During the AFL-CIO Executive Council’s winter meeting, U.S. Department of Labor (“DOL”) Secretary Hilda Solis announced plans to address what she perceives to be the rampant misclassification of independent contractors by their would-be employers.  Designed to inform workers of their rights and protections under federal law, notify them of whom to contact should they have questions or issues, and enlighten them about “who they can trust,” the campaign will begin in Houston, Texas as early as April.

The DOL’s campaign is part of a new, joint DOL-Treasury Department initiative that seeks to combat misclassification of employees as independent contractors.  The DOL’s proposed budget for the campaign includes a request for $25 million to hire additional Wage and Hour division employees, employees to pursue misclassification litigation, and funds to modify the training curriculum and investigation guidelines used by Occupational Safety and Health Administration (“OSHA”) inspectors.  According to Secretary Solis, the DOL’s focus on misclassification will look first at those sectors where she believes the most “egregious abuse” is occurring - the service and construction industries.  Employers in all industries, and certainly those in the service and construction industries, should take a second look at whether they have properly classified individuals as independent contractors.  Employers should also make sure to maintain all documents and records relating to their workforce for at least the three-year statute of limitations period on wage covering misclassification claims.

Secretary Solis also took time during her remarks to comment on the make up of the National Labor Relations Board and the seemingly-stalled Employee Free Choice Act (“EFCA”).  Declining to provide specifics or discuss particular nominees, Secretary Solis indicated that “people will be pleased, they will be very pleased,” with the NLRB’s composition.  Her comments hint that the White House will not give up on its embattled Board nominee, Craig Becker, the AFL-CIO’s former associate general counsel.  With regard to EFCA, Secretary Solis acknowledged that she did not have the ability to pressure Congress to pass EFCA, but indicated she would continue to acknowledge its merits, and she encouraged labor organizations not to give up on its passage.

In 2009, employers faced a barrage of wage and hour class and collective actions.  2010 promises more of the same, plus increased enforcement by administrative agencies, including the Internal Revenue Service (“IRS”).

Taking a step in a new direction, in recent months, courts have demonstrated an increased willingness to grant class or collective action certification in Fair Labor Standards Act (“FLSA”) and/or state wage and hour claims.  This trend toward certification can be the difference in liability for underpaying a handful of individual employees versus an entire workforce.  When multiplied class-wide, liability for wage and hour violations adds up quickly.  Walmart, for example, agreed to pay up to $640 million last year to settle multiple wage and hour suits.

At the same time that employers are facing increased pressure from civil suits, state and federal agencies have stepped into a more prominent role in enforcing wage and hour laws.  Department of Labor (DOL) Secretary Hilda Solis recently announced that in early 2010, the DOL’s Wage and Hour Division will launch “We Can Help,” a national public awareness campaign to inform workers about their rights.  Secretary Solis has also hired an additional 250 wage and hour investigators to step-up enforcement efforts.  President Obama’s proposed 2011 budget would allocate $25 million to the DOL to combat employees misclassified as independent contractors.  The “Misclassification Initiative” provides for 100 additional enforcement personnel and would encourage state enforcement through grant money.  Even the IRS is participating, announcing that it will launch a three-year employment tax audit initiative, the “National Research Project.”  Like the DOL’s We Can Help initiative, the National Research Project will also focus on the misclassification of employees as independent contractors. 

Faced with triple threats from civil lawsuits, labor-focused administrative agencies, and the IRS, employers would be well-served by auditing their wage payment practices and workforce classification structure to ensure compliance with both federal and state wage and hour laws.

On March 2, 2010, President Obama signed into law the Temporary Extension Act of 2010.  The Act amends the American Recovery and Reinvestment Act of 2009 by extending through March 31, 2010, a 65% federal subsidy of COBRA continuation coverage premiums.  Without the extension, employees laid off after February 28, 2010 would have been ineligible for the subsidy.  In addition to extending the eligibility period, the Act also extends eligibility criteria.  Now individuals who had a reduction of hours, did not elect COBRA coverage at the time of the reduction, and later suffer involuntary termination may be eligible to receive premium subsidy assistance under certain conditions. 

The Temporary Extension Act only extends COBRA continuation coverage for the thirty-one days of March.  The Act was only intended as a stop-gap.  Congress continues to debate proposed legislation, H.R. 4213, further extending the subsidy period through December 31, 2010.  H.R. 4213 is presently before the Senate.

Office-supply retailer Staples, Inc. has agreed to a $42 million settlement of thirteen lawsuits alleging that the company had misclassified more than 5,000 assistant store managers as exempt from federal and state wage-and-hour laws and consequently failed to pay them overtime compensation to which they were entitled.  The claims, brought under the federal Fair Labor Standards Act and various state wage-and-hour laws, date back as far as 2002.  The settlement, which is subject to court approval, contains no admission of wrongdoing by the company.

The Staples settlement illustrates the highly contentious issue of exempt status for assistant store managers in retail operations.  Although some assistant store managers can satisfy the standards for exempt status as bona fide executive employees, many retail employers routinely classify this job title as exempt without assessing whether the individuals holding these jobs actually meet the requirements for exempt executive status.  In some instances, assistant store managers spend most of their time performing such nonexempt work as stocking shelves and ringing up sales – a situation that can defeat exempt status.  In some stores, assistant store managers do not independently supervise two or more full-time employees, but merely share supervisory authority with the store manager.  This situation can also result in the assistant store managers being deemed nonexempt.  Given the potential financial pitfalls of misclassifying assistant store managers as exempt, employers in the retail industry would be wise to examine carefully whether those positions meet all of the requirements for exempt status under the Fair Labor Standards Act and applicable state laws.

Job bias claims filed with the Equal Employment Opportunity (“EEOC”) in 2009 reached near-record numbers.  By the end of the EEOC’s fiscal year on September 30, 2009, over 93,000 charges of discrimination had been filed with the agency, the second-highest in the EEOC’s history.  In a January 6, 2010 press release, the EEOC attributed this “near-historic level of total discrimination charge filings” to several factors, including greater accessibility of the EEOC to the public, distressed economic conditions, employees’ enhanced awareness of their legal rights, and changes to the agency’s intake process that reduced the number of steps necessary for an individual to file a charge.

Both the EEOC and industry experts expect the number of charges filed with the agency to continue to increase in 2010.  The EEOC anticipates that the current economic climate will result in at least 101,653 charges of discrimination being filed with the agency during fiscal year 2010.  To meet the increased demand for its services, the EEOC requested a $23 million funding increase from Congress.  The money will be used to hire approximately 300 new investigators, mediators, and attorneys to reduce the backlog in private sector claims.

Employers should expect a very visible and active EEOC in 2010 and beyond.  Not only has the EEOC received increased funding for 2010, but President Obama’s proposed 2011 budget includes a request for an $18 million increase to the EEOC’s annual budget.  EEOC Acting Chairman Stuart Ishimaru reiterated the agency’s intent to remain vigilant, stating that President Obama’s requested funds will permit the EEOC “to continue our focus on systemic enforcement.”  In light of the EEOC’s heightened visibility, employers should take affirmative steps to prevent discriminatory actions that could serve as the basis for a charge and to ensure that they are in the best position to defend against any charges filed.  Employers would be well-served to update handbooks, audit employment policies to ensure that they include recent amendments to the ADA, FMLA, and Equal Pay Act, and train their  managers on the implications of such amendments.  Employers should also consider providing refresher sexual harassment training courses and remind front line managers of the crucial need to partner with human resources and to document performance problems and conversations at the time they occur.

In a surprise result, the Senate seat held by Democrat Ted Kennedy for 46 years will now belong to Republican Scott Brown.  The results of Massachusetts’ special election obviously threaten to upset the fragile success Senate democrats have achieved with healthcare legislation.  The election could also impair democrats’ chances of passing another piece of legislation of interest to unions and of concern for business: the Employee Free Choice Act (the “EFCA”). Read Kilpatrick Stockton's whitepaper on EFCA. 

Even before healthcare monopolized the Senate’s attention, when both Massachusetts seats were held by Democrats, EFCA appeared unlikely to pass in its present form.  As we’ve previously reported, EFCA’s card-check provision proved too controversial for many Senators, and Senate democrats were working to forge compromise legislation behind closed doors.  Now, with one fewer seat, Senate democrats will likely face an even tougher battle to pass EFCA.

The Federal Trade Commission (“FTC”) recently issued guidelines on product endorsements that raise concerns about employer liability for misleading advertising stemming from online statements that employees make about their employers’ goods and services.  The guidelines suggest that an employer can be charged with a violation of the FTC Act if an employee posts an endorsement of the employer’s goods or services on his or her personal blog or social networking website without disclosing the employment relationship in the posting.  The FTC has indicated, however, that it probably would not pursue an enforcement action based on the conduct of a single “rogue” employee when the employer has in place an adequate policy addressing web-based employee endorsements.  These issues are addressed more fully in the Kilpatrick Stockton Legal Alert that can be accessed at http://www.kilpatrickstockton.com/publications/legal-alert.aspx?ID=411.

On December 14, 2009, a federal judge in Tennessee issued a preliminary injunction against an employer accused of retaliating against five employees who had filed a collective action against the employer for alleged FLSA violations.  When their employer, New Vision Telecommunications, Inc. (“New Vision”), failed to comply with a previously issued temporary restraining order restricting the Company’s retaliatory behavior, the employees sought the preliminary injunction.

The five plaintiffs’ negative experiences with New Vision began immediately after they filed the action against it in the Middle District of Tennessee.  The plaintiffs alleged that the Company had misclassified them as independent contractors instead of hourly employees, depriving them of overtime.  After receiving notice of the lawsuit, New Vision refused to give the plaintiffs new work assignments, effectively blocking the plaintiffs from earning any pay.  In response, the plaintiffs amended their complaint to include a retaliation count and moved the court for a temporary restraining order requiring New Vision to provide them with the same work opportunities they would have received before initiating the suit.  The plaintiffs also requested that the court require New Vision to post a notice informing all potential class members that there would be no retaliation for joining the collective action.

The court granted the plaintiffs’ requests in their entirety.  However, New Vision failed to comply with the restraining order and further defied the court by singling out the plaintiffs for random drug testing.  The plaintiffs then filed a motion for a preliminary injunction, which the court granted, ruling that the plaintiffs were likely to succeed on their retaliation claim and would be irreparably harmed in the absence of the injunction.

The New Vision case serves as a cautionary tale.  By failing to appropriately instruct its managerial workforce, New Vision had a temporary restraining order and preliminary injunction issued against it less than a month into litigation.  In so doing, the Company diminished its reputation with the court, increased its litigation costs, reduced the likelihood of early settlement, and laid the groundwork for retaliation claims that may very well survive summary judgment.  Additionally, the Company’s failure to properly train its managerial staff will result in New Vision expending its own resources to publicize the collective action prior to certification, which is likely to significantly increase the number of early opt-in plaintiffs.

Retaliation claims often pose a bigger threat than those claims brought in the original action.  Employers should be especially careful when dealing with complaining employees and should do everything possible to ensure that complaining employees are treated the same as, if not better than, other employees in order to minimize the risk of facing retaliation claims.

On December 19, 2009, President Obama signed into law an amendment to the American Recovery and Reinvestment Act of 2009 (“ARRA”), extending the government subsidy of premiums associated with health insurance continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”).  The December amendment to ARRA extends the government’s 65% COBRA premium subsidy from nine to fifteen months for individuals who were involuntarily terminated from employment between September 1, 2008 and February 28, 2010.  Significant aspects of the COBRA-subsidy extension are summarized below.

Extension of COBRA Subsidies.  Under the amendment, individuals experiencing a qualifying event as a result of an involuntary termination from employment between September 1, 2008 through February 28, 2010 are eligible for subsidized coverage.  This eligibility period would have expired on December 31, 2009.

Maximum Coverage Period.  The amendment extends the maximum period of subsidized coverage to 15 months from the 9 months originally provided under ARRA.

More Notifications.  Group health plans are required to provide notification of the subsidy extension to all individuals eligible for the subsidy after October 31, 2009 within 60 days of enactment and to individuals who become eligible for the subsidy after the bill is enacted.

Retroactive Payments.  Individuals who lost their coverage as a result of not timely paying the December (or later) premiums are entitled to elect coverage retroactively by paying the premium within 60 days of enactment or, if later, within 30 days of receiving notification of the extension from the group health plan.  If someone remained on COBRA by paying the full rate in December (and later months), he or she is entitled to a refund under the existing ARRA refund rules.

On December 15, 2009, Sen. John Kerry (D-Mass.) introduced a bill in the Senate aimed at reducing the misclassification of workers as independent contractors.  The bill, called the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882), is a companion bill to a measure introduced in the House of Representatives last August (H.R. 3408).

Sen. Kerry’s proposed legislation would amend Section 530 of the Revenue Act of 1978, the so-called “safe harbor” provision that gives businesses some flexibility in classifying workers as independent contractors for employment-tax purposes.  Generally, in determining a worker’s status as an employee or an independent contractor for tax purposes, the IRS applies the common-law test for employee status.  The common-law test focuses on twenty factors regarding the relationship between a business and a worker.  Section 530, however, allows businesses to classify workers as independent contractors, regardless of the analysis under the common-law test, unless the business has no “reasonable basis” for such a classification.  Under the safe harbor provision, employers may rely on an industry practice of classifying workers in a particular position as their “reasonable basis” for the classification.  Sen. Kerry’s proposed legislation would substantially reduce the scope of the “safe harbor” provision.

Under the Taxpayer Responsibility, Accountability, and Consistency Act, a business would have a reasonable basis for treating a worker as an independent contractor regardless of the outcome of the common-law test only if the business or its predecessor met a two-factor test as follows.  First, the employer could not have treated any worker holding a substantially similar position as an employee since December 31, 1977, and second, the classification of the worker as an independent contractor must be based in reasonable reliance on either a written determination from the Department of Treasury that the worker (or someone holding a substantially similar position) was not an employee or on an IRS examination of the worker (or someone holding a substantially similar position) that did not conclude the worker was an employee.  To strengthen enforcement efforts regarding the misclassification of workers, the bill would require businesses to issue Form 1099s to every service provider (whether an individual, a partnership, or a corporation) to whom the business pays more than $600 annually and would give workers classified as independent contractors the right to seek a determination of their status for employment-tax purposes from the Secretary of the Treasury.

Senator Kerry’s bill and the companion bill in the House closely resemble bills that were introduced in the last Congress.  In the intervening year since the previous introduction of the legislation, a labor-friendly president who has made clear his intent to enforce the nation’s laws governing the fair payment of wages has entered the White House, and a cash-strapped government is ever more feeling the pinch of lost employment-tax revenue attributable to the classification of workers as independent contractors.  Congress, therefore, has enhanced incentives for pursuing this legislation.

Moreover, in addition to being a tax issue, proper workforce classification is inextricably linked to the lawful payment of wages, including overtime, which remains the primary area of growth in labor and employment litigation.  Misclassification leaves employers liable not only to penalties from the IRS, but also vulnerable to state and federal wage and hour litigation by employees who, because of misclassification as independent contractors, were not provided with statutorily required pay or work breaks.  Accordingly, employers would be well-served to review their system of worker classification.