U.S. Department of Labor WHD Issues Administrator’s Interpretation on Independent Contractors and Asserts that “Most Workers are Employees”
As promised earlier this summer, on July 15, 2015, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued an “Administrator’s Interpretation” (AI) regarding when individuals are misclassified as independent contractors under the Fair Labor Standards Act (FLSA). The AI sends a signal to employers that the WHD has set a demanding standard for establishing when an individual is properly classified as an independent contractor and indicates that the agency views the issue as an enforcement priority. The AI states that, in the view of the WHD, “most workers are employees under the FLSA’s broad definitions.”
As background, unlike regulations, AIs are not subject to the rulemaking process such as that which is now underway for the proposed amendments to the white collar overtime rules. Rather, the AI provides the WHD’s view of the law, and that view is very unfriendly to those attempting to classify workers as independent contractors. In media interviews this week, the WHD’s Administrator David Weil stated that the AI was designed to give employer’s “fair notice” that they will run into the agency’s crosshairs if they misclassify individuals.
According to the AI, in order to determine whether an individual is an employee or independent contractor, the “economic realities” need to be examined to determine the true relationship. This test is to determine “whether an individual is economically dependent on the [putative] employer (and thus an employee) or is really in business for him or herself (and thus is an independent contractor).”
The AI uses a six-factor test commonly used by courts in determining status under the FLSA. The factors are (1) whether the work performed is integral to the employer’s business; (2) whether the worker has an opportunity for profit and loss based on his/her skills; (3) the relative investments of the employer and the worker; (4) whether the work requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. The AI emphasizes that no one factor is determinative.
While the factors discussed above are not new, the WHD’s application of them is more expansive than ever articulated by the federal government. In weighing the factors in the AI, the WHD clearly puts its thumb on the scale in favor of employee status. For example, in discussing the “control” factor — which many have viewed as the most indicative factor in determining status — the AI emphasizes that “it should not play an oversized role in the analysis” and states that an employer’s “lack of control over workers is not particularly telling if the workers work from home or offsite.” It also states that “workers’ control over the hours when they work is not indicative of independent contractor status.”
Importantly, the AI states it will give no weight to the parties’ understanding or agreement concerning the relationship. The AI states that “an agreement between an employer and a worker designating or labeling the worker as an independent contractor … is not relevant to the analysis of the worker’s status.”
Notably, the FLSA is only one of many laws governing worker classification. Many states, including Massachusetts, have set a high bar for establishing that an individual is an independent contractor. Given these trends, we expect to see litigation and enforcement action to increase.
The ride-sharing industry faces another challenge to its business model, this time on account of an FLSA lawsuit alleging that Lyft drivers are denied minimum wage and overtime compensation because they have been misclassified as independent contractors rather than employees. Frederic v. Lyft, Inc., d/b/a Lyft Florida, Inc., No. 8:15-cv-01608, (M.D. Fla.July 8, 2015).
According to plaintiff Fequiere Frederic, who drove one of the familiar pink-mustached shared rides for almost two years, Lyft exercised almost complete control over how and when he would perform his work and, he claims, he should have been considered an employee. For example, according to Frederic, Lyft controlled the means by which he performed his work, it decided who would be hired and fired, it retained the right to terminate the Lyft “platform” that would prevent drivers from picking up riders, his tips were subject to a 20 percent administrative fee, Lyft set drivers’ rates of pay, it required him to accept all customer discounts and promotions, and he had to comply with Lyft’s requirements regarding his car’s appearance and cleanliness. In sum, Frederic contends that “in an effort to avoid providing its drivers with the minimum benefits and protections afforded employees under the FLSA and Florida law, Lyft has willfully, uniformly, and unilaterally classified each and every one of its drivers as independent contractors, rather than employees, despite the fact that the factual circumstances of the relationship between Lyft and its drivers clearly demonstrate that Lyft drivers are in fact employees of the company.” Lyft has not yet responded to the lawsuit.
The Frederic case comes on the heels of two recent decisions in California involving Lyft and its competitor Uber, where separate courts denied summary judgment and found that it was up to a jury to decide whether their respective drivers were employees or independent contractors. O’Conner v. Uber Technologies, Inc., — F.Supp.3d —, 2105 WL 1069092; Cotter v. Lyft, Inc., 60 F.Supp.3d 1067 (N.D. Cal. 2015). For anyone who has ever wrestled with the issue of whether a worker is an employee or an independent contractor, Judge Vince Chhabria said it best in his ruling on the Cotter matter: “Lyft drivers don’t see much like employees,” but then again “Lyft drivers don’t seem much like independent contractors either.” So goes the independent contractor/employee conundrum.
Andrew S. Naylor
Waller Lansden Dortch & Davis, LLP
The Healthy Workplaces, Healthy Families Act of 2014 took full effect on July 1, 2015. The new law requires employers to provide paid sick leave to employees who work 30 or more days in California in a calendar year.
Yesterday Governor Jerry Brown signed a bill amending and clarifying several provisions of the new law. The bill was passed as an “urgency statute” and took effect immediately. Among the most noteworthy changes are the following:
Eligibility: The new bill clarifies that to be eligible for paid sick leave, an employee must work 30 days for the same employer in California, and not simply work 30 days in California.
Accrual: As originally enacted, the law allowed employers to provide paid sick leave either by providing 24 hours in bulk at the beginning of the year, or by accrual at a minimum rate of one hour of paid sick leave for every 30 hours of work. This threw a wrench into many existing paid sick leave and paid time off programs that tie accrual to pay periods, not time worked. The new bill provides greater flexibility by specifically allowing the following additional accrual methods:
24 Hours Within 120 Days: An employer may use an accrual method different than one hour of paid sick leave for every 30 hours of work, provided the accrual is on a regular basis and the employee will have 24 hours of accrued paid sick leave available by the 120th calendar day of employment.
Grandfathering of Pre-Existing Accrual Methods: If an employer provided paid sick leave before January 1, 2015 pursuant to an accrual method different than providing one hour per every 30 hours worked, that program will satisfy the law’s accrual requirements provided an employee (including any employee hired after January 1, 2015) will accrue eight hours of paid sick leave within three months, and the employee is eligible to earn at least 24 hours within nine months.
Unlimited Sick Leave: If an employer provides unlimited paid sick leave or unlimited paid time off, the law’s written notice requirement may be satisfied by indicating on the notice or the employee’s itemized wage statement that such leave is “unlimited.” [Note: Employers should carefully consider the implications of “unlimited” paid time off, and exercise caution when drafting such policies.]
Rate of Pay Clarified: Employers may pay out paid sick leave to nonexempt employees either at the regular rate of pay for the workweek in which the employee uses paid sick leave, or by dividing the employee’s total wages (not including overtime premium pay) by the employee’s total hours worked in the full pay periods of the prior 90 days of employment. Paid sick leave for exempt employees should be calculated the same way as other forms of paid leave time.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
According to the 7th Circuit Court of Appeals, FedEx drivers in Kansas are employees not independent contractors as FedEx claimed. The ruling is part of multi-district litigation that involved similar FedEx cases from 40 states that have been pending in an Indiana federal court since 2005.
In 2010, the district court in Indiana granted FedEx’s motion for summary judgment ruling that the drivers were independent contractors, not employees. In this case, the Kansas drivers appealed complaining that the company was making unlawful deductions from their pay for claimed FedEx business expenses. The drivers also claimed that the operating agreement that they signed with FedEx should be rescinded because it improperly characterized them as independent contractors. The Kansas drivers filed an appeal of the grant of summary judgment to FedEx arguing that because, among other factors, FedEx assigned drivers their routes, set appearance standards and required them to report to a FedEx official at the beginning and end of each day, they were employees. FedEx argued that the drivers were independent contractors as the drivers hired helpers, could sell their routes, controlled their own breaks and could cooperate with other drivers to complete their routes. Because the case involved an issue of Kansas state law that had not been addressed by the Kansas Supreme Court, the 7th Circuit Court of Appeals certified the issues to the Kansa court to have it rule on the state law issue. Last year, the Kansas Supreme Court applying a 20 factor test ruled that the drivers were employees not independent contractors. In agreeing with the Kansas Supreme Court, the 7th Circuit stated that “actual control” was not among the factors that needed to be considered in determining employee status.
The issue of independent contractor versus employee status is a hot issue with both the Department of Labor as well as private attorneys. Independent contractor status should be carefully reviewed to make sure that the individual is truly an independent contractor and not an employee as the potential liability of misclassification is substantial.
W.V. Bernie Siebert
Sherman & Howard
The recent flurry of FLSA lawsuits brought on behalf of unpaid interns claiming to be employees has finally spawned appellate guidance. In a pair of decisions issued on July 2, 2015, the Second Circuit rejected the DOL’s six-part test for determining whether an intern working in the for-profit private sector is actually an employee, and therefore entitled to the minimum wage and overtime pay. That test was embodied in a Fact Sheet published in 2010 and was “essentially a distillation of the facts discussed” in the U.S. Supreme Court’s 1947 decision in Walling v. Portland Terminal Co. The Court of Appeals deemed the DOL’s test “too rigid for our precedent to withstand” and instead adopted a “primary beneficiary” test that focuses on “whether the intern or the employer is the primary beneficiary of the relationship.”
The test formulated by the Second Circuit in Glatt v. Fox Searchlight Pictures, Inc., and applied in Wang v. The Hearst Corp., is comprised of the following “non-exhaustive set of considerations”:
1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee–and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.
The Second Circuit emphasized that “[a]pplying these considerations requires weighing and balancing all of the circumstances” and that “[n]o one factor is dispositive and every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage.” Because the district courts applied the discredited six-part test set out in the DOL’s Intern Fact Sheet, the Court of Appeals vacated the decisions and remanded the cases to allow the lower courts an opportunity to assess the plaintiffs’ status under the newly conceived “primary beneficiary” test.
Lawrence Peikes, Wiggin and Dana LLP
By: Jason E. Reisman, Blank Rome LLP
Today, the U.S. Department of Labor finally issued its much-anticipated proposed update to the regulations governing the “white collar exemptions” (those for executive, administrative, and professional employees) under the Fair Labor Standards Act. The last changes to the regulations occurred in 2004. With this latest update, explained in just under 300 pages in the Notice of Proposed Rulemaking (NPRM), the DOL’s key focus is on increasing the minimum salary threshold required to meet the exemptions. (If you are interested in reading more detail or 300 pages of “fun,” surf to the DOL’s announcement page here.)
Effort to Provide Overtime Pay to 5 Million More Workers
Although we have not yet parsed through the full NPRM, it is clear that the DOL has taken President Obama’s instructions to heart and sought to broaden the federal overtime pay requirements to cover an estimated 5 million additional workers in the U.S. The primary method for this expansion comes through raising the minimum salary level required to meet the applicable white collar exemption tests. To meet one of these exemptions, an employee must be paid at least the minimum salary, be paid on a salary basis, and primarily perform certain job-related duties. The DOL does not appear to have proposed any material changes to the salary basis requirements or duties tests for the exemptions.
Minimum Salary Hike to $970 a Week in 2016
Since 2004, the minimum required salary has been $455 per week (or $23,660 annually). The proposed rule would increase that amount to what is expected to be $970 per week in 2016 (or $50,440 annually). The DOL is setting the salary threshold to be equal to the 40th percentile of weekly earnings for full-time salaried workers. The DOL’s logic behind the substantial increase is that too many white collar salaried workers (85%) get paid at least $455 per week yet fail to meet the duties tests to be exempt. That means, in the DOL’s view, that the current salary level is only screening from exemption approximately 15% of overtime-eligible white collar salaried employees. By changing the salary level as proposed, the DOL states that it would screen out an additional approximately 44% of overtime-eligible white collar salaried employees. By enhancing the effective screening ability of the salary threshold, the DOL believes there will be less pressure on the duties test and also avoid a return to the more detailed “long” duties test that existed before 2004.
Additionally, the DOL is seeking to ensure that the salary threshold remains meaningful and grows over time by establishing a mechanism for automatic updates to the standard salary level. The DOL has suggested two different methods for this updating mechanism (one continually tied to the 40th percentile noted above and the other tied to inflation) and seeks public comment on both.
Duties Test – No Changes Right Now, But…
Although no direct changes to the duties tests are proposed, the DOL is seeking comments on the current requirements and whether they are working as intended to screen out employees who are not bona fide white collar exempt employees. So, there certainly could be potential changes in the works. Only time will tell. The comment period will be open for 60 days following the official publication of the proposed rule in the Federal Register.
Don’t Wait – Think Now!
Regardless of whether the proposed new rule goes into place exactly as laid out in the DOL’s NPRM, this is a call to all employers to begin (if you have not already) thinking about the impact on your workforce and where you may need to re-evaluate and re-classify. There’s no better time than with newly issued, or even proposed, regulations to evaluate and plan the implementation of any needed re-classifications. You can “blame” the re-classifications on the new regulations, rather than admitting to any prior misclassification.
Check back soon for more detailed information and updates on the DOL’s efforts!
As the current Administration winds down (and in absence of support in Congress to go after employers), the USDOL WHD is launching two high-impact strikes against employer business models. The first one – amendments to FLSA white-collar exemption regulations – we’ve known about for over a year as the APA regulatory process has unfolded. On Friday, WHD Administrator David Weil confirmed that the proposed regulations will be disclosed “very soon” (when the White House OMB finishes its review). The second one, however, is coming out of left field. Administrator Weil announced during a speech on June 5 that WHD will soon be issuing new “guidance” on independent contractor status via an “Administrator Interpretation.” WHD is taking advantage of the opportunity blessed by a recent, unanimous U.S. Supreme Court holding that WHD’s issuance of an “Administrator’s Interpretation” reversing its prior position regarding the exempt status of mortgage loan officers was valid even though it did not go through the notice-and-comment APA rule-making process.
Administrator Weil refused to comment on the specifics of the soon-to-be-issued AI on independent contractors saying only that it would be a “holistic,” rather than “mechanical,” test, which is generally a code word for a “totality of the circumstances” approach that will make the application of the distinction between independent contractors and employees subjective and fraught with risk for employers, particularly those whose business models depend on engaging numerous small contractors and freelancers to regularly perform personal service. According to Weil, the AI is targeted to be released in early Summer.
Michael J. Killeen, Davis Wright Tremaine LLP
In 2012, the Fifth Circuit decided Martin v Spring Break ’83, LLC, 688 F.3d 247 (5th Cir. 2012), holding that private settlements of FLSA claims involving bona fide disputes over hours worked or compensation owed are enforceable absent court supervision.
The Martin case arose in the context of union employees complaining about an alleged FLSA violation, and who were represented by their collective bargaining unit in resolving those claims through a private settlement that was not supervised by a court or the DOL. Because there was a bona fide dispute over the amount of hours worked (and, of course, the compensation owed), the Fifth Circuit held that the unsupervised nature of the settlement did not render it unenforceable.
A Texas district court later extended Martin to a general release that was entered by 2 former employees who had been sued by their employer in state court for breaching a non-compete agreement. Bodle v. TXL Mortg. Corp., Civil Action No. H–12–1515, 2012 WL 5828593 (S.D. Tex. Nov. 15, 2012). The district court agreed that Martin applied because the plaintiffs had raised unpaid salary and commissions in the non-compete case, and, by the way, had signed (but apparently not filed) consent-to-join forms in the underlying suit against their employer.
The Fifth Circuit reversed the district court, holding that the court extended Martin too far. Bodle v. TXL Mortg. Corp., No. 14–20224, 2015 WL 3478146, — F.3d —- (5th Cir. June 1, 2015). In short, there must be an actual dispute over an FLSA claim, and some discussion between the parties about it, to bring Martin in to play. The fact that the plaintiffs, at the time they negotiated their settlement, had signed consent to join forms for the existing FLSA suit was not enough in the Fifth Circuit’s view to make their settlement a bona fide dispute. The FLSA claims were not discussed as part of the negotiations between the parties. Plaintiffs also claimed there has to be a suit filed, but the Fifth Circuit did not say that it was adopting that specific requirement. Nevertheless, it did put a limit on the use of Martin for severance agreements and in general releases (note that the Ffith Circuit also rejected the argument that res judicata barred plaintiffs’ claims).
The U.S. Department of Labor’s proposed regulations dramatically reducing the number of employees who qualify for the white-collar overtime exemptions to the federal Fair Labor Standards Act are expected to be announced publicly in June. So far, no specifics have been provided by USDOL as to what the proposed regulations will say, but two changes are widely anticipated: (1) a new annual salary threshold in the range of $50,000 (more than twice the current salary threshold), and (2) a quantitative primary duty test requiring an employee to spend more than 50% of his or her time on tasks deemed exempt. We also believe the proposed regulations will preserve or increase the current complexity, subjectivity, and vagueness as to exempt criteria, contrary to President Obama’s directive to the Secretary of Labor to “simplify the regulations to make them easier for both workers and businesses to understand and apply.”
In any event, virtually all employers, large and small, will incur significant time and expense evaluating whether job positions currently classified as exempt still qualify and, if not, what actions to take. Employers should immediately intiate a proactive review of their exempt positions even before the specifics of the proposed regulations are announced.
In many cases, the potential increase in labor costs will be less significant than the hidden costs of additional recordkeeping, more complicated payroll administration, difficult employee relations issues, increased claims and litigation, scheduling complications, expanded training, and other human resource considerations.
- Proposed regulations, which have not been made public, were submitted to the White House OMB Office of Information and Regulatory Affairs (OIRA) on May 5, 2015.
- USDOL anticipates that the OIRA review will be completed sometime in June.
- Once OIRA completes its review, USDOL will publish the proposed regulations for comment.
- How long will the public comment period be? Brief. A full and comprehensive public comment process cannot be accomplished in less than 120 days. However, employers are apprehensive that USDOL will not allow a comment period of more than 60 days.
- At the end of the comment period, USDOL will review the comments and publish its final regulations. Given the USDOL’s “fast-track” leanings, the final regulations will likely appear in 4Q CY2015.
- Will there be an implementation period? Yes, but likely short. It is believed that USDOL will likely “fast-track” implementation to begin in the 1Q CY2016.
- Will Congress block the new regulations? Highly unlikely. There is no indication currently that key members of Congress are interested in taking on this issue. Most major employer associations have other labor and employment law matters that are higher on their priority lists.
- Will there be litigation seeking to overturn or enjoin the regulations? Chances are remote at best. No legal theories have been publicly articulated and no potential plaintiffs have come forward.
- Fewer employees will qualify for exempt status. Food service and retail trades, in particular, will be impacted negatively.
- It will be especially difficult to make determinations as to positions that are within +/- 10% of the new salary threshold and positions where currently exempt employees perform non-exempt duties to any significant degree.
- Remember: The USDOL regulations apply only to potential claims under the federal FLSA.
- If state law places more restrictions on salary basis or exempt duties than the proposed USDOL regulations, the employer must comply with state law even though it may be in compliance with the new USDOL regulations.
- The publicity generated by the nationwide impact will cause more exempt employees to critically question their classification status and bring administrative claims or lawsuits.
- If there is a collective bargaining agreement, employers will need to comply with the CBA in classifying or changing pay/benefits. Also, employees reclassified as non-exempt may become part of the bargaining unit.
Strategic Considerations for Maintaining Exempt Status
- Increase salary to meet new salary threshold. Cost/benefit analysis.
- Revise job descriptions to demonstrate that an individual’s primary duty involves actually performing exempt duties more than 50% of the time.
- Make sure that, in practice, exempt employees are actually performing exempt duties more than 50% of the time.
Strategic Considerations Concerning Reclassifications
- No employer is required to guarantee that an employee will receive overtime work.
- No employer is required to pay an employee more total wages as a non-exempt employee than what the employee was making as an exempt.
- To mitigate increased labor costs, employers may implement changes to bonuses, benefits, work schedules, and other measures.
- In setting an hourly rate for a newly non-exempt employee, the employer has options in how to compute the new hourly wage for formerly exempt employees. As a legal matter, employers can configure the hourly wage and the anticipated overtime pay such that the employee’s total compensation is approximately the same as when the employee was paid on a salary basis.
- Formerly exempt employees will often see reclassification as a “demotion” and resent being converted to hourly pay. Communications with employees about the conversion and, possibly, continuing to pay on a salary basis, while implementing a fluctuating work week program for overtime, may be a necessary employee-relations device.
- A major administrative burden and employee-relations issue will be the need to train new non-exempt employees on filling out timekeeping records, complying with meal/rest break requirements, restrictions on working outside normal work hours, travel time, and other compensable time issues.
Employers are strongly advised to conduct their classification analysis under the guidance of an experienced wage and hour attorney due to the complexity of potential issues and the availability of the attorney-client privilege to protect candid discussions involving legal advice and risk management.
Don’t Delay Planning
The USDOL final regulations on FLSA white-collar exemptions will go into effect very quickly in the near future. Employers need to begin their internal analysis of exempt positions now and identify their options to minimize negative impacts on employee relations, direct payroll costs, indirect administrative costs, and general operations.
by Michael J. Killeen, Sheehan Sullivan Weiss – Davis Wright Tremaine LLP
On Tuesday the Los Angeles City Council voted to raise the city’s minimum wage to $15 an hour by 2020. Los Angeles will join San Francisco, San Jose and Oakland as California cities with minimum wages higher than both the federal and state minimum wages.
The federal minimum wage is $7.25 per hour. California’s state minimum wage is currently $9 per hour, and is scheduled to rise to $10 per hour on January 1, 2016. Employees must be paid the highest minimum wage in effect, which in California is the state minimum wage except in cities that have established their own higher minimum wages.
The City of Los Angeles does not currently have its own minimum wage, but on Tuesday the City Council voted to establish a city minimum wage of $10.50 per hour effective July 1, 2016. Thereafter the city’s minimum wage will increase to $12.00 on July 1, 2017; $13.25 on July 1, 2018; $14.25 on July 1, 2019; and $15.00 on July 1, 2020. Beginning in 2022 the city’s minimum wage will be adjusted for inflation on July 1 of each year.
California cities that already have minimum wages higher than the state minimum wage include San Francisco (currently $12.25 per hour and scheduled to rise to $13 on July 1, 2016; $14 on July 1, 2017; and $15 on July 1, 2018; followed thereafter by annual adjustments for inflation each July 1); San Jose (currently $10.30 per hour and adjusted each January 1 for inflation); and Oakland (currently $12.25 per hour and adjusted each January 1 for inflation).
Meanwhile, San Diego’s minimum wage is on hold. In October 2014 the San Diego City Council voted to establish a city minimum wage that would rise to $11.50 per hour by January of 2017, and would also require employers to provide their employees with up to 40 hours of paid sick leave each year. But opponents of the ordinance gathered enough petition signatures to put the measure to a public vote. It will go into effect only if it survives a June 2016 referendum.
It is becoming increasingly clear that employers can no longer assume that compliance with federal and state laws is enough. The trend of cities establishing their own minimum wages appears to be picking up steam. Employers should take steps to stay abreast of, and comply with, all local minimum wages and other local mandates.