Labor & Employment Newsletter - Winter 2012
Are Your Employees Misclassified?
By: Peter D. Guattery
Worker classification has become a major concern for employers, as governmental agencies have stepped up their efforts to investigate allegations that individuals who are properly considered employees have been misclassified as independent contractors. Recently, the IRS announced a program under which employers may be eligible to reclassify workers as employees at a reduced cost and without the threat of major IRS penalties. This article examines the potential benefits – and pitfalls – associated with the new program and provides an overview of the worker misclassification conundrum.
The September announcement of a safe-harbor program by the Internal Revenue Service (IRS) for employers with misclassified employees -- the Voluntary Classification Settlement Program (VCSP) -- added new emphasis to one of this year's most discussed employment issues: the misclassification of employees as independent contractors.
Employment lawyers have been sounding the alarm about an uptick in enforcement efforts over misclassified employees in the past two years. These efforts have been coupled with more recent cooperation between state and federal agencies to crack down on misclassification of employees as independent contractors and to recoup unpaid wages and taxes. Long considered an easy "alternative” by employers looking to reduce staff and costs, the concept of using independent contractors to provide necessary services has come front and center as employers cope with a need to reduce expenses and state and federal governments look for more sources of revenue.
The question of employee misclassification is as relevant to nonprofit organizations as it is to traditional business operations, if not more so. Nonprofit organizations are more likely to experience nontraditional employment arrangements, such as telecommuting, or to have a short-term, part-time, or episodic need for services such as event coordination, publishing, or member accreditation. The limited nature of the services provided or the distance of the employee make it easy to internally justify treating the individual as a contractor, particularly if the employee agrees in writing. Properly answering the question is not so simple.
Traditionally, an independent contractor provides a business organization with a service or a product that is outside of the scope of the organization's main business purpose or which is not usually required for day-to-day operations. A contractor is someone who holds herself out to the public as providing these services. But defining the line is often complex.
There are multiple tests employed by the Department of Labor (DOL), the IRS, and the Equal Employment Opportunity Commission (EEOC), as well as various state agencies such as, in Maryland, the Comptroller of the Treasury and the Department of Labor Licensing and Regulation (DLLR), among others. Within these agencies, the issues range from wage and hour violations, unemployment compensation, withholding taxes, workers' compensation coverage, and pension and benefit issues. The classification question becomes even more complicated in states like Maryland, where the unemployment law has a very narrow definition of an independent contractor.
The closer you look at the issue of misclassification, the more apparent it becomes that the IRS program -- while offering a deal to avoid more severe penalties in the face of an audit -- does not address concerns that may exist under other federal and state laws such as the Fair Labor Standards Act (FLSA) and state unemployment insurance.
For example, an independent contractor is usually paid a set fee or an hourly rate for the service he provides. If the individual was treated as an employee, he might be eligible for overtime pay for all work tours in excess of 40 in any given week. Independent contractors, however, would not be paid overtime. Thus, entering into an agreement with the IRS to reclassify employees, no matter how confidential the "closing agreement" may be, will open the door to potential liability for unpaid overtime wages and perhaps claims for benefits for these misclassified employees.
The liability will grow with the more employees who are misclassified. If you add the possibility that employees will seek back wages through private action, you may need to consider an award of attorneys' fees to their lawyers, which in many cases can far exceed the dollar recovery for the employees. In one recent case, the settlement allocated more than 80 percent of the total recovery to attorneys' fees. While the court decided to take a closer look at the allocation when the agreement was submitted for approval, the fact that there may be a large disparity is not surprising. You don't need to look too hard to see that other legal risks could be much greater than unpaid taxes.
Some of these concerns prompted the IRS to announce recently that it would not share any data or information of those employers participating in the program within various states. Still open, however, is whether the information may be shared with other federal agencies such as the DOL, with which the IRS entered into a memorandum of understanding (MOU) addressing the agencies' coordination on employee-misclassification compliance and education. How the VCSP fits into this cooperation is not entirely clear, though it would seem counterproductive to expose a repentant employer to additional liability if the program was to succeed.
Does this necessarily mean that an employer should ignore the IRS offer? No. There are certain benefits to the program, particularly if there are a large number of misclassified employees. The savings on penalties could be substantial. What it does mean, however, is that any decision to pursue the VCSP should only be taken with caution.
There may be legal grounds to defend a classification of an independent contractor to recommend against accepting the terms of the VCSP, which include extending the limitations period for tax collection. There may also be significant risks of unpaid overtime claims for the employees in question and potential savings from a tax standpoint may not be large. An employer who has always treated the contractor as a contractor may have far less to be concerned about than the employer whose contractor was classified as an employee a year ago, particularly if the services of the former are intermittent and sporadic and the latter is doing much of the same work as she did while employed and still works a regular work week.
Reclassifying employees may also raise the number of employees to the point that the employer becomes subject to other laws, such as.
- Title VII of the Civil Rights Act of 1962, as amended
- The Age Discrimination in Employment Act
- Federal COBRA
- Family and Medical Leave Act of 1992
Each of these laws has a different employee threshold for coverage, and the implications of coverage should be understood before entering the program.
Whether an association decides to take the IRS up on its offer, all employers should be aware that the question of misclassification does not end there. The DOL has aggressively stepped up enforcement efforts to address employee misclassification, a topic they broadly define as 'Wage theft."
Recently, the DOL signed MOUs to share information and coordinate law-enforcement efforts related to reducing misclassification of employees with 11 states, including Maryland, Connecticut, New York, Massachusetts, and Minnesota, among others. Maryland, like New Jersey and other states, has enacted a law to increase cooperative efforts among various state agencies. In Maryland, these include unemployment, workers' compensation, the Comptroller of the Treasury, and the wage unit of the DLLR to share information and coordinate enforcement actions regarding misclassified employees. The same law established target industries, such as construction and landscaping, where fines would be levied on employers who misclassify employees.
The issue remains active in Congress as well. Representative Lynn Woolsey (D-CA) has reintroduced legislation to address misclassification in the form of the Employee Misclassification Prevention Act (EMPA). Similar to the 2010 bill that was stalled in committee, the 2011 version of the bill, which has also been introduced in the Senate, would impose strict recordkeeping and notice requirements on businesses and organizations with respect to workers treated as independent contractors and establish potential fines from $1,000 up to $5,000 per worker for each violation. The bill would also allow targeted audits in industries that are known to misclassify employees and permit information sharing absent an interagency MOU. The bill would also add administrative penalties under the Social Security Act for misclassification.
Even if the EMPA does not pass Congress, the DOL may well take action to establish similar mandatory recordkeeping and notification requirements on businesses and organizations covered by the FLSA. Such regulations may require that every employee treated as an independent contractor be provided a detailed explanation as to the basis for the classification and require that the information be kept on file.
There is a lot at stake for this issue to consume the interest of governmental agencies for years to come. Estimates in some industries are that up to 20 percent of the workforce is misclassified. That reflects a substantial amount of revenue for agencies looking to make up shortfalls in budgets and to justify their performance.
Likewise, as employees feel the pressure of the current financial downturn, they may pursue their own remedies to address misclassification issues that have denied them healthcare coverage, pensions, and the benefit of social security, unemployment, and workers compensation coverage.
The incentives are very real and should serve as a warning shot to employers to do a close review of those they call independent contractors. Maybe the VCSP is for them, or perhaps some other approach is the best remedy. But getting ahead of the ball now is far preferable than waiting for a summons, subpoena, or an audit tomorrow.
This article was originally published in the December 2011 issue of Association Law and Policy and is reprinted by permission of ASAE.
NLRB Adopts Final Rule Implementing Some, But Not All, Proposed Regulations
By: David M. Stevens
On December 21, the NLRB adopted a final rule implementing certain changes to the procedures governing union elections. While the NLRB has chosen to forego implementation of some of the more controversial proposed rules that had previously been announced, the changes included in the final rule will nevertheless have significant consequences for employers who may be targeted for organizing. This article examines the Board’s final rule and its potential impact for employers.
In June 2011, the National Labor Relations Board issued a proposed rule announcing seismic changes in the procedures applicable to union organizing elections. Among these changes was a controversial shift to so-called “quickie elections,” under which the standard time period between the filing of a representation petition and the subsequent election date would have been reduced from approximately forty days to between ten and twenty-one days. Such a change would have tilted the playing field in favor of union organizers by significantly reducing the amount of time available to employers to mount a campaign responding to the petitioning union.
After announcement of the proposed rule, further action had been on hold pending a period for public comment. The Board broke its silence on the regulations at a November 30 meeting at which it adopted a resolution to develop a final rule implementing some, but not all, of the proposed changes. Significantly, the “quickie election” procedure was not among those proposals included in the resolution, so concerns relating to that development can (temporarily) be put to rest. Also excluded from the resolution was a proposal that would have required an employer to furnish to the petitioning union email addresses and telephone numbers for those employees participating in the election. The Board subsequently adopted a final rule implementing the changes encompassed by the November 30 resolution.
While employers will certainly be pleased with the Board’s decision not to move forward with the changes outlined above, the final rule contains a number of modifications to Board procedure that will be of concern to employers. Chief among these is the Board’s decision to limit the issues to be considered at the standard pre-election hearing to those which directly affect whether a “question of representation” exists. While the Board has justified this decision on the grounds that the change will reduce unnecessary litigation, the net effect of the change is likely to be that employers will be hamstrung in their ability to dispute the proper scope of a bargaining unit identified in a representation petition. Prior Board decisions have held that a union’s proposed bargaining unit is entitled to significant deference, and the implementation of the final rule is likely to further reduce an employer’s opportunity to challenge the union’s definition of the unit. This change may manifest itself by way of unions choosing to file petitions seeking representation of subsets of workers who might otherwise be deemed to have a community of interest with a larger group of employees. In such a scenario, the union would potentially increase its chances of success (by reducing the number of “yes” votes it must gain in an election), and an employer that is deprived of an opportunity to meaningfully argue for a larger unit may end up with a union which represents an unwieldy subgroup of its workers and has a toehold from which to subsequently expand its reach.
The remaining proposals incorporated by the Board’s final rule deal primarily with the handling of appeals connected with representation proceedings. Perhaps the most significant of these changes is a proposal to dramatically increase the authority of the regional directors who preside over the Board’s various regional offices and correspondingly diminish the ability of employers and unions to seek review from the Board itself. In addition to limiting the right of review, this change also has the potential to promote uncertainty, as the law may well be applied differently from region to region depending on the interpretations of each regional director. The Board’s resolution also modifies the appeal procedure to eliminate preelection appeals, which in certain cases will have the effect of reducing the amount of time between the filing of a petition and the election date.
Takeaway for employers:
The procedural changes implemented as part by the Board’s resolution will significantly alter the nature of election proceedings before the National Labor Relations Board, in a manner that seems likely to increase a union’s chances of success in representation proceedings. The potential implementation of the Board’s new election procedures, particularly when viewed in connection with the Board’s notice posting requirement set to take effect in April 2012, reinforces the need for employers to be aware of potential organizing activity in their workplaces and to develop plans for responding to a union campaign. Developing such contingency plans, as well as training management personnel to properly recognize and respond to organizing activity, are critical steps that employers can take now to prepare their businesses to respond effectively in the event that they are targeted for organizing under the new procedures.
NLRB Again Delays Effective Date of Notice Posting Requirement
By: David M. Stevens
Last August, the National Labor Relations Board issued a regulation requiring that all employers subject to the National Labor Relations Act post a notice advising employees of their right to form unions and engage in other activities protected by the Act. The effective date of the posting requirement was originally set for November 2011, but was later pushed back to January 31, 2011. The NLRB has now further delayed the implementation date to April 30.
As detailed in the previous edition of this newsletter, the NLRB issued a final rule last August requiring all employers subject to the National Labor Relations Act to post a notice summarizing the rights of employees under the statute. (The notice may be viewed on the Board’s website, at http://www.nlrb.gov/poster.) The notice consists of a summary of the rights established by the NLRA, including the right of employees to form a union and to engage in other collective activities to seek improved terms of employment.
At the time the regulation was announced, the deadline for posting of the notice was set for November 14, 2011. Shortly after the regulation was adopted, however, the NLRB’s authority to require the posting of such a notice became subject to multiple court challenges. The NLRB subsequently delayed the regulation’s effective date to January 31, 2012.
In late December, the NLRB announced a second delay in the effective date of its notice posting requirement. The requirement to post the notice is now set to take effect on April 30, 2012.
Takeaway for Employers:
The postponement of the effective date of the notice posting requirement is certainly welcome news for employers. The Board has acknowledged that the purpose of the most recent delay is to facilitate the resolution of the legal challenges that have been raised with regard to the rule. While the outcome of those legal proceedings may result in the notice posting requirement never taking effect, employers are advised to prepare for the posting obligation to become effective on April 30. Therefore, employers who have not yet developed a contingency plan for responding to potential organizing activity will need to become more attuned to the possibility of such activity in light of the fact that information on unionization will potentially be displayed by law at their own places of business.
Court Addresses Interplay Between FMLA and ADA Obligations
By: Kevin C. McCormick
One particularly vexing issue that employers are often faced with is the confluence of FMLA and ADA concerns that arise when an employee experiencing a serious health condition – which may also qualify as a disability for purposes of the ADA – is approaching the end of his or her FMLA leave allotment. While the employer’s obligations under the FMLA can be determined by reference to concrete obligations imposed by that statute, the obligations imposed by the ADA frequently require a case-by-case determination of whether the accommodation needed by an employee is reasonable under the circumstances. The interplay between these statutes frequently causes significant headaches for employers. This issue was recently taken up by the U.S. District Court for the District of Maryland. This article examines the case, which has significant lessons for employers attempting to maintain compliance with these statutes.
In a recent decision, the U.S. District Court in Baltimore addressed an all-too-common issue that many employers face involving employees who are away from work for a serious health condition and have also exhausted their leave under the Family and Medical Leave Act (FMLA). (Moore v. Dep’t of Public Safety and Correctional Services, Civil Action No. CCB-11-553, D. Md. September 12, 2011)
Oftentimes, employers are eager to resolve the issue by simply concluding that once the 12-week FMLA leave is exhausted, the employee can be terminated. However, the resolution of this issue is often not that easy as the employee’s serious health condition that triggered the FMLA coverage in the first place oftentimes constitutes a disability under the Americans With Disabilities Act (ADA) or the Rehabilitation Act of 1973 (Rehab).
The resolution of the ADA/Rehab issue requires a separate level of analysis before any decision is made to terminate. Let’s take a look at this recent District Court decision.
Background Facts
Arlene Moore began working at the Maryland Department of Public Safety and Correctional Services (Patuxent Institution) located in Jessup, Maryland, in July 1993. Moore worked at the facility for 17 years and consistently received satisfactory job performance evaluations throughout her employment.
In October 2009, Moore was diagnosed with stage three breast cancer. On November 15, 2009, Moore was granted medical leave to receive treatment for cancer, which included a mastectomy and radiation. By December 2009, Moore had exhausted all of her paid medical leave. She, therefore, applied for and received unpaid leave under the FMLA. Moore also received donated leave from co-workers at the Patuxent Institution, which allowed her to receive paid leave through June 29, 2010.
At some unspecified date, the Director of Patuxent Institution’s Human Resources Department urged Moore to apply for medical disability retirement. Moore rejected the suggestion and informed the Human Resources Department that she intended to return to work upon the completion of her treatment. Thereafter, on August 4, 2010, Moore was placed on unpaid medical leave. Moore also claims that the HR Department prohibited other employees from donating additional leave to Moore.
On August 5, 2010, Moore received clearance from her doctor to return to work. She notified Patuxent Institution that day that she intended to return to work as early as August 13, 2010. On August 9, 2010, Moore was informed that she had been terminated effective August 4, 2010. Moore was told that she would have to reapply for a position through the Maryland Department of Corrections Central Hiring Office. Moore immediately reapplied for a position and was able to receive unemployment benefits in the meantime. In December 2010, Moore was offered a correctional officer position at a different correctional facility, also located in Jessup, Maryland.
Moore rejected that offer and instead filed the complaint with the EEOC alleging a violation of the ADA due to her alleged termination. On March 1, 2011, Moore sued her employer alleging violations under the ADA and Rehab Act seeking reinstatement to her position as a Correctional Officer II at Patuxent Institution, compensatory damages, attorneys’ fees and costs. Moore’s employer, thereafter, filed a motion to dismiss.
The Court’s Decision
As an initial matter, Patuxent Institute argued that Moore’s ADA claim was barred by the Eleventh Amendment Sovereign Immunity. Moore did not contest that claim and her ADA count was dismissed. However, Moore also sued under the Rehab Act. States are not generally immune under the Eleventh Amendment from suits alleging violation of §504 of the Rehab Act.
Under the Rehab Act, no otherwise qualified individual with a disability shall solely by reason of her disability be excluded from participation in, be denied the benefits of, or be subject to discrimination under any program or activity receiving federal financial assistance. Discrimination includes, “not making reasonable accommodations to the known physical or mental limitations of an otherwise qualified individual with a disability who is an applicant or an employee unless such covered entity can demonstrate that the accommodation would impose an undue hardship on the operation of the business.”
To state a claim under the Rehab Act, the employee/applicant must show 1) she suffers a disability as defined by the statute, 2) with or without reasonable modifications she is otherwise qualified to participate in the benefit or employment in question, and, 3) she was excluded from that benefit or employment because of the disability suffered.
Patuxent Institute argued that Moore failed to state facts to show that she was “otherwise qualified” to carry out the job of a correctional officer, claiming that she could not perform the essential functions of the job and/or there was no reasonable accommodation at Patuxent Institute could make to able her to perform those functions.
According to Patuxent Institute, Moore could not perform the essential functions of her job because she was unable to be present at work and that an indefinite medical leave is, as a matter of law, an unreasonable accommodation.
The trial court disagreed, and found that although Moore was unable to perform the essential functions of her job during the period that she was on leave to receive medical treatment, the correct issue was whether Moore’s request for additional medical leave to receive treatment for cancer was a “reasonable accommodation” under the Rehab Act.
Although the Fourth Circuit has held that a reasonable accommodation does not require an employer to grant an employee an indefinite leave of absence to receive medical treatment for a prolonged illness or disability, a temporary leave of absence, in some cases, can be a reasonable accommodation.
According to the court, whether Moore’s eight-month absence from her job to receive cancer treatment was a reasonable accommodation under the Rehab Act or amounted to an “indefinite leave of absence” that imposed an undue hardship on her employer, was a factual issue that cannot be answered so early in the litigation.
According to Moore, although she was unable to work while she was receiving treatment, she requested a reasonable accommodation of additional medical leave that would have enabled her to return to her job. Indeed, Moore was cleared to return to work just one day after she was allegedly terminated by Patuxent Institute. As a result, the court denied the motion to dismiss.
Takeaway for Employers:
As clearly demonstrated in this decision, when an employee has exhausted all available FMLA and other available medical leave, the employer is not free to simply terminate the employee at that time. Under the Rehab Act, as well as the ADA, an employer must also consider whether there are any other reasonable accommodations that can be made to allow that employee to remain away from work for additional time.
Here, the facts were not particularly good for the employer. Moore had been away from work for over eight months and during that time the employer never complained about this prolonged absence. Then, for reasons that were not discussed in the court’s decision, Moore was terminated one day before she was cleared to return to work. This case demonstrates the need for an employer faced with a similar scenario involving a long-term leave to remain attentive to the duration of the leave, and to promptly engage in the interactive process mandated by the ADA.