It is easy for us to recommend that employers conduct regular and comprehensive wage and hour audits that examine all facets of the employer’s pay practices to ensure compliance with the myriad of wage and hour laws. After all, the news in the area of wage and hour law continues to be discouraging for employers. Year after year, wage and hour class-based litigation and government enforcement actions continue to increase. Each year brings a new record number of Fair Labor Standards Act (“FLSA”) claims filed in federal court. Smaller employers increasingly are targeted, as plaintiffs’ law firms have improved their efficiency in identifying and litigating potential wage and hour claims. There is no indication that any of these negative trend lines are improving any time soon for employers.
That said, we recognize that HR professionals, in-house counsel, and senior management have very limited time and resources to address potential wage and hour compliance concerns. For those employers who are unable to conduct a soup-to-nuts wage and hour compliance audit, below is a list of those specific areas where employers should dedicate their wage and hour compliance efforts in 2014.
1. Independent Contractor Misclassification
The misclassification of individuals as independent contractors, instead of employees, remains a considerable source of potential liability for employers. Independent contractor misclassification often presents a fertile ground for class-based litigation. The Department of Labor’s Wage and Hour Division has targeted independent contractor misclassification with its “Misclassification Initiative.” In November, Pennsylvania Senator Bob Casey, along with two other Senators, introduced the Payroll Fraud Protection Act of 2013, a bill designed to “protect workers from being misclassified as independent contractors, thereby ensuring access to safeguards like fair labor standards, health and safety protections, and unemployment and workers’ compensation benefits” and “prohibit employers from using misclassification to avoid paying their fair share of taxes.”
The attention focused on independent contractor misclassification has never been higher. Unlike other wage and hour compliance issues, independent contractor misclassification is a source of potential liability for employers under numerous other laws, including unemployment compensation, payroll taxes, and workers’ compensation.
Coverage under the FLSA is afforded only to “employees” of covered employers, not true independent contractors. When determining FLSA coverage, courts look to the “economic reality” of the situation. Relevant factors in the economic reality analysis include:
the degree of control exercised by the alleged employer over the work performed;
the alleged employee’s opportunity for profit or loss depending upon his/her managerial skills;
the alleged employee’s investment in equipment or materials;
whether the service rendered requires a special skill;
the degree of permanence of the working relationship;
whether the service rendered is an integral part of the alleged employer’s business.
Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376 (3d Cir. 1985). The FLSA applies a very narrow definition of independent contractor. Close calls typically result in a finding that the individual is an employee, not an independent contractor, creating significant potential liability.
In light of the current enforcement environment, employers who utilize the services of independent contractors, especially on a regular, non-sporadic basis, should review these relationships to determine whether they would meet the FLSA’s “narrow” definition of independent contractor. If not, employers should look to transition these relationships to traditional employment relationships.
2. Properly Calculating Overtime Compensation for Non-Exempt Employees
Most employers understand that non-exempt employees are entitled to overtime compensation at a rate equal to one and one-half times their regular rates for all time worked in excess of 40 in any work week. Fewer employers are aware that an employee’s “regular rate” does not automatically mean the employee’s hourly rate. If an employee’s compensation includes more than a straight hourly rate (e.g., commission earnings, bonuses, profit-sharing payments, etc.), the employer may need to include such compensation in the regular rate for overtime compensation purposes. Depending on the timing of these additional payments, the employer may even need to do a deferred overtime calculation.
Employers who pay non-exempt hourly employees more than simply an hourly wage should review their compensation plans to determine whether the FLSA allows such payments to be excluded from the regular rate. If not, the employer may need to include them in the regular rate or face liability for unpaid overtime compensation. Regular rate issues are ripe for class-based claims, as they typically are systemic and affect many employees.
We are reminded time and time again that common sense will not ensure wage and hour compliance. In this case, showing generosity by making additional payments to non-exempt employees could trigger inadvertent additional overtime compensation liability.
3. Unpaid Internships
2013 was the year that FLSA liability for unpaid internships gained national attention. Numerous employers, including a few high-profile media enterprises, faced class-based litigation filed by former unpaid interns, seeking wages under the FLSA and state law.
Unpaid internships traditionally have been relatively common, especially with college students seeking “real world” experience to supplement their classroom education. With the downturn in the economy, many students and young people have sought such internships to enhance their resumes in the absence of actual paying jobs.
Few employers understand the very limited circumstances under which unpaid internships are permissible under the FLSA. Specifically, for-profit entities may lawfully have unpaid interns only if they can meet each of the following six factors:
The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
The internship experience is for the benefit of the intern;
The intern does not displace regular employees, but works under close supervision of existing staff;
The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
The intern is not necessarily entitled to a job at the conclusion of the internship; and
The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Simply put, very few unpaid internship relationships can meet this stringent test, resulting in potential minimum wage and overtime liability.
Employers, especially those in the for-profit private sector, that host unpaid interns should determine whether those interns can meet this test. If not, employers should ensure that their interns are treated as employees and paid at least the minimum wage rate.
4. Tracking and Compensating All Hours Worked by Non-Exempt Employees
With the advancement of the digital age, fewer non-exempt employees simply punch a time clock at the beginning of the work day and punch out at the end of the day. As mobile devices become ubiquitous, employers increasingly are expecting or allowing non-exempt employees to carry devices like Smartphones and check e-mail, voice mail, and texts remotely. Many exempt employees struggle to remember a time when they did not habitually check e-mail and voice-mail messages before, during, and after the work day. As more non-exempt employees begin to adopt a similar lifestyle, the risk of liability for unpaid hours worked has grown.
Employers are liable to pay non-exempt employees for hours worked if they “knew or should have known” that they were working. Note that this test does not ask or care if the employer actually asked the employee to work.
Employers who give non-exempt employees remote access to e-mail or voice mail should put in place procedures to track the time spent by employees using such tools outside their normal work hours. In addition, travel by non-exempt employees and time spent at meetings or training outside normal work hours also may constitute compensable hours worked.
Employers should work in 2014 to ensure that they are capturing all time worked by non-exempt employees and compensating them for it. If non-exempt employees are engaged in activities for the employer outside their normal working hours, the employer may have growing liability for unpaid wages on a class-wide basis.
5. Proper Classification of Exempt Employees
Overtime exemption misclassification remains one of the primary sources of wage and hour liability and class-based claims. The rules of the game remain the same. Non-exempt treatment is the “default” status under the FLSA. To establish an exemption, the employer bears the burden of the proving that the employee qualifies for the exemption. Courts and the U.S. Department of Labor interpret the exemptions narrowly, and close calls generally go the employee in a claim for overtime compensation. An employer may treat an employee as non-exempt and pay him/her overtime compensation, even if the employee could qualify for exempt status. The reverse is not true. An employer may not treat an employee as exempt if the employee does not meet the requirements of any of the exemptions.
Employers should review all employees that they treat as exempt and ensure that they feel comfortable that they could prove the applicability of one or more recognized exemptions in the event of a dispute. Simply paying an employee a salary is not sufficient to qualify the employee as exempt. The employer must be able to prove that the employee’s job duties meet the duties test for one of the recognized exemptions.
6. Beware Successor FLSA Liability
While this issue is not technically one of compliance, it should be a priority for any entity acquiring the assets of an employer. In March 2013, the Seventh Circuit Court of Appeals confirmed that an entity that bought another company’s assets at a receiver’s auction was liable to pay $500,000 to satisfy the settlement of an FLSA lawsuit reached between the predecessor employer and its employees. Even though buyers typically do not acquire a seller’s liabilities in an asset purchase transaction, liability for a seller’s FLSA violations may be imposed on a buyer, even if the buyer expressly disclaims liability for such claims in the asset purchase agreement itself, if the buyer is considered a “successor employer” under federal common law.
In the Teed decision, the Seventh Circuit pointed to the following factors in support of its successor finding: the buyer knew about the pending FLSA lawsuit when it bought the seller’s assets, the seller was unable to provide the relief sought by its former employees after the sale, the buyer was able to provide such relief, and there existed significant continuity of operations and work force between the seller and buyer after the closing.
If an entity is looking to acquire the assets of an employer, it is important that the potential buyer investigate as part of the due diligence process the seller’s potential FLSA liability prior to completing the acquisition. As shown by the Teed decision, the buyer may be on the hook for its predecessor’s liability, even if it expressly disclaims such liability in the agreement itself.