Allyn & Fortuna LLP
Diana Uhimov, April 17, 2014.
Employee misclassification occurs when employers treat workers who should be considered employees as independent contractors or simply do not report them and pay them “off the books”. The consequences for misclassification may include civil penalties, liability for employment taxes, class action lawsuits for unpaid wages, and even criminal prosecution. Although engaging an independent contractor may appear to streamline the hiring process for companies upfront, it is critical to ensure that workers are properly classified to prevent audits, investigations and potential lawsuits. The crackdown on businesses who incorrectly classify employees as independent contractors has intensified following recently forged partnerships between federal and state agencies, as well as across state agencies. To avoid liability, employers should be certain that their workers are bona fide independent contractors under the applicable laws, and that the relationship is properly implemented, documented, and structured.
Misclassification is treated as a serious problem by the United States Department of Labor because misclassified workers are denied access to benefits to which they would otherwise be entitled. These benefits include family and medical leave, overtime compensation, minimum wage pay, and unemployment insurance. On the other hand, misclassification also hurts business owners who try diligently to abide by the laws, by giving a competitive edge to those evading compliance. The IRS and state governments also have a strong interest in identifying employers attempting to skirt the law since a worker’s status determines what taxes are paid and who is charged with paying these taxes. Generally, the employer is responsible for withholding income taxes, withholding and paying Social Security and Medicare taxes, and paying unemployment tax on behalf of employees. But with independent contractors, federal and state governments are deprived of upfront tax revenues generated through withholdings.
Generally, someone is an independent contractor if the business for which the services are performed controls or directs only the result of the work, but not the means and manner of carrying out the work. New York courts usually consider the totality of the circumstances, focusing on the degree of employer control over the worker. The degree of control inquiry focuses on whether the company may direct how the worker does his or her job; how the worker is paid; who provides the tools necessary for the job; whether expenses are reimbursed; where the job is performed; and the benefits provided. However, the tests used to determine whether a worker is an independent contractor vary not only state to state, but also among industries and agencies. New York has enacted misclassification statutes covering two industries where the occurrences are widespread–the construction industry and the commercial goods transportation industry. The New York State Construction Industry Fair Play Act, as well as the newly signed New York State Commercial Goods Transportation Industry Fair Play Act, presumes workers are employees unless they meet all three of the following criteria:
- Free from control and direction in performing the job, both under contract and in fact;
- Performing services outside of the usual course of business for the hiring company; and
- Customarily engaged in an independently established trade, occupation or business that is similar to the service provided to the company in question.
In 2007, New York State established a Joint Enforcement Task Force on Employee Misclassification, which conducts audits and investigations each year. Last year, its 13,000 audits revealed 127,000 workers were misclassified as independent contractors and over $55 million in unpaid unemployment contributions were due. The highest offending industries were found to be: professional, scientific and technical services; food/drink services; administrative and support services; ambulatory health care services; specialty trade contractors; construction; educational services; messengers; performing arts, spectator sports, and related industries; motion picture and sound recording; and amusement, gambling and recreational industries. The Task Force also ramped up its efforts to combat misclassification in 2013 by adding joint agency “sweeps” of construction sites, bars and restaurants, automotive repair centers, grocery stores, adult entertainment venues, and retail establishments to its enforcement activities.
Now, the New York Attorney General has partnered with the DOL in a data sharing deal, to further target worker misclassification. The deal between New York and the federal government aims to level the playing field by going after offending employers. Employers should anticipate escalated aggressiveness in identifying and prosecuting misclassification. And with cooperative enforcement among state and federal agencies, it is likely that one enforcement action will trigger others. In addition, for companies operating in multiple jurisdictions who have been subjected to actions in other states, scrutiny in New York is more likely.
The best course of action for New York companies is to familiarize themselves with the classification requirements and review their independent contractor compliance prior to facing any potential audits or lawsuits. The industries identified in the Task Force Report run the greatest risk of scrutiny, but any industry could be targeted. Many instances of employee misclassification in New York involved businesses that failed to structure, document, and implement the independent contractor relationship in accordance with the law. Therefore, New York employers should be on heightened alert.
Megan J. Muoio, March 26, 2014
On Tuesday, March 25, 2014, the United States Supreme Court heard oral arguments in one of the most anticipated cases of the 2013-2014 Term – Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties Corp. v. Sebelius, which were consolidated for argument. Both cases concern a challenge by a private, for-profit corporation to the ACA’s mandate that all covered employee health plans provide no-cost pregnancy-related services for women, which includes prescription contraceptives.
Hobby Lobby is a national chain of craft stores with 13,000 employees and has a subsidiary, Mardel, a national chain of religious book stores with 400 employees. The Green family, which owns Hobby Lobby and Mardel, objected to the contraception mandate in the ACA because they believe that the mandate interferes with their religious beliefs. Hobby Lobby challenged the mandate to cover only those forms of birth control that it believes are abortofacients. Hobby Lobby points to the 1993 Religious Freedom Restoration Act, which prohibits the federal government from imposing a “substantial burden” on the religious exercise of a “person” unless the government can prove a compelling government interest in the burden and that it is using the least restrictive means. Importantly, for the purpose of this appeal, “person” is not defined under the Act.
The key question is whether a corporation is a “person” under the Act whose religious freedom can be impinged upon by the federal government. The United States Court of Appeals for the Tenth Circuit held that a for-profit corporation could express its faith, which should be protected under the Act. On appeal to the Supreme Court, the federal government argued that: (1) corporations do not exercise religion, (2) the ACA’s mandate only applies to corporations and not their individual owners, who are separate entities, and (3) the federal government has proven a compelling interest in ensuring women’s access to vital health benefits under the federal health insurance program.
Conestoga Wood comes to the Supreme Court on appeal from the United States Court of Appeals for the Third Circuit, which held that the Mennonite-family-owned corporation could not claim the religious rights of a “person” under the Religious Freedom Restoration Act or the First Amendment of the Constitution.
At oral argument, the Justices divided their questioning along predictable lines, with Justices Breyer, Ginsburg, Kagan and Sotomayor peppering Paul Clement, the attorney for Hobby Lobby and Conestoga Wood, with difficult questions regarding whether a corporate-religious exception to the contraception mandate would be a slippery slope to corporate objections for other medical issues, such as the provision blood transfusions or vaccinations. Their questions also expressed a concern with the possible impact of religious objections of corporations on other types of litigation, such as minimum wage and overtime laws, social security tax legislation and legislation that secures rights for lesbian, bisexual, gay and transgender individuals. Solicitor General Donald Verilli, arguing on behalf of the federal government and in support of the ACA mandate, fielded tough questions from Chief Justice Roberts, Justice Alito and Justice Scalia. Justice Kennedy played both sides of the argument, lending credence to his reputation as the Justice with the swing vote.
Attorneys and advocates on both sides of this case have been anticipating the outcome of this appeal for months and predicting the result: will the mandate be upheld or will corporations be able to deny contraceptive coverage to their employees? Whatever the outcome, a decision is expected by the end of the Court’s term in June.
Nicholas Fortuna, March 19, 2014.
The Occupational, Safety and Health Administration (OSHA) is charged with issuing standards to protect workers’ safety on the job. Employers are required to know and follow the applicable rules, regulations, and standards affecting their industry/workplace and supply all necessary safety equipment to protect their employees. Even if there is no specific standard, rule or regulation pertaining to an employer’s workplace, there is a general duty requirement to keep employees and the workplace free from hazards. Any employer in the United States and its territories (with a few exceptions) with one or more employee is subject to OSHA’s authority and must follow its dictates.
There is no reliable way to predict when an OSHA inspector will arrive at an employer’s doorstep, but the inspector will arrive at some point. OSHA can inspect an employer’s work site without advanced notice and employers should be ready. These inspections are not limited to employers with a large number of employees. Forty percent of the inspections conducted by OSHA are of employers with 10 or fewer employees. What follows are some general tips an employer can follow to help prevent it from being caught off guard by OSHA.
Hazard Assessment
As part of an overall safety plan, an employer has to perform a hazard assessment of the worksite, each job, and any personal protective equipment issued and then must put the results in writing. The analysis should include a worksite survey, and examination of job, processes, and phases of work.
The worksite survey must identify sources of hazard and categorize them. Examples of some categories are Heat, Harmful Dust, Chemical, Compression (roll-over), Noise, Fire, Penetration, and Impact. Following the survey, the employer should create a written check list of the hazards found and a corresponding safety measure to minimize or eliminate the hazard. OSHA has specific standards for particular hazards which must be followed.
Individual jobs and tasks at the worksite must be assessed for hazards as well. A good approach would be to perform a four step job safety analysis: (1) Select a job to be analyzed; (2) Separate the job into basic steps; (3) Identify the hazard associated with each step; and (4) Implement safety measures to control each hazard. The job safety analysis should be in writing and updated as job requirements change.
Personal protective equipment must be surveyed and the results put in writing. Initially, an employer should identify equipment employees should have to ensure their safety, such as, goggles, steel toed boots, harnesses, etc. The employer must then provide the necessary personal protective equipment to employees and require its use. If an employee fails to use personal protective equipment provided by the employer, OSHA will hold the employer responsible and the employer will be cited.
Written Safety Plan and Training
After the hazards are identified and each appropriate safety measure to control for each hazard is determined, they must be put in writing as part of the overall safety plan. All employees must be provided with access to the written assessment and corresponding safety measures. The plan must be implemented and the employees trained on its operation. Employees must be made aware of known hazards at the workplace and the safety protocols to control for those hazards.
OSHA On-Site Consultation Program
OSHA provides a free program where it will work with the employer and identify the hazards and what must be done to ensure workers’ safety. If the employer enrolls in OSHA’s consultation program, no inspection citations will be given to the employer while the employer is enrolled in the program. The employer must, however, implement the measures required within the timelines given by OSHA. The consultants are not permitted to report to OSHA’s enforcement division anything about the enrolled employer other than confirmation of its enrollment. This is done to allow a free flow of information between the employer and OSHA consultants about hazards without fear of punishment.
OSHA Inspection
Generally, an employer should not deny access to an OSHA inspector. It is insufficient to claim one is not ready for an inspection. When the OSHA inspector arrives, review the inspector’s credentials and call OSHA to verify that the person is actually an OSHA inspector. (There are many reasons why someone would want to get access to an employer’s work site and pose as an OSHA inspector – industrial espionage, sabotage, etc.) An employer representative can and should shadow the inspector during the inspection and take copious notes.
The required documentation the employer must maintain and make available for review upon inspection are: written hazard assessment; records of employee training for the past three years; emergency action and fire prevention plans; safety related disciplinary records; records of exposure to toxic substances; written safety plans; and a written record of all injuries at the work place for the past five years. Depending on the nature of the hazards at the employer’s worksite, OSHA may have specific standards requiring additional documentation. An employer is charged with knowing what documentation it must provide on inspection.
At the end of the inspection, if a violation is found and a citation issued, the employer can respond in one of three ways: (i) it can accept the violation, (ii) contest it or (iii) request an informal conference. At the informal conference the employer may negotiate the fine and obtain information from OSHA as to how it wants the employer to address the violation.
Reporting
One last proviso, if there is ever a catastrophic event at the worksite; an employer has eight hours to report it. A catastrophe is defined by OSHA as one or more deaths or three or more employees hospitalized for the same incident. The hotline to call in a catastrophe is (800) 321-6742. Failure to self-report a catastrophe as defined by OSHA will result in significant penalties.
Diana Uhimov, March 11, 2014.
Early this month, a divided U.S. Supreme Court ruled that the whistleblower provision of the Sarbanes-Oxley Act of 2002 (SOX) protects employees of private contractors conducting work for publicly-traded companies in the same way as it protects the public company’s employees. The relevant part of the statute at issue states that “no public company … or any … contractor … of such company may [retaliate] against an employee … because of [SOX – protected activity].” The Court found that a plain reading of the phrase “employee” in the statute described “the contractor’s own employee”. Justice Ruth Bader Ginsburg’s decision for the majority in Lawson v. FMR LLC overturned the decision of the U.S. Court of Appeals for the First Circuit, which held that this provision applied only to employees of publicly-traded companies and denied protection to employees of privately-held companies.
The plaintiff whistleblowers in Lawson initiated the lawsuit against their former employers, privately-held companies that advised and managed Fidelity mutual funds. The Fidelity funds, public companies covered by SOX, themselves had no employees of their own, which is common in the industry. After raising concerns about accounting methods and inaccuracies in federal filings, the employees were subjected to adverse actions and discharge. Under the First Circuit’s decision, the plaintiffs were denied shelter from retaliation by the statute.
Although the particular merits of the plaintiffs’ claims will be decided by the First Circuit on remand, the Supreme Court’s decision is a big win for whistleblowers—it essentially closes a loophole that would deny protection to everyone who works for mutual funds. The Court rejected the narrower interpretation suggested by the defendant employers that Congress included “contractors” in the statute only to avoid permitting public companies to evade liability by hiring a private contractor to retaliate on their behalf. The defendants even illustrated their position by invoking George Clooney’s character from Up in the Air, an “ax-wielding specialist” brought in for the sole purpose of terminating employees.
The Court’s opinion was largely based on a broad reading of Congress’s intent in enacting SOX to “safeguard investors in public companies and restore trust in the financial markets following the collapse of the Enron Corporation” by preventing retaliation against employees that question fraudulent financial activities, among other measures. Major corporate accounting scandals from 2000-2002 left thousands unemployed, lost billions for investors, and challenged the integrity of the U.S. securities market. Enron and other companies misstated their income and inflated the equity value on their balance sheets, while hiding huge debts and losses in other companies it had created, abetted by privately-held accounting firm, Arthur Andersen. Eventually, Enron declared bankruptcy and share prices plummeted to penny stock levels.
A significant factor in the majority’s analysis was the enormous reach of the investment advising industry, which today manages $14.7 trillion on behalf of almost 94 million investors. Confidence in public markets may well be bolstered by the assurance that employees, including attorneys and auditors, will be shielded from retaliation if they disclose information about financial practices that may harm investors.
Despite providing added security for the 94 million investors, the majority opinion is being criticized for failing to limit the scope of its opinion to resolve potential issues of overbreadth of contractors covered. Justice Sonia Sotomayor, writing for the dissent, opined that the majority’s ruling would lead to “absurd results”, such as allowing a “babysitter to bring a federal case against his employer—a parent who happens to work at the local Walmart (a public company)—if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud. The significant expansion of coverage of SOX beyond publicly-traded companies could expose millions of small businesses to suits by employees seeking to exploit them.
Although Congress likely did not mean to leave an executive working for a mutual fund manager without a remedy, the decision surprisingly opens the door to low-level employees bringing federal retaliation cases after reporting minor offenses. While this scenario seems “more than hypothetical” to the majority, there is a major concern that employment lawyers will seek out contractor employees with any plausible claim of retaliation that can be connected to a financial matter.
Privately-held companies must now review their compliance systems and processes for investigating whistleblower complaints, as well as update training procedures for human resources departments regarding fraud-related issues. Whether whistleblower protection will extended to all they way down to personal service contractors employed by executives and officers of publicly-traded companies is an open question.