Category Archives: Classification

young people having fun on the beach

Don’t Dance Around the Facts: Staying Compliant with FLSA

No matter what business you’re in, the long arm of the law is only a lawsuit away. That means you need to have a solid handle on the legality (or lack thereof) of your employment practices today.

A series of lawsuits filed across the country – from Harrisburg, PA to St. Louis, MO and from Grand Junction, CO to Las Vegas, NV – has brought to light a common practice that was nearly universal across an entire industry for years.

One would think that an exotic dance club would, unquestionably, be a place that employs exotic dancers. However, it turns out this assumption would be wrong.

Under longstanding practice, adult gentlemen’s clubs typically treated their dancers as independent contractors, who worked solely for tips and who were not eligible for minimum wage, overtime, workers’ compensation, insurance coverage or any other benefits. In fact, many clubs have historically required dancers to pay a “house fee” to appear on stage, which the club owners compare to the practice of hair salons renting out chairs to individual stylists, who often serve as independent contractors in that industry also.

The Harrisburg, PA lawsuit, however, set the stage for what most courts have concluded is a pretty ‘cut-and-dry’ debate. If a key factor in identifying the difference between an employee and an independent contractor is the level of control exerted (or not exerted) over the worker, then it sure looks like the dancers at many clubs were employees, considering that many clubs:

  • Established extensive rules that dancers had to follow.
  • Subjected dancers to random drug testing.
  • Levied fines against dancers who violated ‘house rules’.
  • Controlled dancers’ schedules.
  • Often required dancers to work more than 40 hours per week.
  • Notified dancers that they could be ‘fired’ if they worked at other competing clubs.

In the Harrisburg case, the employer lost to a default judgment even though the club owners claimed they could not clearly identify and recognize the plaintiffs because club management “only recognized the dancers by their stage names” and “treated them as artists who offered artistic services”.

One factor complicating these cases across the country is that in some places, dancers clearly struggled to make an average hourly rate of compensation at or close to minimum wage, while in other regions dancers were quite successful financially, when evaluated on an hourly compensation basis. Another interesting twist in the Harrisburg case is that the club in question did not even keep regular records of the hours dancers worked (since, they argued, doing so was not essential given that the dancers weren’t actually employees).

This “ignorance is the best defense” scenario resulted in a potential nightmare for the club owners, since in the absence of their records, any financial judgment awarded by the courts would then be based on the dancers’ own accounts of their hours worked, with no input from the club owners.

It should be noted that not all of the suits are being decided in the same manner, due to technicalities specific to each case. However, the general consensus in the legal community is that the arrangements that the vast majority of clubs and dancers have held do not meet the “six-factor economic realities” test essential to proper interpretation of the Fair Labor Standards Act (FLSA).

Bottom Line: If it walks like a duck and you manage it like a duck, it’s a duck — i.e. an employee to whom you owe all of the proper provisions required by federal and state law. Make sure your entire workforce (including independent contractors) is properly defined, clearly classified and managed in full compliance with the law. Ignorance is no excuse, and will only guarantee that you lose not only a court case, but potentially, your entire business.

Selected Sources

Ex-dancer sues midstate gentlemen’s club http://www.pennlive.com/midstate/index.ssf/2013/12/ex-dancer_sues_midstate_gentle.html

Harrisburg, Pa. strip club faces FLSA undressing http://www.businessmanagementdaily.com/40352/harrisburg-pa-strip-club-faces-flsa-undressing

Dancers sue strip club for failing to pay wages and taking tips http://www.denverpost.com/breakingnews/ci_23954514/dancers-sue-strip-club-failing-pay-wages-and

Courts Continue to Hold That Exotic Dancers Are Misclassified as Independent Contractors
http://flsaovertimelaw.com/tag/strippers/

Exotic Dancers Sue Strip Club for Labor Law Violation http://inthesetimes.com/working/entry/16383/exotic_dancers_sue_strip_club_for_labor_law_violation

Las Vegas Strip Club May Owe Millions in Back Wages to Strippers
http://blogs.findlaw.com/free_enterprise/2014/10/las-vegas-strip-club-may-owe-millions-in-back-wages-to-strippers.html

More Exotic Dancers’ Misclassification Suits Dispute Clubs’ Business Model, Lawyers Say
http://www.bna.com/exotic-dancers-misclassification-n17179893648/

Image Credit: Pustovit (Flickr @ Creative Commons)

 

 

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FedEx truck

Independent Contractor or Employee? How Even FedEx Got it Wrong

Small business owners often look to top companies for examples of the best practices they should use to manage their own enterprises. In fact, Disney created a whole program called Disney Institute just to teach smaller companies how to adopt the key principles that make Disney such a successful worldwide brand. But sometimes, following in the footsteps of the big players isn’t such a good idea.

Take the example of FedEx, the $45 Billion “blue chip”, Fortune 500 global logistics and delivery company. With more than 300,000 employees, one thing that you’d think we could all learn from FedEx is how to manage an effective workforce.

Well, you’d be wrong.

Turns out, this business of determining if someone really works for you or not is trickier than a lot of us think. Either that, or perhaps it’s just too easy for business owners to drop into a dreamland of wishful thinking, as they envision saving up to 30% in labor costs by not having to pay overtime, social security, payroll taxes, worker’s compensation or benefits.

When FedEx purchased Roadway Package Service (RPS) to create its FedEx Ground division in 1998, the company took the position that drivers operating for the subsidiary were not employees. After all, many of them owned their own vehicles, handled their own maintenance, took care of their own uniforms, and operated essentially as subcontractors partnering with FedEx Ground to be a part of its national network.

On the other hand, it was FedEx Ground management that specified the vehicle requirements; maintenance standards; uniform requirements; delivery times; paperwork and filing processes; and even daily personal grooming expectations. The company also deducted fees from the drivers’ pay to cover uniform costs, truck washings and rental of the scanners used to log shipments. Drivers routinely worked 50+ hours to maintain their contractual obligations, but since they were not employees they were not paid overtime, nor did the company contribute to their Social Security, worker’s comp or unemployment insurance, among other things.

Well, the chicken came home to roost for FedEx Ground in late August when a federal appeals court ruled that 2,300 FedEx Ground drivers in California were misclassified as independent contractors when in fact they should have been classified as employees.

The fallout? Hundreds of millions of dollars in damages, hundreds of millions more in back taxes, and a major company rapidly rewriting its independent contractor agreements in other states, hoping to prevent the California decision to impact it nationally.

While the legal specifics are highly intricate and continue to be contested by both sides, the moral of the story boils down to this: If it quacks like a duck and walks like a duck, chances are, it’s a duck. From the government’s perspective, an independent contractor needs to be not just a contractor – it also needs to be independent.

According to the IRS, three key categories can be used to perform an initial assessment of this question. They are behavioral, financial and relationship type. In summary, if you are primarily directing, instructing and managing the contractor; if they are NOT truly operating a separate business operation that has its own infrastructure, expenses and profit or loss, then the contractor is not independent and should be promptly re-classified and brought onto your payroll as an employee.

For more details and specifics on twenty factors the IRS will use, please see this publication:

Present Law and Background Relating to Worker Classification for Federal Tax Purposes
http://www.irs.gov/pub/irs-utl/x-26-07.pdf

The FedEx Ground case is just one of numerous instances in which the courts have increasingly questioned the role of independent contractors in many situations. Nonetheless, the FedEx Ground case gives what to most of us would serve as a surprisingly clear example. In that example, just about everything was controlled by FedEx Ground, and if the same job were performed by an employee or an independent contractor, the two people would look, act and function in almost identical ways.

So as you look at your independent contractor relationships, make sure you’re enabling them to walk like whatever they are – ducks, geese, blue jays, hawks or greyhounds. That means not managing them or their activities like those of employees, and ensuring that they are operating as independent business people providing value-added services to your company, invoicing you for those services – and not just doing work like an employee would.

And, don’t forget that you need to issue a 1099-MISC for any independent contractor where payments to the contractor equal $600 or more (and that number includes expense reimbursements, by the way). In fact, the IRS also requires you to collect backup withholding of 28% if any payments are made to the independent contractor before you receive a W-9 to confirm whether a 1099-MISC will be required for that vendor.

Selected Sources

FedEx Misclassified Drivers As Independent Contractors, Rules Ninth Circuit
http://www.forbes.com/sites/robertwood/2014/08/27/fedex-misclassified-drivers-as-independent-contractors-rules-ninth-circuit/

FedEx Latest Company Slammed Over ‘Independent’ Employees
http://www.forbes.com/sites/eriksherman/2014/09/03/fedex-latest-company-slammed-over-independent-employees/

FedEx Ground Says Its Drivers Aren’t Employees. The Courts Will Decide
http://www.businessweek.com/articles/2014-10-16/fedex-ground-says-its-drivers-arent-employees-dot-the-courts-will-decide

Coffee Talk with Trish: Independent Contractor vs. Employee…
http://www.stambaughness.com/2014/11/ndependent-contractor-vs-employee/

 

Image Credit: dguo @ Flickr (Creative Commons)

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Classify Correctly and Stay Classy: Exempt vs. Non-Exempt Employees (Accidental HR)

image2When you’re running at full speed and trying not to trip, it’s often the little things that mess you up. And when it comes to human resources, these gremlins are particularly dangerous when you’re practicing “Accidental HR” – the unplanned, unbudgeted and unsupported business of ‘doing’ HR in a catch-as-catch-can manner, buried under a task list of understandably critical priorities like making payroll, getting more customers and generally running your business.

One of the many gremlins you need to be aware of is the classic confusion over employee classification. Every time you hire someone or shift an employee’s professional role, the question comes up: Are they Exempt or Non-Exempt? And for that matter, what exactly do these terms mean? Some business owners resolve this question with nothing more than simple coin toss or less-than-educated guess.

But we want you to stay classy…and compliant when it comes to these things!

Here’s a quick summary on how to better evaluate whether or not an employee is Exempt or Non-Exempt.

First, you need to know that the whole exempt/non-exempt question arose because of a law called the Fair Labor Standards Act (FLSA). Almost all employers are covered by the FLSA. The key question raised by FLSA in this regard is how to treat those employees who exceed 40 hours of work in a given week (i.e. overtime). Exempt” means “exempt from overtime under this law” and Non-Exempt, naturally, means “eligible for overtime”.

The three factors the government has used to develop and apply its rules for classifying Exempt employees have to do with some key factors:

1. How much you pay an employee
2. How you pay that employee
3. The nature of the work performed by the employee.

Do you pay this employee through a salary, or by the hour? Remember that if you pay someone an hourly wage, it must be at least equal to the legally required minimum wage, and you must pay overtime of 1.5 times hourly pay (at a minimum) for any hours worked beyond 40 in each week.

Hourly employees are considered Non-Exempt and are, therefore, entitled to overtime wages. Salaried employees, who are usually serving in management roles (professional, technical, supervisory or executive) or those who are in outside sales positions (usually paid by commission), are generally considered Exempt (although, interestingly, those in inside sales positions are usually Non-Exempt).

Remember, however, that you can’t just take an employee from a 40 hour-per-week hourly position, pay them the same amount in a salary, and suddenly declare them Exempt. It doesn’t work that way. Item #3 above (the nature of the employee’s work) is the absolute most important part!

In fact, if the FLSA does not specifically provide an exemption for the type of position the employee holds, then you may be violating the law regardless of how you compensate the employee. So, if everyone is Non-Exempt unless the law itself says otherwise, then what does the law actually say? The most common exemptions specified in the FLSA include the following:

1. Administrative employees involved primarily in office-related, non-manual work and who exercise discretion and independence of judgment in their work. You must also pay them a certain amount per week in order for this position to qualify as Exempt.

2. Executive employees who are clearly recognized as responsible for management duties and activities, and who regularly direct the work of two or more other employees and possess significant authority. You must also pay them a certain amount per week in order for this position to qualify as Exempt.

3. Computer employees must be directly involved in consulting, testing, designing, developing, documenting, analyzing and managing computer systems or programs. You must also pay them a certain amount per week in order for this position to qualify as Exempt.

4. High-wage employees who make more than $100,000 per year are generally exempt.

5. The ‘learned’ professions are also generally exempt, such as lawyers, doctors, dentists, teachers, architects, engineers, and the clergy. However, it gets complicated quickly because while an accountant or CPA may be exempt, the bookkeeper working next to her or him may not be. Registered nurses (RNs) may be exempt, but licensed practical nurses (LPNs) may not be. A scientist working in a research lab may be exempt, but the research assistant on the same bench may not be. A registered pharmacist (RPh or PharmD) may be exempt, but the pharmacy technician may not be.

6. Creative professionals are usually exempt, but again this may depend on the nature of their work. Those who are directly involved in the invention, creativity, originality and a unique interpretation or analysis may be exempt. However, the increasingly technical nature of much of this work, coupled with downward wage pressures and more ‘assembly-line’ style work conditions, has created some red flags for the FLSA and employers should proceed with caution.

You can certainly get a clear sense of what the government is trying to do. In short, it’s looking to protect the labor rights of those who need protection, while giving somewhat greater latitude to the nature of the work and compensation relationship between employer and employee where the professional or individual is in a more powerful position.

Remember, too, that the Fair Labor Standards Act was originally written into law in 1938 and is regularly amended and updated, as any law written in 1938 would probably need to be. Ask yourself what the world looked like for you in 1938, and you quickly get the point!

By the way – Since the law is regularly updated, amended, revised and reinterpreted, the information above is just that – information and information only. Specifically, it’s information that, while reasonable as a resource for general guidance and to help you gain a better overall understanding of the law, it is not intended or appropriate for use as an official or complete reference for formal business, legal or other purposes.

The IRS and the U.S. Department of Labor can make your life very unpleasant if either or both conclude that you are cheating at the classification game. The best thing to do next is to consult with an HR professional who is regularly updated, fully informed and constantly reviewing how the law is applied to the widest range of scenarios.

In addition, the best way to learn more about the Fair Labor Standards Act is to go on the web and visit it for yourself, right here:

U.S. Department of Labor – FLSA Overview
http://www.dol.gov/whd/flsa/

So remember: Classify conservatively, commit to careful compliance, and stay classy!

For more information on how your business can benefit from leaving the gaps, gremlins and gripes of “Accidental HR” behind, contact HR Resolutions today for a free initial consultation to discuss how on-site, on-call and as-needed HR outsourcing can work cost-effectively in your business, or call us at 717-652-5187 today.

Article Sources:

FLSA Resources by Chamberlain, Kaufman & Jones LLP http://www.flsa.com/coverage.html

What’s the Difference Between Exempt and Nonexempt Workers? (Monster.com)
http://career-advice.monster.com/salary-benefits/salary-information/whats-the-difference-between-exempt/article.aspx

Exempt vs. Non-exempt Employees (HR Hero)
http://topics.hrhero.com/exempt-vs-non-exempt-employees/#

The Difference Between Exempt & Non-Exempt Employees (CPA Practice Advisor) http://www.cpapracticeadvisor.com/blog/11173480/payroll-the-difference-between-exempt-non-exempt-employees

Image Credit: PFJK @ Flickr (Creative Commons)

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