ABOUT YOUR PRESENTER. Paralegals and Overtime: Misclassification Can Cost You A Bundle 10/16/2014

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1 ABOUT YOUR PRESENTER Joseph Ortiz is a partner with the Labor & Employment practice group at Best Best & Krieger, LLP. Ortiz advises and represents private and public employers in labor & employment matters of all kinds, such as union organization issues and claims for wage-andhour violations, wrongful termination, discrimination, and harassment, among others. He routinely provides training and presentation to employers and employment groups on a widerange of employment-related topics, ranging from leave law compliance to labor organization issues and harassment and diversity training. He also teaches employment law as adjunct faculty at the University of California, Riverside Extension Center, and is an active volunteer in the community. Education University of Minnesota, J.D. (2001) University of California, Los Angeles (UCLA), B.A. Bar Admissions California (2002) Paralegals and Overtime: Misclassification Can Cost You A Bundle PRESENTED BY Joseph T. Ortiz, Esq. ICAP October 15,

2 The Paralegal The American Bar Association (ABA): Legal assistants, also known as paralegals, are a distinguishable group of persons who assist attorneys in the delivery of legal services. Through formal education, training and experience, legal assistants have knowledge and expertise regarding the legal system and substantive and procedural law, which qualify them to do work of a legal nature under the supervision of an attorney. The Paralegal Cal. Business & Professions Code 6450(a): A paralegal is a person who holds himself or herself out to be a paralegal, who is qualified by education, training, or work experience, who either contracts with or is employed by an attorney, law firm, corporation, governmental agency, or other entity, who performs substantial legal work, under the direction and supervision of an active member of the State Bar of California, as defined in Section 6060, or an attorney practicing law in the federal courts of this state, that has been specifically delegated by the attorney to the paralegal. The Paralegal Minimum qualifications: Completion of an ABA approved program or 24 units from an approved secondary institution. A bachelor s or advanced degree in any subject, with 1 year of law related experience, and a supporting declaration from an attorney. A high school diploma or equivalent, with 3 years of experience, if completed before 12/2003, and a supporting declaration from an attorney. 2

3 CALIFORNIA LAWSUIT CLIMATE: RANKED AMONG THE WORST A 2012 report from the US Chamber Institute for Legal Reform finds: CA ranked 47 th out of 50 for lawsuit climate. 7 of 10 business leaders object to climate in CA. TOP TEN THINGS TO DO: IF YOU WANT TO GET SUED 1. Classify all employees as exempt, whether they are or not. 2. Be nice to employees let them take lunch whenever they want to. 3. Make everyone as an independent contractor because having employees is too much trouble. 4. Don t bother providing training about harassment and discrimination to managers and supervisors. They won t need the information. 5. Let employees decide which hours and how much they want to work each day. 6. Terminate any employee who takes a leave of absence, whatever the reason. 7. Don t give employees their final check if they fail to return company property. 8. Provide loans to employees and deduct the money from their paycheck each pay period. 9. Use non compete agreements to protect confidential business information such as business secrets, customer lists and pricing information. 10. Implement a use it or lose it vacation policy and avoid paying out all that money on termination. Wage & Hour Suits, including failure to pay overtime and misclassification cases, have increased 38%.* STATISTICS * 3

4 TYPICAL MISCLASSIFICATION SUITS 1. The Non Exempt Employee misclassified as an Independent Contractor. 2. The Non Exempt Employee Misclassified as Exempt. INDEPENDENT CONTRACTOR VS. EMPLOYEE ECONOMIC PRESSURES TO USE INDEPENDENT CONTRACTORS Economic Downturn Cost Savings No Unemployment tax No Social Security tax No Federal Unemployment tax No Workers Comp premiums No vacation time No sick time, personal leave No retirement plan participation Less Paperwork Inapplicability of labor laws Reduced risk of discrimination/wrongful termination claims Reduced administrative time in payroll reporting Willing Workforce 4

5 COMMON MISCONCEPTIONS He or she wanted to be a contractor I m okay. I pay with a 1099 I m okay. I have a written and signed contract I m okay. I was audited before and no one said anything. Another Agency found independent contractor status. Everyone else is doing it. LIABILITIES FOR MISCLASSIFICATION Federal Income Tax Withholding penalties State Income Tax Withholding penalties Unemployment/SDI penalties Workers Comp/Penal Code penalties Minimum Wage penalties Overtime Pay penalties Missed Meal Period/Breaks penalties Attorney fees & costs for enforcement actions Liabilities for unfunded health or retirement benefits Individual and class action lawsuits ENFORCEMENT CLIMATE Feds estimated employee misclassification resulted in underpayment of estimated $2.72 billion in Social Security taxes, unemployment and income taxes for year President Obama s budget allocates $25 million to Department of Labor Misclassification Initiative targeting employers. IRS announced in February 2010, Employment Tax National Research Project for line-by-line audits of thousands of businesses for misclassification. DOL announces intent to continue crackdown on misclassification. 5

6 WHAT IS AN INDEPENDENT CONTRACTOR? No set definition for term Independent Contractor. Federal and State Agencies follow different tests to make determination, based on the context at issue. Generally speaking: An independent Contractor is a person who contracts with another to do something for him or her but who is not controlled by the other, nor subject to the other s right to control with respect to his or her physical conduct in the performance of the undertaking. (Restatement, Second, Agency, 2.) DIFFERENT AGENCIES FOLLOW DIFFERENT TESTS FOR CONSIDERING MULTIPLE FACTORS IRS 20 Factor Test U.S. DOL DLSE Guidelines EDD Guidelines Workers Compensation EEOC DFEH OSHA NLRB COMMON THEMES PERMEATING ALL TESTS Common law right-to-control test: The most important factor being the right to control the manner and means of accomplishing the result desired. The greater control reserved by employer, the greater likelihood worker is an employee. Recent case law confirms second most important factor as: The extent services rendered by the worker are integral to the business. Other factors must be considered in their totality, with no one factor being decisive. 6

7 THE FACTORS CONSIDERED FOR DETERMINING INDEPENDENT CONTRACTOR STATUS Ask yourself: 1. Does the business instruct or supervise the paralegal while he or she is working? 2. Can the worker quit or be discharged (fired) at any time? 3. Is the work being performed part of its regular business (a law office)? If you answer Yes to any of the above, it is a strong indication the worker is an employee. THE FACTORS CONSIDERED FOR DETERMINING INDEPENDENT CONTRACTOR STATUS Ask yourself: 4. Does the paralegal have a separately established business? 5. Is the paralegal free to make business decisions which affect his or her ability to profit from the work? 6. Does the paralegal have a substantial investment which would subject him or her to a financial risk of loss? If you answer No to any of the above, it is an indication the worker is an employee. THE FACTORS CONSIDERED FOR DETERMINING INDEPENDENT CONTRACTOR STATUS Ask yourself: 7. Does the business have employees who do the same type of work? 8. Does the business furnish the tools, equipment, or supplies used to perform the work? 9. Is the work considered unskilled or semi-skilled labor? 10. Does the business provide training for the worker? 11. Is the paralegal paid a fixed salary, an hourly wage, or based on a piece rate basis? 12. Did the paralegal previously perform the same or similar services for you as an employee? 13. Does the paralegal believe that he or she is employed? If you answer Yes to any of the above, it is an indication the worker is an employee. 7

8 REBUTTABLE PRESUMPTION OF EMPLOYEE STATUS DLSE presumption of employee status (Labor Code 3357.) Because independent contractor status is an exception to coverage under wage/hour and other employment laws, burden is on employer to establish bona fide Independent Contractor status and correct classification. EXEMPT VERSUS NON EXEMPT EXEMPT FROM WHAT? 8

9 OVERTIME California Labor Code Sec. 510, et. seq.; Wage Order (No. 4); 8 CCR Sec , et seq. Federal FLSA (29 USC Sec. 207) and 29 CFR Sec Cal. law must comply with whichever standard provides greater protection. OVERTIME California: One and one half times regular rate of pay if he/she works more than 8 hours per day or 40 hours per week; and double pay for work in excess of 12 hours per day. Section 510(a). FLSA: Time and a half for hours over 40 per week. 29 USC 207(a)(1). ICAP Survey % of paralegals participating in the survey reported that they are not compensated, considered exempt from overtime. 9

10 WORKING OFF THE CLOCK Hourly Wages: Federal Minimum Wage: $7.25/hour as of July 24, Working off the clock claims. California Minimum Wage INCREASES!! AB 10 $9/ hr by July 2014 & $10/ hour by THE TYPICAL EXEMPTIONS PRESUMPTIONS PRESUMPTION: The law presumes that every employee is entitled to overtime pay if the employee works more than 8 hours per day or 40 hours per week. EMPLOYER BURDEN: The burden is on the employer to show than any particular employee is EXEMPT. Magana v. No. Marian Islands(9 th Cir.) 107 F.3d

11 The Exemptions Both the Federal and State law provide for the following exemptions: Executive (Supervisor); Administrative; or Professional. Outside sales and certain computer employees may be exempt professionals under other provisions of the law. The Exempt Duties Must Primary The principal, main, major or most important duty that the employee performs. (Distinguish from State Rules). Factors to consider include, but are not limited to: Relative importance of the exempt duties; Amount of time spent performing exempt work; Relative freedom from direct supervision; and Relationship between the employee s salary and the wages paid to other employees for the same kind of nonexempt work. Primary Duty Employees who spend more than 50% of their time performing exempt work will generally satisfy the primary duty requirement. State requires that exempt employees spend more than 50% of time performing exempt work. 11

12 Exempt Employees Have Salary Requirements The typical exemptions have salary requirements: $455 per week under the Federal Law. 2 times minimum wage under State Law. ($10/hr by 2016). $20/hr x 40 hrs = $800/ week. Apprx. $38,400 annually. ICAP Salary Survey % less than $18, % between $20 and $21, % between $30 and $31, % between $34 and $35, % between $36 and $37, % Potentially Below Threshold Compare: DOL reports 2012 Median $46,990 EXECUTIVE (SUPERVISOR) Executive (Supervisor) Exemption. Must be paid a salary (State-2 X Min. Wage). ($455 per week - fed; $720 per week - state) Must supervise two or more employees. Must exercise independent judgment and discretion; and, Must do so more than 50% of the week. 12

13 Executive Duties Primary duty is management of the enterprise or of a customarily recognized department or subdivision; Customarily and regularly directs the work of two or more other employees; and Authority to hire or fire other employees or whose suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees are given particular weight. Supervising Two or More The phrase two or more other employees means two full time employees or the equivalent. Full time generally means 40 hours per week. The supervision of the same employees can be distributed among two or more exempt executives, but the hours worked by an employee cannot be credited more than once. Does Not Meet the Two or more Requirement Assistant Manager Assistant Manager Full-time Employee Full-time Employee Full-time Employee 13

14 ADMINISTRATIVE Administrative Exemption. Must be paid a salary (State - 2 X Min. Wage). Must perform office work related to management or general business operations (not production ). Must exercise independent judgment and discretion; and, Must do so more than 50% of the week. Administrative Duties Whose primary duty is the performance of office or non manual work directly related to the management or general business operations of the employer or the employer s customers; and Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. General Business Operations Refers to the type of work performed by the employee. Work must be directly related to assisting with the running or servicing of the business. Does not include working on a manufacturing production line or selling a product in a retail or service establishment. 14

15 General Business Operations Tax Finance Accounting Budgeting Auditing Insurance Quality Control Purchasing Procurement Advertising Marketing Research Safety and Health Human Resources Employee Benefits Labor Relations Public and Government Relations Legal and Regulatory Compliance Computer Network, Internet and Database Administration Independent Judgment The comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. Must be exercised with respect to matters of significance, which refers to the level of importance or consequence of the work performed. Decisions and recommendations may be reviewed at a higher level and, upon occasion, revised or reversed. Independent Judgment Factors include, but are not limited to: Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices. Whether the employee carries out major assignments in conducting the operations of the business. Whether the employee performs work that affects business operations to a substantial degree, even if the employee s assignments are related to operation of a particular segment of the business. 15

16 Independent Judgment Factors include, but are not limited to: Whether the employee has authority to commit the employer in matters that have significant financial impact. Whether the employee has authority to waive or deviate from established policies and procedures without prior approval. Whether the employee has authority to negotiate and bind the company on significant matters. Whether the employee provides consultation or expert advice to management. Independent Judgment Factors include, but are not limited to: Whether the employee is involved in planning long or short term business objectives. Whether the employee investigates and resolves matters of significance on behalf of management. Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances. Independent Judgment Discretion and independent judgment does not include: Applying well established techniques, procedures or specific standards described in manuals or other sources. Clerical or secretarial work. Recording or tabulating data. Performing mechanical, repetitive, recurrent or routine work. 16

17 PROFESSIONAL Professional Exemption Must be paid a salary (State - 2 X Min. Wage). Generally, must be licensed by the State (i.e., law, medicine, accounting, etc.) or, have an advanced degree in a field of science or learning. Must exercise independent judgment and discretion; and, Must do so more than 50% of the week. Advanced Knowledge Predominantly intellectual in character Includes work requiring the consistent exercise of discretion and judgment. The advanced knowledge is generally used to analyze, interpret or make deductions from varying facts or circumstances. Not work involving routine mental, manual, mechanical, or physical work. Cannot be attained at the high school level. Specialized Instruction Required The learned professional exemption is not available for occupations that may be performed with: Only the general knowledge acquired by an academic degree in any field. Knowledge acquired through an apprenticeship. Training in the performance of routine mental, manual, mechanical or physical processes. The exemption also does not apply to occupations in which most employees acquire skill by experience. 17

18 Does The Professional Exemption Apply to Paralegals? Likely Not. The DOL issued an Opinion Letter on December 16, 2005: Paralegals and legal assistants generally do not qualify as exempt learned professionals because an advanced specialized academic degree is not a standard prerequisite for entry into the field. DLSE (State) follows suit. Does the Administrative Exemption Apply to Paralegals? Possibly. Though not addressed in the DOL opinion, the issue centers around whether the work is production. Thus, law firm paralegals would not qualify. However, paralegals working for a corporation (e.g., corporate General Counsel) may so long as all the other requirements are met. Joseph T. Ortiz, Partner Best Best & Krieger LLP 3390 University Avenue, 5 th Flr. Riverside, CA (951) Joseph.Ortiz@bbklaw.com 18