The New York State Department of Labor ("NYSDOL") recently issued regulations regarding Labor Law Section 167, which prohibits health care employers from requiring nurses to work more than their regularly scheduled work hours.  The regulations reiterate and explain the provisions of the law, but also impose a requirement (which is not contained in the law) that health care employers establish a written "Nurse Coverage Plan" within 90 days of the regulations' July 15, 2009 effective date.  The NYSDOL has also posted on its web site answers to some frequently asked questions regarding the law and regulations.

The law, which went into effect on July 1, 2009, provides that health care employers may not require registered professional nurses and licensed practical nurses who provide direct patient care to work more than their "regularly scheduled work hours," subject to the following exceptions:

• a health care disaster, such as a natural or other type of disaster that increases the need for health care personnel, unexpectedly affecting the county in which the nurse is employed or a contiguous county;
• a federal, state, or county declaration of emergency in effect in the county in which the nurse is employed or in a contiguous county;
• a health care employer's determination that there is a patient care emergency (an unforeseen event that could not be prudently planned for and does not regularly occur) that makes work beyond regularly scheduled hours necessary; or
• an ongoing medical or surgical procedure in which the nurse is actively engaged and whose continued presence through the completion of the procedure is needed to ensure the health and safety of the patient.

 

The phrase "regularly scheduled work hours" is defined in the law as the hours a nurse has agreed to work and is normally scheduled to work pursuant to the budgeted hours allocated to the nurse's position by the health care employer, or some other measure generally used by the health care employer to determine when an employee is minimally supposed to work, consistent with the provisions of any applicable collective bargaining agreement.  Therefore, if a part-time nurse is regularly scheduled to work 20 hours per week, that nurse cannot be required to work more than 20 hours per week unless one of the exceptions identified above applies.

Under the regulations, all health care employers are required to establish and implement a written Nurse Coverage Plan within 90 days of the regulations' July 15, 2009 effective date, which means that the Plan must be in place by October 13, 2009.  The Plan must take into account typical patterns of staff absenteeism due to illness, leave, and other factors, and must identify as many alternative staffing methods as are available to ensure adequate staffing through means other than the use of mandatory overtime.  These methods might include contracts with per diem nurses, arrangements for assignment of floating nurses, and requesting voluntary overtime from nurses.  The Plan must be made available to all nursing staff, either by posting the Plan in a location accessible to all nursing staff or by other means such as posting on the health care employer's intranet site, and must be provided to any collective bargaining representative of the nurses.  The Plan must also be provided to the Commissioner of Labor, upon request.

Health care employers that do not prepare a Nurse Coverage Plan may be precluded from relying on the "patient care emergency" exception to the law.  The regulations provide that a health care employer may not require a nurse to work beyond his or her regularly scheduled hours to address a patient care emergency, unless the employer first makes a good faith effort to secure coverage by utilizing the alternative staffing methods set forth in its Plan.  The health care employer is required to document its attempts to secure coverage under the terms of its Plan.  If a health care employer does not have a Nurse Coverage Plan in place, or fails to make efforts to utilize the alternative staffing methods set forth in its Plan, the employer cannot rely on the "patient care emergency" exception. 

The regulations also provide some guidance for health care employers regarding how the other exceptions will be interpreted and applied by the NYSDOL.  The regulations provide that a determination regarding whether a "health care disaster" exists shall be made by the health care employer and must be reasonable under the circumstances.  Some examples of health care disasters include unforeseen events involving multiple serious injuries (such as fires, auto accidents, or a building collapse), chemical spills, or a widespread outbreak of an illness requiring hospitalization of many individuals in the community.  The regulations also provide that a determination regarding whether a nurse's continued presence beyond regularly scheduled work hours is required for an ongoing medical or surgical procedure shall be made by the nursing supervisor or nurse manager supervising the nurse.

Effective July 24, 2009, the New York State minimum wage will increase from $7.15/hour to $7.25/hr. This increase will bring the state minimum wage in line with the federal minimum wage which will increase from $6.55/hour to $7.25/hour, also effective July 24, 2009. Employers should note this change, take the necessary steps to implement this increase and replace all prior state minimum wage postings with the recently-promulgated New York State Department of Labor Minimum Wage Notice.

 

It is that time of year when employers are approached with requests from college students for unpaid internships. The benefits of the symbiotic relationship are obvious. The internship provides the student with an opportunity for real life experience, resume enhancement and perhaps a step towards a paying position with the employer after graduation. The employer receives the chance to evaluate a new applicant, at no cost. What is not so obvious are the legal risks.

One area of risk is the Fair Labor Standards Act (“FLSA”) which requires non-exempt employees to be paid the minimum wage for all hours worked. Non-exempt employees must also receive 1.5 times their regular rate of pay for all hours in excess of 40 in a workweek.

The $64,000 question, however, is whether the unpaid intern is an “employee” within the meaning of this and other federal and state statutes. The Department of Labor (“DOL”) has adopted six criteria for evaluating this issue. They are as follows: 

1. he internship should be similar to the training given in a vocational school;
2. The training must be primarily for the benefit of the intern, not the employer;
3. The intern must not displace any regular employees, but must work under close supervision;
4. There should be no immediate advantage to the employer and, in fact, operations may be impeded by the training;
5. The intern must not be entitled to a job at the completion of the internship; and
6. The intern and the employer must understand that the intern shall receive no pay for the training. 

In one case, a company requested an opinion from the DOL as to whether unpaid interns who received college credit to work 7 to 10 hours per week as field marketers were employees. There was a coordinator who advised the students and communicated regularly on their progress. There was no obligation to hire them. The DOL found that four of the six criteria were established: (i) training similar to vocational school; (ii) no expectation of compensation; (iii) training primarily for the benefit of the intern; and (iv) no obligation of hiring.

On the two remaining questions, displacing regular employees and whether the company derived an immediate benefit, the DOL indicated the record was not clear. This opinion letter indicates employers should not assume the DOL will not carefully scrutinize these relationships. DOL has affirm its view in a subsequent formal opinion letter.

If a company is using unpaid interns, it should make sure:

1. It has an agreement or letter making it clear there is no pay and no guaranteed job;
2. Adopt a policy that sets up strict supervision and assigns a mentor;
3. Ensure the primary benefit of the internship is for the student, not the employer -- minimize assigning the same duties given to regular employees, do not use interns to displace any employees, and, if possible, require college credit; and
4. Arrange for a structured program of internal and, if possible, external instruction of the type of work done by the employer.

Remember, a determination that an unpaid intern is, in fact, an employee can have impact beyond minimum wage and overtime. The discrimination laws, worker’s compensation coverage, state and federal tax laws, employee benefits and unemployment insurance coverage all pose potential consequences in the event of a misguided classification.