5 HR Tips to Avoid Department of Labor Citations Presented By: - - PowerPoint PPT Presentation

Nauman, Smith, Shissler & Hall, LLP and MANTEC Present:

5 HR Tips to Avoid Department

• f Labor Citations

Presented By: Benjamin C. Dunlap, Jr., Esquire

Overview

1. Proper Classification – Independent Contractor vs. Employee

• 2. Proper Classification – Exempt vs. Non-Exempt

Employee

• 3. Overtime
• 4. Time and Attendance
• 5. Unpaid Internships

#1: Independent Contractor vs. Employee

The Law

• Properly classifying employees is the crucial first

step in complying with federal and state labor laws.

• Federal: All facets of federal labor law including:

IRC, FMLA, FLSA, ADA, ADEA, Civil Rights Laws, etc.

• State: Unemployment Compensation Law,

Workers’ Compensation Act, PHRC, etc.

Why Do Companies Misclassify?

• Cost Reduction Strategy
• Classifying a traditional employee as an independent

contractor can result in savings because employers avoid the obligation to:

▫ Carry unemployment and workers’ compensation insurance ▫ Make Social Security and Medicare tax contributions ▫ Provide health benefits ▫ Pay minimum wage and compensate for overtime ▫ Abide by certain requirements of the anti-discrimination and medical leave laws

 Note: Contractors may be able to bring “discrimination-like” claims under alternative legal theories

Test

• Focus on CONTROL

▫ Although the employee vs. independent contractor test varies across contexts – the fundamental determinative factor is control.

• Control = The employer retains the power to

determine not only what work should be done by the individual, but also the manner in which the work is completed.

Factors that Affect S tatus

Factor Independent Contractor Employee

• 1. Monitoring

Independently completes work Employer directs and supervises work

• 2. Training

Brings skills to the job Employer provides training

• 3. Benefits

Employer provides no benefits Employer provides benefits (health, retirement, etc.)

• 4. Tools

Owns tools Employer furnishes tools

• 5. Duration of Relationship

Discrete project Longstanding/Extended

• 6. Form of Payment

Paid by the job Paid weekly/monthly

• 7. Hours

Sets personal schedule Employer sets hours

• 8. Exclusivity

Free to contract with various entities / Power to reject work Works only for the employer

• 9. Discipline

Employer’s only recourse is termination of the agreement Power to discipline like other employees

• 10. Taxes

No withholding/Form-1099 Withholding, pays employment taxes/Form W-2

• 11. Written Contract

Performing under written contract that sets forth IC relationship Generally, no employment contract

Factors that Affect S tatus - Notes

• The “exclusivity” factor is critically important
• The Pennsylvania Unemployment Commission

and courts place emphasis on this factor

• A written agreement, although indicative of the

parties’ intent, will not necessarily control where the other factors point strongly in one direction

Penalties for Misclassification

• Back pay for minimum wage and overtime

violations, as well as statutory damages and attorney’s fees

• Loss of liability protections under

Pennsylvania’s Workers’ Compensation Law

• Criminal charges

Real World Examples

• On March 5, 2014, Bimbo Bakeries (makers of Thomas’ English Muffins,

Entenmann’s baked goods, etc.) entered into a settlement agreement with its delivery drivers to pay $905,000. The underlying suit alleged that Bimbo misclassified the drivers as independent contractors and failed to pay proper overtime, minimum wage and benefits.

• In July of 2011, an Essington auto-parts company was forced to pay more

than $256,000 in back wages to misclassified delivery drivers for violating

• vertime pay laws.
• In 2012, Honghua America LLC was forced to pay $687,469 in overtime

back wages to employees at its equipment manufacturing facility. Honghua had misclassified the employees as independent contractors in order to avoid paying them overtime. The employees were primarily engaged in the manufacturing of oil and gas exploration and production equipment.

• Manufacturer’s Rep Case

Tips – Independent Contractor S tatus

• Review how you classify your employees taking into

account the above factors

• Focus on control – does the individual really have

the power to control how and when the work is completed

• When in doubt – PUT IT IN WRITING

▫ Although a written contract is not completely determinative, it helps prove the intent of the parties

Independent Contractors as “ S tatutory Employees”

• Certain workers who qualify as independent

contractors for FLSA purposes may nevertheless be treated as “statutory employees” for certain employment tax purposes.

“ S tatutory Employee” – 4 Categories

1. A driver who distributes beverages (other than m ilk) or m eat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on com m ission. 2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company. 3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. 4. A full-tim e traveling salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other sim ilar establishm ents. The goods sold m ust be m erchandise for resale or supplies for use in the buyer's business operation. The work perform ed for you m ust be the salesperson's principal business activity.

S

• cial S

ecurity and Medicare Taxes

• You must withhold social security and Medicare taxes

from the wages of statutory employees if all three of the following conditions apply:

1. The service contract states or implies that substantially all the services are to be performed personally by the contractor. 2. The contractor does not have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation, such as a car or truck). 3. The services are performed on a continuing basis for the same payer.

Federal Unemployment Tax (FUTA)

• The test for withholding FUTA tax is the same as

that applied in the social security and Medicare context.

• BUT: Only category 1 or 4 individuals are

treated as employees for FUTA purposes.

▫ Note: Generally, these are the relevant categories for manufacturers

Penalties for Misclassifying

• If you misclassify an employee you will be held

liable for employment taxes for that worker and possibly subjected to penalties

• If this situation arises immediately contact an

attorney because they may be able to raise “reasonable basis” arguments on your behalf in

• rder to avoid liability

#2: Exempt vs. Non-Exempt Employees

The Law

• Federal: Fair Labor Standards Act
• State: Minimum Wage Act

Importance of Proper Classification

• Properly classifying employees as exempt or

non-exempt is the cornerstone of complying with the FLSA.

• Misclassification is one of the most common

grounds for lawsuits against employers.

• Misclassification is a hot area for DOL

enforcement

Non-Exempt – General Rules

• “Blue-Collar” workers are non-exempt

employees under the FLSA

▫ The employees that “work with their hands”

• Examples: Laborers, mechanics, electricians,

line workers, etc.

FLS A – Exempt Employees

• A. Executive
• B. Administrative
• C. Professional
• D. Computer Professionals
• E. Outside Salespersons
• Note: Exem pt status hinges on an em ployee’s job

duties not on the paym ent of a salary or job title

FLS A – Exempt Employees

• All exempt employees must be paid on a “salary

basis.”

• Employee must receive a fixed, predetermined,

amount of compensation each work week, regardless of the quality or quantity of work performed.

• The minimum amount required by the FLSA is

$455/ week.

• A. Executive
• Primary duty = managing the enterprise or a

recognized subdivision

• Customarily and regularly directs 2+ full-time

employees

• Power to hire/ fire or participate in decisions
• Examples = Managers, department heads,
• fficers

What constitutes “ managing? ”

• Interviewing, selecting, and training employees
• Setting and adjusting pay and work hours
• Maintaining production or sales records
• Appraising employee productivity and efficiency
• Handling employee complaints and grievances
• Disciplining employees
• Planning and apportioning work among

employees

“ Managing” cont…

• Determining the techniques to be used; the type
• f materials, supplies, machinery, equipment or

tools to be used; or the merchandise to be bought, stocked and sold

• Providing for the safety and security of

employees or property

• Planning and controlling the budget
• Monitoring or implementing legal compliance

measures

• B. Administrative
• Warning: The “administrative” exemption is the biggest

source of legal issues for employers.

• Primary duty is performance of office or non-manual

work directly related to management policies or general business operations of employer or employer’s customers

• Key: Duties require exercise of discretion and

independent judgm ent with respect to m atters of significance

• Examples: HR managers and purchasing agents

Administrative Duties

• Administrative employees need not formulate

policy

▫ But: In applying the policy they must have the power to compare and evaluate possible courses of action and make an informed decision (which may

• r may not be subject to final review)
• Duties relate to administrative operations of a

business (i.e. running the business), as distinguished from production activities

Administrative Duties - Examples

• Advising management
• Planning
• Negotiating
• Representing the company
• Purchasing
• Business Research
• Control over employees
• Auditing

Important Note for Manufacturers

• Employees who engage in ordinary inspection work

involving well-established techniques and procedures are non-exempt

• Examiners and graders who perform work involving

comparison of products with established standards are non-exempt, unless grading involves specialized scientific or technical knowledge

▫ In order to be exempt a high level of independent judgment is required

• C. Professional
• Primary duty = performance of work requiring

advanced knowledge customarily acquired through prolonged intellectual instruction

▫ Note: The new regulations relaxed this exemption by eliminating the requirement that the employee must have a college degree in the field in which they work. The new lower threshold only requires “specialized intellectual instruction” to qualify for exempt status.

• Duties require exercise of discretion and judgment
• Example: Accountants, engineers, lawyers

Professional Fields

• Occupations with recognized professional status,

as distinguished from the mechanical arts or skilled trades

Law Accounting Actuarial Computation Theology Teaching Physical Sciences Medicine Architecture Chemical Sciences Pharmacy Engineering Biological Sciences

• D. Computer Professionals
• Salaried ($455+/ week) OR Hourly ($27.63+)
• Position: computer systems analyst, computer

programmer, software engineer, or other similarly skilled worker in computer field

• Duties: System design, testing, application,

creation, modification, programming etc.

• Examples: software engineers and developers,

network analysts

Distinguished from Non-Exempt Computer Personnel

• Exempt employees in the computer-related operations

field are the ones actually designing, testing, and programming a company’s network and software.

• Employees that merely operate the software or engage in

simple troubleshooting, debugging, or upkeep are non- exempt.

▫ For example, help-desk and data entry personnel are non- exempt

• Further, the exemption does not apply to employees

engaged in the manufacture, repair, or maintenance of computer hardware or related equipment.

• E. Outside S

alespersons

• Salary basis does not apply – can be paid completely
• n commission
• Primary duty is to make sales or obtain orders
• Customarily and regularly work away from

employer’s place of business

• Note: Certain outside salespersons may be classified

as independent contractors (see above), but beware

• f the statutory employee rules for tax purposes

Penalties for Misclassifying

• Recovery of Back Wages: 2 years (3 years if willful)

▫ Overtime or Minimum Wage violations

• Statutory Double Damages: equal to back wages
• Attorney’s Fees and Costs
• Criminal penalties for willful offenders

▫ First Conviction = $10,000 fine ▫ Second Conviction = Up to 6 months in prison

• Important Note: DOL is more willing to work with employers who have

attempted to properly classify employees in good faith

Tips

• Carry out a self-audit
• NSSH “Exempt vs. Non-Exempt Self Audit”

▫ If you would like an electronic copy contact Karen Farhat at klfarhat@nssh.com

#3: Overtime

Overtime: Exempt Employees

• This is the easy one!
• Exempt employees are not entitled to overtime
• But: Make sure your classifications are correct

Basic Rule

• All non-exempt employees must receive 1.5x

their regular rate of pay for all hours worked

• ver forty in any given workweek.

The Details

• 40 hour weekly threshold is the key

▫ If an employee works more than his or her regular hours on a given day but does not exceed 40 for the week, no overtime must be paid ▫ Overtime can’t be carried over in exchange for time off in subsequent weeks

• Unless company policy or CBA requires

“overtime” payment for hours worked beyond the ordinary work week (for example: 37.5 hours), overtime need not be paid until 40 hour limit is reached

Examples

• In 2013, Cumberland County based Rite-Aid

settled an overtime suit with its employees for $20.9 million. The suit alleged that Rite-Aid misclassified assistant store managers and co- managers as exempt employees in order to avoid paying them overtime.

• This case highlights the severe ramifications of

failing to comply with both the overtime pay and employee classification provisions of the FLSA

S tay Updated on the Rules

• President Obama signed an Executive Order on

March 13, 2014, authorizing the Department of Labor to revise the federal rules governing

• vertime pay with the goal of expanding the

types of workers who are eligible for overtime.

• If the rules are changed, employers will have to

react accordingly in order to avoid violations.

#4: Time and Attendance

Areas

• A. Absences
• B. Compensable Work Time

• A. Absences
• The proper handling of employee absences

depends on whether the employee is classified as an exempt or non-exempt employee

Absences – Non Exempt Employees

• Absent a company policy or CBA, a company

does not need to pay non-exempt employees for missed work time.

Absences – Exempt Employees

• General Rules

▫ An employee’s salary may be reduced in full day increments for personal leave, but not for absences caused by sickness or accident

 For example, if an employee is absent for 1 ½ days for personal reasons only 1 full day may be deducted

▫ Deductions may not be made if the absence is due to sickness or accident unless the employee misses a full week of work.

Absences – Exempt Employees

• If an employer institutes a “bona fide benefits

plan” (sick leave or paid time off plan), the rules change:

▫ An employer may deduct from an employee’s leave bank for any absences, no matter the duration or cause, as long as the employee’s salary payment remains the same ▫ An employer may deduct from an employee’s salary for one or more full day absences before the employee has qualified for the plan and after the employee has exhausted his or her PTO

Wage Replacement Benefits

• Employers can deduct from an employee’s salary

for full day absences due to disability where alternative compensation is provided by:

▫ Bona Fide Wage Replacement Plan (e.g. short term disability insurance) ▫ State disability insurance law ▫ State workers’ compensation law

Penalties for Violations

• Employers who fail to comply with the FLSA

wage deduction law risk losing the exempt classification for that employee

▫ Reclassification may lead to liability for unpaid

• vertime, back pay, and other statutory remedies

Tips

• The rules governing bona fide benefits plan offer

employers greater flexibility in dealing with absences

• Discipline excessive, unexcused absences

through the company disciplinary policy, not through an unlawful pay reduction

• B. Compensable Work Time
• The Big Issue: What constitutes compensable

working time under the FLSA?

• Main Idea: If activities are an integral and

indispensable part of the employee’s principal activities then the employee must be compensated for the time spent carrying them

• ut.

Compensable Working Time - Basics

• Clock starts:

▫ Preliminary activities: booting up computer, turning on machinery, etc.

• Clock stops:

▫ After “postliminary” activities are completed (i.e. work time includes shutting off computers, cleaning up, etc.)

The In-Between: Examples

• Time spent waiting for assignments following on-time arrival =

compensable

▫ But: voluntarily early arrival and waiting = non-compensable

• Short break periods (DOL guidance suggests 5 to 20 minutes) =

compensable

▫ Unauthorized extensions of authorized breaks need not be counted as hours worked when the employer has clearly communicated rules governing break policies ▫ Neither Pennsylvania nor federal law require employers to provide breaks

• Bona fide meal periods (30 minutes+) = non-compensable

▫ Note if an employee is required to eat at his desk or near his machine = compensable

• Travel to and from work = non-compensable

▫ But: Travel during work day in furtherance of work duties = compensable

The In-Between: Donning and Doffing

• Generally speaking, time spent changing in and out of

mandatory uniforms, necessary protective gear, or specialized clothing is compensable

▫ But: Time spent changing into clothes not required for the job = non-compensable

• However, the Supreme Court recently ruled that

unionized employees can negotiate away their right to be compensated for the time spent donning and doffing protective clothing as part of a collective bargaining

• agreement. The ruling is unclear on whether

compensation for time spent donning and doffing protective gear or specialized equipment can be bargained away.

Real World

• The United States Supreme Court has agreed to

hear a case over whether Amazon warehouse workers are entitled to backpay for uncompensated time spent undergoing post shift security screenings designed to prevent worker theft.

Tips

• Employers should ensure that their systems

accurately track how many compensable hours are actually worked in order to avoid FLSA violations.

▫ Example: A recording system that “punches” employee time cards after the initial computer start-up period would systematically omit the first few minutes of an employee’s time each day, and could subject the employer to FLSA liability.

• Employers employing unionized employees should

bargain over whether time spent donning and doffing certain clothing is compensable.

# 5: Unpaid Internships

Background

• Every year employers bring on an enormous

number of paid and unpaid interns

▫ In 2011, estimated number was more than 1 million

• Employers don’t have to meet the basic FLSA

requirements (minimum wage / overtime) for internships that are “primarily for the interns’ educational benefit”

DOL – S ix Criteria

1. Educational: The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment 2. Benefits Intern: The internship experience is for the benefit of the intern 3. No Displacement: The intern does not displace regular employees, but works under close supervision of existing staff 4. No Advantage: The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded 5. No Job Entitlement: The intern is not necessarily entitled to a job at the conclusion of the internship, and 6. Mutual Understanding: The employer and intern understand that the intern is not entitled to wages for the time spent in the internship program.

Consequences of Violations

• Back wages (overtime and minimum wage)
• Liquidated damages
• Attorney’s fees
• Potential personal liability for decision makers

Examples

• Black Swan: Court found that unpaid production

interns who performed tasks usually undertaken by paid employees, such as taking lunch orders, making deliveries, taking out trash, organizing file cabinets, and making photocopies, did not fall within FLSA unpaid intern exception.

▫ Notice that the interns engaged in little or no activity that educated them on the film production process. Rather, they were used to perform free labor, which ordinarily would have been carried out by paid employees.

Tips

• Create an unpaid internship manual or agreement

that addresses the six DOL criteria.

• Focus on educating the interns.

▫ Don’t be overly gun shy: Some routine tasks are the educational building blocks of higher level concepts

• Have your interns sign the agreement.
• Stick to it.

Contact Us

• Ben Dunlap, a partner at Nauman Smith, routinely provides

legal assistance to businesses of all types.

• Final tip from Ben: A pinch of prevention is worth a

pound of cure!

▫ Most HR and employment matters are best handled by devising a legal strategy beforehand to ensure that violations or lawsuits do not occur.

• If you have any further questions or need any assistance feel

free to contact Ben at:

▫ (717) 236-3010, ext. 21 ▫ bdunlapjr@nssh.com