wage & hour and misclassification issues 1 presented by: marcus d. brown winstead pc austin...

WAGE &

HOUR A

ND MIS

CLASSIFI

CATIO

N

ISSUES

1

Presented by:Marcus D. BrownWinstead PC

AUSTIN HOTEL & LODGING ASSOCIATION

LABOR & EMPLOYMENT PRACTICE GROUP

DEPARTMENT OF LABOR UPDATES

• 2015 has seen a renewed emphasis on enforcement and important changes to key policies: • increased audits and prosecutions of federal and state

minimum wage and overtime law violations; • intensified scrutiny of the classification of workers as

independent contractors; and • proposed overhaul of the Fair Labor Standard Act’s

overtime exemption for white collar employees

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• Wage and Hour Division: Administrator’s Interpretation of FLSA • addressed the distinction between employees and

independent contractors• emphasized the importance of whether an individual’s

services are an integral part of a company’s business • downplayed the importance of whether the business

controls an individual’s work• “Most workers are employees under the FLSA’s

broad definitions.”

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MISCLASSIFICATION:INDEPENDENT CONTRACTOR VS. EMPLOYEE• Implications of Misclassifications: Why This Matters!

• Workers' Compensation• Unemployment• Taxes• Employee benefits• Payment of overtime and minimum wage• Discrimination• Recordkeeping

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HOW IS CONTRACTOR STATUS DETERMINED?

Simply paying on a 1099 is not determinative!

• IRS and TWC test = "Right to Control"

• USDOL test = "Economic Reality"

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IRS Test = “Right to Control”

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (e.g., how worker is paid, whether expenses are reimbursed, who provides tools/supplies)

Type of Relationship: Are there written contracts or employee benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

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United States Department of Labor = “Economic Reality Test”

1) The extent to which the services rendered are an integral part of the principal's business.

2) The permanency of the relationship.

3) The amount of the alleged contractor's investment in facilities and equipment.

4) The nature and degree of control by the principal.

5) The alleged contractor's opportunities for profit and loss.

6) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.

7) The degree of independent business organization and operation.

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TIPS TO PREVENT MISCLASSIFICATION

• Avoid classifying former employees as independent contractors• Use independent contractors who are incorporated and market their

services to the public• Do not be an independent contractor’s first or only customer• Pay by invoice and negotiate rate• No training, reporting obligations, evaluations, handbook• Do not permit independent contractor to make employment decisions

for your employees• Have signed agreement (but not determinative as to status)

• Confirm status• No benefits• Pay by project (not hourly)

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VOLUNTARY CLASSIFICATION SETTLEMENT PROGRAMVCSP offers a discounted cost to resolve the issue

The employment tax liability is first calculated at the reduced rates of Section 3509 (a reduction from the full FICA and income tax withholding rates otherwise applicable)

Under VCSP, the taxpayer pays only 10% of such reduced rate

No interest or penalties apply if the amount owed is paid at the time of entering into the closing agreement

IRS states that it will not share information from this program with the DOL or state agencies

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VOLUNTARY CLASSIFICATION SETTLEMENT PROGRAMEligibility:

1. Consistently treated the workers as independent contractors.

2. Over the previous three years, company filed Forms 1099 for each of the workers it wishes to reclassify.

3. Not currently under employment tax audit by the IRS

4. Not currently under misclassification audit by DOL or state agency

5. In compliance with previous DOL or state agency audits

VCSP Temporary Eligibility Expansion: • Employers may be eligible even if all required 1099s have not been filed for

previous 3 years• Application must be filed before June 30, 2013• Pay 25% of the employment tax liability• $50 -$100 penalty per unfiled Form 1099, depending on the number of total

unfiled forms

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VOLUNTARY CLASSIFICATION SETTLEMENT PROGRAMIf approved, the IRS will propose a closing agreement.

Under the closing agreement: Taxpayer agrees to treat the workers as employees All workers in the same class as the reclassified workers must

be treated the same The taxpayer pays 10% of the employment tax liability that

would have been due had the workers been properly classified for the most recent tax year (no interest or penalties) Calculated at reduced rates of Section 3509

Full payment of the amount due must be made at the time of signing the VCSP closing agreement

The IRS will conduct no employment tax audits relating to the reclassified workers for prior years

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VOLUNTARY CLASSIFICATION SETTLEMENT PROGRAMPotential Drawbacks The normal statute of limitations for payroll taxes is 3 years.

Under VCSP, taxpayers will be subject to a special 6-year statute of limitations for their first 3 years under VCSP

This would allow the IRS an additional 3 years to examine ANY wage or employment tax issues for such years

Potential liability for claims for employee benefits

No guarantee of confidentiality – could potentially be used by DOL or state agencies

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• DOL Proposed Rule would annually update the minimum salary level for exempt employees• Minimum salary level has not changed since 2006• Now, the standard salary level would be set to the 40th

percentile of earnings for all full-time salaried workers, as annually reported by the Bureau of Labor Statistics• The DOL projects that the 2016 exemption would require

a minimum salary of $970 per week ($50,440 per year for a full-year worker)—anyone making less must be paid overtime• Final Rule will likely take effect sometime in 2016

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EXEMPT vs. NON-EXEMPT: “White Collar” Exemptions

• Generally, to be exempt an employee must:• Qualify for one of the exemptions, and• Be paid on salary basis and not less than $455 per week ($23,660

per year for a full-year worker)• Salary basis soon to be raised to $970 per week ($50,440 per year)

• Exemptions:• Executive• Administrative• Professional• Computer Professional• Outside Sales

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HOSPITALITY INDUSTRY: COMMON ISSUES• Tip Credit /Pooling Issues• All tips must be received by the employee EXCEPT:• Does not “prohibit the pooling of tips among employees who

customarily and regularly receive tips.”• DOL gives list of examples, but no real explanation• YES: waiters/waitresses, busboys/girls, service bartenders• NO: chefs or cooks, dishwashers, janitors, laundry room attendants

• Montano v. Montrose Restaurant Associates• “The common thread of the cases and the DOL opinion letters is to

require a tipped employee to have more than a de minimis interaction with customers who have undesignated tips.”• “A court or factfinder should also consider whether the employee is

engaging in customer service functions.”

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HOSPITALITY INDUSTRY: COMMON ISSUES• Montano v. Montrose Restaurant Associates• Not a perfect test. Examples:• Hotel guests and housekeeping• Restaurant owner or manager• Bouncer: “A night club’s bouncer may have to

‘interact’ (a clear understatement) with customers, and yet it’s virtually unknown for anybody to tip him after picking themselves up off the pavement.”

• Tip jar for chefs• Generally ask: at the specific business involved, do the

customers, as a habitual and usual practice present money with the intent that the employee in question receive it as a gift or gratuity in recognition of service that the employee performed.

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HOSPITALITY INDUSTRY: COMMON ISSUES• Proper Calculation of Premium Rate

• Includes Various Forms of Compensation• “Non-Discretionary” Bonuses

• Strict and Specific DOL Definition• Incentive Pay• Commissions• Shift Differentials• Retroactive Pay Increases

• Additional Compensation Requires Recalculation of Pay Rates

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HOSPITALITY INDUSTRY: COMMON ISSUES• Working “Off-the-Clock”• Strictly prohibit off-the-clock work• Require employees to report any instructions to work off-the-clock• Require employees to accurately record work time and sign

timecards• Discipline for violation of timekeeping policies• Mandatory process for reviewing exceptions or changes to time

entries

• Working Remotely

• Automatic Meal Period Deductions• Common allegation that employees work through their meal

periods• Closely monitor and ensure employees take meal breaks

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HOSPITALITY INDUSTRY: COMMON ISSUES• Temporary/Staffed Employees• Who is the employer?• Title VII/EEO Laws• ADA

• Workers’ Compensation Coverage• Indemnity Agreements

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STRATEGIES FOR LIMITING EXPOSURE

• Arbitration Agreements/Collective Action Waivers

• Requirements for Effective Arbitration Agreements:• FAA governs• Broad application• Carve outs• Administrative Charges (EEOC/NLRB)• Specific Claims (NLRA, Dodd Frank)

• Selection of arbitrator (mutual agreement)• Arbitrator qualifications (member of local bar, retired from

local judiciary – see 9 U.S.C. § 5)• Who pays?

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STRATEGIES FOR LIMITING EXPOSURE

• Requirements for Effective Arbitration

Agreements (cont’d):• Venue (close to where employee last worked for company)• Express class/collection action waiver• NLRB section 7 disclaimer• Remedies (individual only)

• Regular Compliance Audits

• Routine Management Training

• Simplify and Streamline Where Possible

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EMERGING ISSUES:ADA ACCOMMODATION AND LEAVES OF ABSENCES• Expanded definition of “disability”• Reasonable accommodation = action that must be taken by employer to allow

“qualified individual with a disability” to perform essential functions of job without

undue hardship• Indefinite leave does not equal “reasonable accommodation”• Defined period of additional leave may be required as reasonable accommodation• Be flexible in application of maximum leave policies• Intermittent leave

• Consider obtaining second opinion regarding medical certification• Transfer employee to different position (with same pay, benefits)*** • Require monthly recertification• Require use of accrued vacation or sick time for intermittent FMLA absences• Dock pay of nonexempt employee for FMLA partial day absences after exhaustion

of vacation and sick time

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wage & hour and misclassification issues 1 presented by: marcus d. brown winstead pc austin...

Documents

claimed independent

employment decisions

contractor status

business aspects

principals business

companys business

workers job

alleged contractors