The War on Employee Misclassification: Risks and Costs to Employers and Insurers RIF0101

Transcription

1 The War on Employee Misclassification: Risks and Costs to Employers and Insurers RIF0101 Speakers: John Zeigler, Attorney, Marshall Dennehey Warner Coleman & Goggin Stephanie Watts, Casualty Manager, Arthur Reeher Company, Inc.

2 Learning Objectives At the end of this session, you will: Understand the scope of employee misclassification and regulation trends to date. Federal employee misclassification interpretations State regulation of employee misclassification Appreciate the costs and risks of employee misclassification for employers and insurers. Workers Compensation v. Liability Application of the law to a sample case Anticipate the future of employee misclassification regulation.

3 So What s The Issue Here? The government has determined that many Employers are misclassifying workers as independent contractors in an effort to avoid obligations to pay minimum wages and overtime, as well as unemployment, payroll, workers compensation, and Social Security taxes. Sample wage and hour cases (2012) where Employers were forced to pay: - Jan. 9: A Tennessee security company was required to pay $62,000 in back wages to 34 guards. - May 3: A suburban Chicago maid service had to pay more than $500,000 in back pay and liquidated damages to 75 cleaning employees. - May 14: After a Department of Labor investigation, a California home healthcare provider had to pay $654,082 to 108 nurses. - Aug. 23: A Texas pipe company was required to pay over $100,000 for unpaid overtime to 55 shop employees who were treated as independent contractors during a 90 day probationary period. - Aug. 20: A Washington, D.C. drywaller owed over $100,000 in unpaid overtime to 120 workers who were paid on a piece-rate basis regardless of hours worked. Source: DOL Press Releases: Employee Misclassification as Independent Contractors

4 So what s the problem? Uneven playing field for employers who properly classify their workers? Uneven protections and benefits for workers in otherwise similar work environments? Uncertain risks and exposure for insurers relative to accidents and injuries? 10 Million+ IC's.. Possibly 30% are misclassified?

5 This is not to suggest there are not legitimate independent contractor scenarios IC s serve an important role to provide unique services for employers who otherwise would not be able to provide a certain service, skill or expertise to their customers; IC s enjoy the freedom of NOT being an employee of any one contracting company so as to obtain diverse and dynamic business; Employers do not have to be saddled with all the costs associated with having employees in a situation where only a unique, temporary or specialized assignment is needed.

6 Employee vs. Independent Contractor Historically, an employee is an individual who is a servant of another the master. If the master provides the manner and means of performing the work, including tools of the trade or other implements of work and withholding taxes, then the servant is an employee of the master. An independent contractor is not an employee, because there is no master/servant relationship.

7 U.S. Department of Labor Economic Realities test as to whether a worker is an employee or independent contractor under the FLSA: 1) The extent to which the work performed is an integral part of the employer s business. If the work performed by a worker is integral to the employer s business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. For example, work is integral to the employer s business if it is a part of its production process or if it is a service that the employer is in business to provide. 2) Whether the worker s managerial skills affect his or her opportunity for profit and loss. Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that worker s opportunity for both profit and loss.

8 U.S. Department of Labor considerations (cont.) 3) The relative investments in facilities and equipment by the worker and the employer. The worker must make some investment compared to the employer s investment (and bear some risk for a loss) in order for there to be an indication that he/she is an independent contractor in business for himself or herself. A worker s investment in tools and equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may simply be required to perform the work for the employer. If a worker s business investment compares favorably enough to the employer s that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.

9 U.S. Department of Labor considerations (cont.) 4) The worker s skill and initiative. Both employees and independent contractors may be skilled workers. To indicate possible independent contractor status, the worker s skills should demonstrate that he or she exercises independent business judgment. Further, the fact that a worker is in open market competition with others would suggest independent contractor status. For example, specialized skills possessed by carpenters, construction workers, and electricians are not themselves indicative of independent contractor status; rather, it is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status.

10 U.S. Department of Labor considerations (cont.) 5) The permanency of the worker s relationship with the employer. Permanency or indefiniteness in the worker s relationship with the employer suggests that the worker is an employee, as opposed to an independent contractor. However, a worker s lack of a permanent relationship with the employer does not necessarily suggest independent contractor status because the impermanent relationship may be due to industry-specific factors, or the fact that an employer routinely uses staffing agencies.

11 U.S. Department of Labor considerations (cont.) 6) The nature and degree of control by the employer. Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works free from control by the employer (or anyone else, including the employer s clients). This is a complex factor that warrants careful review because both employees and independent contractors can have work situations that include minimal control by the employer. However, this factor does not hold any greater weight than the other factors. For example, a worker s control of his or her own work hours is not necessarily indicative of independent contractor status; instead, the worker must control meaningful aspects of the working relationship. Further, the mere fact that a worker works from home or offsite is not indicative of independent contractor status because the employer may exercise substantial control over the working relationship even if it exercises less day-to-day control over the employee s work at the remote worksite.

12 There are certain factors which are immaterial in determining the existence of an employment relationship. For example, the fact that the worker has signed an agreement stating that he or she is an independent contractor is not controlling because the reality of the working relationship and not the label given to the relationship in an agreement is determinative. Likewise, the fact that the worker has incorporated a business and/or is licensed by a State/local government agency has little bearing on determining the existence of an employment relationship. Additionally, the Supreme Court has held that employee status is not determined by the time or mode of pay.

13 IRS Factor Test for failing to withhold taxes: Behavioral Control: Considers who has the right to direct and control the details and means by which the worker performs services. Right to direct how, when and where? Does the employer provide instructions and training? Financial Control: Assesses the workers' financial independence and risk Opportunity to make a profit or incur loss? Investment of worker? Does employer pay the worker's expenses? Is the employee paid in increments? Is worker's services available to others? Relationship of Parties: Looks at the overall nature of the relationship and parties intent. Written contract? Payment of benefits? Right to terminate? Is the work part of employer's regular business activity? Right of employer to withhold payment for unsatisfactory work?

14 Equal Employment Opportunities Commission Test The employer has the ability to control how, where and when the job is performed. The worker does not need a high skill level or special expertise to perform the job. The employer provides the worker with the tools and equipment to do the job. The worker performs the work at the employer's worksite. There is an on-going relationship between the worker and the employer. The employer may assign additional projects to the worker. The employer sets the work hours and duration. The worker is paid based on increments of time (hourly, weekly, monthly, etc.) rather than upon completion of the project. The workers does not have his or her own employees or subcontractors to assist with the work. The work is part of the employer's regular business. The worker does not have his or her own business. The employer provides benefits to the worker. The employer can terminate the relationship at will. The parties intended to create an employment relationship.

15 State Legislation of Employee Misclassification Individualized strategies by the states 1. Legal requirements for a business to validly use independent contractors - Revised definitions relative to benefits such as workers compensation or unemployment. 2. Enforcement of existing laws w/out additional regulation -Increased investigative efforts -Increased penalties - different liability structures e.g. criminal -Use of task forces 3. Industry specific legislation - example Pennsylvania construction industry

16 The 3-Prong ABC Test A Individual is free from direction and control applicable both under contract for performance and in fact B The service is performed outside the usual course of business of the employer C The individual is customarily engaged in an independently established trade, occupation, profession, or business or the same nature as the involved in the service performed. Rebuttable Presumption of Employee Status?

17 Alexander v. FedEx Ground 765 F.3d 981 (9 th Cir. 2014) California Law right to control test Employer retained right to control manner in which drivers perform their work Summary Judgment on employment status for Plaintiffs Summary Judgment despite courts admission that certain factors favored lack of control

18 Risks if employee is misclassified: Employer: Insurer: Payment of back wages Civil penalties Criminal prosecution Uncertain wc distributions relative to premiums collected Differences in policies relative to state standards/regulation Stop Work Orders Possible unintended liability exposure and risk Unrealized revenue from employers impacted from misclassification enforcement

19 Ways in which employers try to avoid workers being classified as employees Workers being corporate entities or Franchisees Third party companies who assist? Aiding and abetting liability? Awuah v. Coverall North America money to franchisees not wages but advances under an account receivable financing system. Coverall paid its workers in advance of receiving payment from customers. If customers did not pay worker had to pay back advance. But see Kabrick v. Employment Security Dept. v State of Washington..$ paid taxi cab driver did not belong to cab company. Cab company facilitated collection of fares rather than paying wages. Payment not appearing as wages. Wage test did money ever belong to employer Have customer pay worker directly followed by fee charge to worker

20 Additional ways employers have tried to avoid workers being classified as employees Contract drafting techniques Course of business semantic arguments Exotic dancers- 3 Massachusetts clubs argued they were in the business of serving alcohol and not providing exotic dancing. Dancing a form of entertainment much like pool tables and televisions Court said would need to be blind to human instinct to decide that live nude entertainment was equivalent to the wallpaper of routinely televised matches, games, tournaments and sports talk. Purpose for attendance analysis

21 Fact Pattern: Drumpf Developer LLC desires to build an over 55 active community 300 units circling a slot machine casino DD LLC contracts with Slap-em-Up Builders as general contractor for the residential units project with a tight timeline for all units to be completed within 1 year and all specifications in strict compliance with Drumpf standards and specifications. Requires Slap-em-Up to provide proof of wc and liability insurance for all employees and subcontractors prior to commencement of project Slap-em-Up Builders subcontracts framing and roofing work to Michael Misstep who used to work for Slap-em-Up Builders before deciding to venture out on his own. Michael Misstep signs an IC agreement stating that he is not an employee and that he is being retained for his services for this contract. As Drumpf is pressing hard for this work to be completed so quickly Slap-em-up Builder has Michael Misstep start immediately with the understanding that a certificate of liability will be provided as soon as possible.

22 Michael Misstep shows up to the worksite in his haste does not see that Slap-em-up has placed shovels on the ground..michael Misstep steps on the end of the shovel with the handle, flying up and striking him in the face, knocking him down and knocking him out. Michael Misstep is taken to the hospital with cervical complaints and after a course of therapy is scheduled for C3-4 fusion surgery. Drumpf is so angry with the delay he assigns an internal project manager to oversee all aspects of the construction thereafter.

23 Questions: Michael Misstep files Petition to seek workers compensation Employee/IC status of Michael Misstep Employer status of DD, LLC? Liability v. Workers Compensation? Where might indemnification, hold harmless and duty to defend clauses come into play? Type of work being performed? Status of working relationship? Specialized skill? Change the fact pattern: What if Michael Misstep sues Slap-em-Up for negligence?

24 The Future of Employee Misclassification? -Federal Standard -Consistency Between the states? -Industry Specific? -Broad Application to all IC's? Ways to minimize risk: -Avoid contracting with former employees -Limited contractor access to employer facilities -Avoid use of uniforms, business cards -contractors working off site of under their own on-site management -Contractors self trained or trained elsewhere -Project specific work with limited duration -Use of staffing agency -Clear and concise IC agreements -Periodic self audits