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Question: We are currently downsizing as part of our company reorganization and are considering redesignating some of our employees as independent contractors. Are there any potential ramifications for making the change?

Answer: It is possible to change a worker’s status from employee to independent contractor provided that the worker meets the legal requirements of an independent contractor. Whether a worker is an employee or independent contractor is determined through a series of legal tests established by state and federal courts and agencies. For example, for federal tax purposes the IRS uses common law rules to determine whether a worker is an independent contractor. The common law rules examine various facts regarding the degree of direction and control the employer has over the worker and the amount of independence the worker has in regards to performing the work. The more direction and control an employer exerts over the worker, the more likely the worker is an employee. Conversely, the more independent the worker is, the more likely the worker is an independent contractor. It is important to note that there is no single factor that is determinative. The determination is based upon the totality of the circumstances.

While there are other tests at both the state and federal levels, most of them look at the same factors contained in the common law rules and focus on the amount of direction and control the employer has over the worker. The major difference is how many factors the court or agency looks at and how much weight is given to particular factors. For comparison, consider the factors used in the economic realities test, which is used by federal courts and the U.S. Department of Labor (DOL) to determine whether a worker is an employee or independent contractor under the federal Fair Labor Standards Act (FLSA).

Employee misclassification is one of the top enforcement issues for the U.S. DOL’s Wage and Hour Division (WHD). This is because under state and federal laws employees are provided protections and benefits that are not provided to independent contractors, such as minimum wage, overtime, family and medical leave, discrimination and harassment protections, unemployment insurance, workers’ compensation, and medical coverage. By misclassifying an employee, the employee is denied access to benefits and protections to which he or she is entitled. In addition, the employer avoids withholding income tax and paying into programs such as Social Security, Medicare, unemployment insurance, and workers’ compensation.

While making sure employees are properly classified can be a huge task, the consequences for misclassifying an employee can be devastating. If the WHD/IRS perform an investigation or audit of an employer, they will examine all employees and independent contractors for a three-year period.

The ramifications for an employer can vary depending on whether or not the WHD and the IRS determine the misclassification was unintentional or intentional, or even fraudulent. With respect to the FLSA, penalties include liquidated damages (i.e., double back wages) and attorneys’ fees and court costs. In regards to federal taxes, if the misclassification was unintentional, the employer faces at least the following penalties based on the fact that all payments to misclassified independent contractors have been reclassified as wages:

• $50 for each Form W-2 that the employer failed to file because of classifying workers as an independent contractor.
• Since the employer failed to withhold income taxes, it faces penalties of 1.5 percent of the wages, plus 40 percent of the FICA taxes (Social Security and Medicare) that were not withheld from the employee, and 100 percent of the matching FICA taxes the employer should have paid. Interest is also accrued on these penalties daily from the date they should have been deposited.
• A failure to pay taxes penalty equal to 0.5 percent of the unpaid tax liability for each month, up to 25 percent of the total tax liability.
• $50 for each failure to obtain a Social Security number.

If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties. For instance, the employer could be subject to penalties that include 20 percent of all of the wages paid, plus 100 percent of the FICA taxes — both the employee’s and employer’s share. Criminal penalties of up to $1,000 per misclassified worker and one year in prison can be imposed as well. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax.

Not to be forgotten, employers may also face tax and other penalties under state laws. For example, in California these penalties include repayment of back payroll taxes, subject to interest and a 10 percent penalty on the unpaid taxes. Failure to withhold and pay payroll taxes can also result in a misdemeanor charge, and the employer can be fined up to $1,000 or sentenced to jail for up to one year, or both. Additionally, Cal. Labor Code § 226.8 imposes penalties of up to $25,000 on employers who misclassify employees.

While employers may choose to navigate the various tests on their own, due to the severity of penalties for misclassification, employers are strongly encouraged to seek counsel when uncertain about the status of certain employees.

The U.S. Department of Labor has announced that it will start next month enforcing the new“Home-Care” Final Rule, which prohibits third-party employers from taking advantage of the overtime exemption for certain domestic service workers and redefines the term “companionship services” under the Fair Labor Standards Act.

In August the U.S. Court of Appeals for the District of Columbia Circuit found in Home Care Association of America v. Weil that the Final Rule was valid.

The plaintiffs, associations that represent home-care staffing agencies, asked the Supreme Court to stay (suspend) the Final Rule pending their request for Supreme Court review of the D.C. Circuit decision.

This week, the Supreme Court denied the stay, meaning that the DOL is free to begin enforcing the Final Rule. The associations’ challenge to the Final Rule itself will continue.

The DOL announced on Wednesday that it will begin enforcing the Final Rule on November 12. The DOL will exercise its prosecutorial discretion with respect to any violations found between now and the end of the calendar year, taking into consideration (among other things) the employer’s good-faith attempts to comply with the Final Rule.

The Final Rule was originally issued by the DOL in October 2013 with an original effective date of January 1, 2015. It remains open to question whether individual plaintiffs can pursue alleged violations dating all the way back to January 1, 2015.

Article courtesy of Constangy Ellen Kearns, Boston Office and Robin Shea, Winston-Salem Office

On September 7, 2015, President Obama issued Executive Order (EO) 13706, which requires federal contractors and subcontractors to provide paid sick leave to their employees. The EO applies to contracts entered into after January 1, 2017 that are procurement contracts for services or construction; contracts for services covered by the Service Contract Act (SCA); contracts for concessions; or contracts in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public. The EO adds to the small patchwork of state and local paid sick leave laws scattered across the nation.

Accrual of Sick Leave

Pursuant to the EO, sick leave accrues at a rate of one hour for every 30 hours worked. Employers may cap accrual at 56 hours (seven days) per year. Unused sick leave will carry over from one year to the next and must be reinstated for employees rehired by a covered contractor within 12 months after a job separation.

Unused accrued sick leave does not have to be paid out upon termination.

Use of Sick Leave

Employees may use paid sick leave:

1. For the employee’s own illness, injury, medical condition, or when an employee needs to obtain diagnosis, care, or preventative care.
2. To care for a child, parent, spouse, domestic partner, or “any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship” who has an illness, injury, medical condition, or who needs to obtain diagnosis, care, or preventative care.
3. For domestic violence, assault, or stalking situations resulting in an illness, injury, or medical condition or the need for obtaining diagnosis, care, or preventative care.
4. To obtain additional counseling, seek relocation, seek assistance from a victim services organization, take related legal action for the employee or one of the above-listed individuals in domestic violence, assault, or stalking situations.

Employers are prohibited from interfering with or discriminating against an employee for taking or attempting to take paid sick leave, or for assisting any other employee in asserting his or her rights to sick leave.

Requests for Leave

Requests for sick leave may be made orally or in writing and must include the expected duration of the leave. If the need for leave is foreseeable, employees must provide at least seven calendar days’ advance notice. If the need for leave is not foreseeable, notice must be provided as soon as practicable. Paid sick leave cannot be made contingent on the requesting employee finding a replacement to cover any work time to be missed.

If an employee is absent for three or more consecutive days on paid sick leave, the contractor is permitted to request a certification from a health care provider (if the absence is related to a medical condition) or from an appropriate individual or organization (if the absence is related to domestic violence, sexual assault, or stalking). The certification must be provided no later than 30 days from the first day of leave.

Going Forward

The EO mandates that the Department of Labor issue regulations concerning the paid sick leave requirements by September 30, 2016. ThinkHR will continue to monitor and report on developments on this issue.

Every once in a while, I amuse myself by reading The DIGEST Of Equal Employment Opportunity Law. If you’re looking for some good bedside material, you can always link here. Here’s what I learned from a perusal of this most recent Digest:

1.  If an employee comes into your work environment with a pre-existing asthmatic condition and you don’t transfer them away from the irritants causing or exacerbating their problems they may get depressed and you may get hit with a disability accommodation claim.

2.  The EEOC awards additional damages when they think an employee has suffered emotional hardship. According to some of the cases, damages were recovered for: hopelessness, depression, anxiety, sleeplessness, hair loss, weight gain, loss of appetite, migraine, a divorce, severe mood changes, isolation, anger, sorrow, loss of self-esteem, crying spells, pain, and muscle spasms. Bottom line: it’s not easy being a federal employee!

3.  I am always amazed at how long people will put up with unfair harassing, hostile intimidating, and otherwise poor conduct. Claimants say they suffer these things for years. Are they so afraid of their ability to get a new job they would rather suffer the pain they know? And just how bad can it really be if they are willing to tolerate it…sometimes for years? I remind folks: it’s called work, not jail.

4.  A number of cases raised the possibility of accommodating employees by allowing them to work from home whether it’s because they can’t physically handle a long commute, they’re being harassed, or suffering some kind of other malady. It matters not that you don’t offer this benefit to your existing employees. If telecommuting would in fact help to accommodate someone they get special treatment.

5.  It seems like there wasn’t a single federal agency that wasn’t named in some type of suit-Department of Veterans, Department of Justice, United States Postal Service, Department of Transportation, Department of Treasury, the Army, Airforce, Navy and Department of Defense, TVA, Homeland Security, Social Security Administration, Department of Commerce, NASA and I’m sure I missed an agency or two. It appears that a number of these agencies breached the settlement agreements they got into with their employees.

And this is the same government that’s trying to tell us how to properly manage our workplaces!

6.  The Digest concluded with a brief discussion surrounding religious expression and harassment. The bottom line is this: keep religion out of the workplace unless you are discussing it on your break or at lunch with somebody who’s willing to participate in the discussion. Do not bring it into performance discussions, and do not harass or act in a hostile manner towards people even if you believe they are possessed by the devil.

In one case against Department of Justice, a Unit Chief commented that complainant had a spiritual disconnect, questioned whether they love Jesus and God, and says she did not think God wanted them to work at the agency. Luckily for the DOJ, the court found that the employee would have been terminated anyway due to their poor performance and that all the Unit Chief needed was some appropriate training. I don’t make this up.