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 Fifth Circuit recently addressed one of the lesser used exemptions under the Fair Labor Standards Act (FLSA)…outside sales. 2013 WL 3013871 (C.A, 5, Tex., June 18, 2013). Meza v. Intelligent Mexican Marketing, Inc. In the opinion, the court laid out a nice roadmap to use when determining if a driver/salesperson is truly exempt.
Meza was an employee who worked for about a year as a route salesman for a company that sells and delivers food and beverage items to convenience stores. He was paid a weekly salary, plus commissions. As a route salesman, he generally worked about 72 hours a week and his wage averaged $6.66 per hour. The employee filed suit alleging he was owed money for unpaid minimum wages and overtime. Under the FLSA the employer has the burden of proving that an employee is ineligible for overtime or minimum wage compensation and in this case the court found in the company’s favor, saving it nearly $20,000 in wages and overtime. Why? As usual when dealing with FLSA exemptions, it all had to do with the employees actual duties, regardless of title.
Here, the employee drove the delivery truck as well as sold products. He was also encouraged to visit new stores to bring in new business. And he received commissions based on the sales. The critical factor in this situation was that the employee was not just driving and delivering. The company did have employees whose only job was to drive and deliver pre-ordered goods. Those employees were not exempt under the FLSA and accordingly, were paid at least minimum wage and overtime if applicable.
But Meza had more duties than just driving and delivering goods. The court reviewed the FLSA regulations on outside sales and went through each factor to see how it applied to Meza. To be considered outside sales, the primary duty has to be: 1) making sales or obtaining orders, and; 2) the employee has to be regularly away from the employer’s place of business when performing the primary duty. Besides this basic guideline, there are also 9 factors to consider and the court went through each one to see how they compared to Meza’s duties. Ultimately the court decided that only one factor favored Meza, five favored the company and two were not applicable to this case. So with the score of one for Meza and five for company, the company won.
Bryant S. Banes
Neel, Hooper & Banes, P.C.
The Supreme Court has agreed to decide whether a defendant in a Fair Labor Standards Act case can avoid a collective action by offering full relief to the plaintiff before other employees join the case.
The practice in FLSA cases is for plaintiffs’ lawyers to file a lawsuit on behalf of the original named plaintiff, and then seek to expand the case into a collective action by issuing notices of right to opt-in to other similarly situated employees. To avoid the prospect of a collective action, employers sometimes choose to make an offer of full relief to the named plaintiff early in the case. They then argue that the case should be dismissed as moot, leaving no pending lawsuit for other employees to join.
This approach has received a mixed reception in the federal courts of appeals. The Ninth and Eleventh Circuits held that a case should be dismissed when the named plaintiffs’ claims have been resolved. The Third and Fifth Circuits have held that a collective action, like a class action under a Rule 23, takes on a life of its own when the case is filed and does not become moot when the named plaintiff’s claim is resolved. The arguments involve some arcane issues involving the distinction between collective actions and class actions and the “case or controversy” requirement under Article III of the Constitution.
In the case that the Supreme Court agreed to hear, the defendant company operates over 200 nursing homes and other facilities. The plaintiff worked for one of those homes for only several months. She filed suit claiming that the company violated the FLSA by making automatic deductions for meal breaks. To make the case go away quickly, the company responded to the court complaint by making an offer of judgment for $7,500 in alleged unpaid wages and liquidated damages, plus attorneys’ fees, costs and expenses. The district court granted the company’s motion to dismiss the case as moot, but the Third Circuit reversed, holding that the company could not preempt a collective action by “picking off” the named plaintiff.
The Supreme Court will hear oral argument in the case, Genesis Healthcare Corporation v. Symczyk, in its term starting October 2012.
It often happens that by the time the parties to a FLSA lawsuit discuss settlement, the claim for attorneys’ fees exceeds the backpay and liquidated damages that the plaintiff could recover if the claim prevailed. Knowing this, employers have tried to cut off accrual of plaintiffs’ attorneys’ fees by paying, or offering to pay, the amount the plaintiff could recover early in the case. Two recent decisions illustrate successful and unsuccessful ways of going about this.
In a case from Florida, the plaintiff filed a collective action complaint in federal court. The employer denied liability, but tendered full payment to the individual plaintiff of the amount it estimated as his backpay, liquidated damages and interest, totaling $638. The plaintiff opposed the tender, claiming that it underestimated the value of his claim, which he said was worth $3,000. Again denying liability, the employer tendered $3,000, split between backpay and liquidated damages. The plaintiff was forced to agree that his individual claim had become moot, but requested that the court award him attorney’s fees and costs, as a prevailing party.
The district court denied that request. The Eleventh Circuit affirmed that denial, holding that under the statutory language, attorney’s fees and costs are allowed “in addition to any judgment awarded to the plaintiff or plaintiffs.” “The FLSA plainly requires that the plaintiff receive a judgment in his favor to be entitled to attorney’s fees and costs,” the court wrote. It went on, however, to hedge its ruling with a confusing footnote that seeks to limit the holding to situations in which the employee concedes that his claim should be dismissed before trial as moot. What the footnote means may be fleshed out in future rulings. For now, the lesson from this case is that it may be possible to avoid paying attorney’s fees and costs in their entirety, if the employer tenders the most the plaintiff could recover early in the case. Dionne v. Floormasters Enterprise, 2012 WL 104906 (11th Cir. Jan. 13, 2012). Of course, a tender is not a settlement agreement, and there is no possibility, under this scenario, of obtaining a confidentiality agreement from the employee.
A case from North Carolina illustrates how to fail to cut off accrual of attorney’s fees. In that case, defense counsel sent plaintiffs’ counsel offers of full relief to all plaintiffs including costs and attorneys fees to date. (The defense was not trying to avoid paying attorneys fees and costs in their entirety, but to cut off their future accrual). The offer did not specify amounts, but said that amounts would be based on affidavits to be provided by each plaintiff. The letter further stated that the offer was to enter into a settlement agreement including a confidentiality clause. The purpose of the offer was not to avoid paying attorney’s fees and costs in their entirety, but to cut off their continuing accrual.
Based on this offer, the district court dismissed the lawsuit as moot, on the grounds that the defense had offered everything that plaintiffs could possibly recover. On appeal, the Fourth Circuit reversed on several grounds. First, the defense did not offer to permit entry of a judgment, but only a contractual settlement agreement, which is more difficult to enforce than a judgment. Second, the offer was deficient because it was conditional. Instead of offering a sum certain, it offered to permit calculation of backpay and liquidated damages based on affidavits. Third, the offer was deficient because it contained a confidentiality clause. A judgment, the court wrote, would not be confidential. Simmons v. United Mortgage and Loan Investment, 634 F.3d 754 (4th Cir. Jan. 21, 2011). One lesson from this case is that if an employer wants to put an end to litigation by making an offer of full relief, it must bite the bullet and tender what the plaintiffs would receive if they won, with no strings attached.
Neither of these decisions addresses the related concern whether an offer of full relief to the named plaintiff can make a case moot, and require dismissal before the court certifies a collective action. For a discussion of how offers of judgment affect motions for collective action notice, see the September 25, 2011 posting in this blog.
DOL’s “Bridge to Justice Program” – Solicitor Smith Provides Crucial New Information at PLI Conference
This posting arises from comments on the “Bridge to Justice Program” by Department of Labor (DOL) Solicitor Patricia Smith, during the panel discussion “The Obama Administration’s Enforcement of the Wage and Hour Laws” at the Practicing Law Institute’s “Managing Wage & Hour Risks 2011” conference held on February 7, 2011, in New York City. David Fortney was co-chair of the conference and led the panel discussion with Ms. Smith. Leslie Stout-Tabackman was a conference speaker and led a panel discussion on wage hour compliance reviews.
The “Bridge to Justice” Program was launched by the DOL’s Wage and Hour Division on December 13, 2010 (See “DOL’s Wage and Hour Division Connects Workers to New Attorney Referral System” posted November 29, 2010; See also November 29, 2010 Entry by Robert Boonin). Under this program, the Wage and Hour Division provides attorney referral information to complainants whose Fair Labor Standards Act or Family Medical Leave Act claims the DOL declines to pursue. In addition, when the Wage and Hour Division has conducted an investigation, the complainant is provided information about the Wage and Hour Division’s determination regarding violations at issue and back wages owed. This information is given to the complainants in the same letter informing them that the Wage and Hour Division will not be pursuing further action, and will be very useful for attorneys who may take the case. In announcing the program, the Wage and Hour Division stated that it had developed a “special process” for complainants and representing attorneys to quickly obtain “certain relevant case information and documents when available.” However, until just recently, the DOL had declined to provide any details as to what information it would release, the process by which the information would be released, and whether and by what means the employer would have access to information released to employees.
New information provided by Ms. Smith
Ms. Smith told the PLI conference attendees that employers will not be notified when the attorney referral letter is sent to employees, but that employers will know that such a letter has been sent if it receives a communication from the DOL that the case has been closed and remains unresolved at the time of case closure. Of course, it is unknown how many of the recipients of the letter will elect to follow up with the ABA attorney referral process and retain counsel.
Regarding the information that the DOL will provide to employees and their attorneys, Ms. Smith provided the following information:
First, in keeping with its longstanding practices, the DOL will release case information only when a case has been closed.
Second, in general, the DOL will follow the normal Freedom of Information Act (FOIA) process, which requires a written request and processing under FOIA procedures, for requests for case information. However, there are two areas of information and documents that the DOL will release to the employee and/or the employee’s attorney –BUT NOT TO THE EMPLOYER –in response to an informal request: (1) any documents or information that the claimant provided to the DOL (claimant interview, documents related to the claim) and (2) the DOL’s computations of damages/back pay deemed owed. Documents and information released to the employee or employee’s attorney based on an informal request will be provided on an expedited basis.
Third, the DOL will not provide notice to the employer of the release of information to the employee or the employee’s attorney.
Fourth, the employer will need to file a written FOIA request to determine whether information has been provided to an employee or the employee’s counsel, and to obtain the same information that was provided to the employee or employee’s counsel without a FOIA request.
Fifth, for information or documents other than the type described above, both the employee (and the employee’s counsel) and the employer will need to make a FOIA request.
We anticipate that the Bridge to Justice Program will result in more private litigation under the FLSA and FMLA. In addition, with the expedited provision of certain documents and information by the DOL to employees and their attorneys, employers should focus on taking steps to protect information provided to the DOL in an investigation and to be prepared to move quickly if they receive case closure letters for unresolved claims. Specifically:
- Employers should continue to carefully review and mark as Confidential and Proprietary Commercial Information all financial and other business proprietary information provided to the DOL in the course of an audit/investigation.
- Employers that receive a case closed letter in a complaint that has not been resolved, should consider quickly filing a FOIA request for the case file documents, including a request for any documents provided to the employee or the employee’s counsel.
- If the employee or other third party files a FOIA request for the employer’s documents or other information marked as Confidential and Proprietary Commercial Information, the DOL must provide the employer with notice and the opportunity to object to the disclosure. Employers should have a process in place for the prompt review and response to the notice by a designated employer representative.
- The DOL must notify the employer if it intends to release objected to documents and information and the date of release. Employers should have a process in place to review the notice and make a determination about filing a complaint in federal court seeking an injunction to prevent disclosure of the documents.
Jennifer Brand has been named the new Associate Solicitor for the Fair Labor Standards Division of the Department of Labor (“DOL”) and will start in her position March 2, 2011. Ms. Brand is moving to the Associate Solicitor job from her current position as the Executive Director of the Misclassification Task Force at the New York State Department of Labor. Previously, she served 20 years in the Labor Bureau of the New York State Attorney General’s office first as a staff attorney, then Section Chief, Deputy Bureau Chief and finally as Bureau Chief. Ms. Brand has extensive litigation experience, both trial and appellate, in wage hour cases arising under New York’s Fair Labor Standards Act and the state’s mini Davis-Bacon Act.
The choice of Ms. Brand, with her leadership and experience on the Misclassification Task Force, is in line with the DOL’s stated enforcement priority regarding employers that misclassify their workers as independent contractors. Just recently, among other steps being taken by the DOL in its misclassification initiative, DOL Solicitor Patricia Smith announced at the Practicing Law Institute’s February 7 “Managing Wage & Hour Risks 2011” conference, that the DOL was in the process of negotiation a Memorandum of Understanding with the Internal revenue Service so that the two agencies could share information on misclassified worker matters.