FLSA Developments: Misclassification as Independent Contractors, Unpaid Interns, the Status of DOL Opinion Letters, and the Meaning of Clothes Under Section 3(o)

8/6/2019 FLSA Developments: Misclassification as Independent Contractors, Unpaid Interns, the Status of DOL Opinion Letters

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FLSA Developments:Misclassification as Independent

Contractors, Unpaid Interns, the Status of DOL Opinion Letters, and the Meaning of

Clothes Under Section 3(o)

by

Robert B. Fitzpatrick, Esq.Robert B. Fitzpatrick, PLLCUniversal Building South

1825 Connecticut Ave., N.W.Suite 640

Washington, D.C. 20009-5728(202) 588-5300

(202) 588-5023 (fax)[email protected]

http://www.robertbfitzpatrick.com (website)http://robertbfitzpatrick.blogspot.com (blog)


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DISCLAIMER OF ALL LIABILITY AND RESPONSIBILITY

THE INFORMATION CONTAINED HEREIN IS BASED UPONSOURCES BELIEVED TO BE ACCURATE AND RELIABLE INCLUDING SECONDARY SOURCES. DILIGENT EFFORT WASMADE TO ENSURE THE ACCURACY OF THESE MATERIALS,BUT THE AUTHOR ASSUMES NO RESPONSIBILITY FOR ANYREADERS RELIANCE ON THEM AND ENCOURAGES READERSTO VERIFY ALL ITEMS BY REVIEWING PRIMARY SOURCESWHERE APPROPRIATE AND BY USING TRADITIONAL LEGALRESEARCH TECHNIQUES TO ENSURE THAT THEINFORMATION HAS NOT BEEN AFFECTED OR CHANGED BY

RECENT DEVELOPMENTS.

THIS PAPER IS PRESENTED AS AN INFORMATIONAL SOURCEONLY. IT IS INTENDED TO ASSIST READERS AS A LEARNINGAID; IT DOES NOT CONSTITUTE LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE. IT IS NOT WRITTEN (NOR ISIT INTENDED TO BE USED) FOR PURPOSES OF ASSISTINGCLIENTS, NOR TO PROMOTE, MARKET, OR RECOMMEND ANYTRANSACTION OR MATTER ADDRESSED; AND, GIVEN THEPURPOSE OF THE PAPER, IT MAY OMIT DISCUSSION OFEXCEPTIONS, QUALIFICATIONS, OR OTHER RELEVANTINFORMATION THAT MAY AFFECT ITS UTILITY IN ANYLEGAL SITUATION. THIS PAPER DOES NOT CREATE ANATTORNEY-CLIENT RELATIONSHIP BETWEEN THE AUTHOR AND ANY READER. DUE TO THE RAPIDLY CHANGING

NATURE OF THE LAW, INFORMATION CONTAINED IN THISPAPER MAY BECOME OUTDATED. IN NO EVENT WILL THEAUTHOR BE LIABLE FOR ANY DIRECT, INDIRECT,CONSEQUENTIAL, OR OTHER DAMAGES RESULTING FROMAND/OR RELATED TO THE USE OF THIS MATERIAL.


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FLSA DEVELOPMENTS by Robert B. Fitzpatrick, Esq. 1

MISCLASSIFICATION AS INDEPENDENTCONTRACTORS

1. August 2009 GAO Report to Congress: Employee Misclassification: ImprovedCoordination, Outreach, and Targeting Could Better Ensure Detection and Prevention

a. In fiscal year 2007, states uncovered at least 150,000 workers who may not havereceived protections and benefits to which they were entitled because their employers misclassified them as independent contractors when they should have

been classified as employees.

b. The GAO report is a vailable at http://www.gao.gov/new.items/d09717.pdf.

2. The Obama Administrations proposed budget includes a joint proposal by the Department of Labor and the Department of the Treasury to pursue employers that misclassify workers asindependent contractors:

a. Delaware Employment Law Blog, Will Misclassification Incentives ReduceEmployers Use of Independent Contractors?, Posted by Scott A. Holt on Feb. 12,2010, available at http://www.delawareemploymentlawblog.com/2010/02/will_misclassification_initiat_1.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+delawareemploymentlawblog%2FUagR+%28Delaware+Employment+Law+Blog%29.

b. Hunton & Williams LLP, Proposed Federal Budget Targets Misclassification of Contractors, Posted on Feb. 12, 2010, available at http://www.huntonlaborblog.com/2010/02/articles/employeeindependent-

contractor/proposed-federal-budget-targets-misclassification-of-contractors/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+HuntonEmploymentLaborLawPerspectives+%28Hunton+Employment+%26+Labor+Law+Perspectives%29.

1 This article was prepared with assistance by Donald R. McIntosh, an associate with Robert B. Fitzpatrick, PLLC.Mr. McIntosh is a May 2008 graduate of Georgetown University Law Center and a member of the Virginia StateBar.


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3. The IRS has entered into information sharing agreements with 29 state labor agenciesthrough which the IRS and the agencies will share results from misclassification audits.

a. Dave Gram, IRS, States Crack Down on Independent Worker Abuse, The

Associated Press, Feb. 11, 2010, available at http://www.google.com/hostednews/ap/article/ALeqM5hdqC3b6B0eL-uQlC7O_sJPB7qNmAD9DQ5KL80.

b. Richard J. Reibstein, et al., Independent Contractor High Alert The IRS andState Labor Departments Take Aim at Employee Misclassifications: HowEmployers Can Minimize Their Liability Risks, WolfBlock.com, HRAdvisor (January/February 2008), available at http://www.wolfblock.com/wbroot/files/Publication/Reib_Nix_Gall_HRAdvisor.

pdf.

4.

The Taxpayer Responsibility, Accountability, and Consistency Act of 2009, S. 2882, 111thCong. (2009) (introduced by Sen. Kerry (D-MA); companion House bill, H.R. 3408,introduced by Rep. McDermott (D-WA)), available at http://frwebgate.access.gpo.gov/cgi-

bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s2882is.txt.pdf.

5. The Independent Contractor Proper Classification Act, S. 2044, 110th Cong. (2007)(introduced by then-Sen.. Obama (D-IL)), available at http://www.appwp.org/documents/s2044110th.pdf.

6. The Maryland Workplace Fraud Act, Code of Md. Regs. 395.10, provides for new penalties for employers that misclassify workers, focusing on the landscaping andconstruction industries.

a. A discussion of the Act is available at http://www.dllr.state.md.us/workplace/.

7. The Illinois Department of Labor (IDOL) recently on behalf of 18 individuals issued a civil penalty of $328,500 under the Illinois Employee Classification Act (ECA), againstElmwood Park, IL-based Mega Builders, Inc., for failing to classify the individuals asemployees.

a. IDOL assessed penalties of $1,500 per day for 218 total days of misclassification,as well as a $1,500 penalty for failure to maintain proper records.

b. For the Illinois ECA, see State of Illinois Department of Labor, EmployeeClassification Act, http://www.state.il.us/agency/idol/laws/Law185.htm.

8. On May 25, Ohio H.B. 523 was introduced. This bill would create a single definition of employee that would be used in all Ohio statutes. The bill would also create a seven factor test, all of which would have to be met, for determining whether an individual is anindependent contractor. The factors are:


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The individual has been and continues to be free from control and direction inconnection with the performance of the service.

The individual customarily is engaged in an independently established trade,occupation, profession, or business of the same nature of the trade, occupation,

profession, or business involved in the service performed.

The individual is a separate and distinct business entity from the entity for whichthe service is being performed or, if the individual is providing constructionservices and is a sole proprietorship or partnership, the individual is a legitimatesole proprietorship or a partner in a legitimate partnership.

The individual incurs the main expenses and has continuing or recurring businessliabilities related to the service performed.

The individual is liable for breach of contract for failure to complete the service. An agreement, written or oral, express or implied, exists describing the service to

be performed, the payment the individual will receive for performance of theservice, and the time frame for completion of the service.

The service performed by the individual is outside of the usual course of business

of the employer.a. The text of Ohio H.B. 523 is available at

http://www.legislature.state.oh.us/bills.cfm?ID=128_HB_523

b. For a discussion of Ohio H.B. 523, see Brian Hall, Ohio H.B. 523 Would UnifyDefinition of Employee, Make it Easier to Find Misclassification, May 28, 2010,available at http://www.employerlawreport.com/2010/05/articles/workforce-strategies/ohio-hb-523-would-unify-definition-of-employee-make-it-easier-to-find-misclassification/

9. Florida Statues Ch. 440 requires employers with 4 or more employees, or if a constructionindustry employer, one or more employees, to provide workers compensation coverage for all employees.

a. Fl. Stat. Ch. 440(c)(2) Employee includes: An independent contractor working or performing services in the construction industry. The 2009 FloridaStatutes, available athttp://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=Ch0440/Sec02.HTM.

b. For a discussion of the above, see Florida Workers Compensation JointUnderwriting Association, Inc., Helpful Tips for Employers, available athttp://www.fwcjua.com/Employer/HelpfulTips.aspx.

10. Is there a potential for RICO claims?

a. Mohawk Indus. v. Williams , 568 F.3d 1350 (11th Cir. 2009).

b. Anza v. Ideal Steel Supply Corp. , 547 U.S. 451 (2007).


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iv. $150,000 for OSHA to train inspectors on worker misclassificationissues; and

v. Proposed legislative changes that would require employers to properlyclassify their workers, provide penalties when they do not, and restore

protections for employees who have been classified improperly.

15. Mark Toth, General Counsel for Manpower, Inc., has created an independent contractor checklist available at http://manpowerblogs.com/toth/wp-content/uploads/2010/05/Blawg-IC-Cheat-Sheet-5.10.pdf.

16. The Employee Misclassification Prevention Act (S. 3254 and H.R. 5107)

a. The Act proposes to do the following:

i. Amend the FLSA to render worker misclassifications a violation of federallaw.

ii.

Require employers to maintain records reflecting hours worked and wages paid for employees and non-employee workers.iii. Require employers to provide workers a notice identifying the workers

classification, a DOL website (to be created), contact information for theappropriate DOL office, and any other information as to be required byregulation.

iv. Additionally, for workers classified as non-employees, the notice would berequired to include the following: Your rights to wage, hour, and other labor protections depend upon your proper classification as an employee or non-employee. If you have any other questions or concerns about how youhave been classified or suspect that you may have been misclassified,contact the U.S. Department of Labor.

v. Employees who violate the notice and/or recordkeeping requirements or misclassify a worker would be subject to a civil penalty of up to $1,100 per work on the first offense and up to $5,000 for willful or repeated violations.

vi. Employers misclassifying workers and violating minimum wage/overtimerequirements could be subject to treble damages.

vii. Provide broad anti-retaliation and discrimination protections.

b. On June 17, 2010, the Senate Committee on Health, Education, Labor, andPensions held a hearing on the Employee Misclassification Prevention Act,entitled, Leveling the Playing Field: Protecting Workers and Businesses

Affected by Misclassification. Testifying were Seth Harris, the DeputySecretary of Labor; Frank Battagliano of Metro Test and Balance; CatherineRuckelshaus of the National Employment Law Project; and Gary Uber of FamilyPrivate Care, a home health caregivers referral service. The hearings preparedtestimony and video replay are available at http://help.senate.gov/hearings/hearing/?id=225aa689-5056-9502-5d83-96cd13339413.


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UNPAID INTERNS 1. In an April 2, 2010 New York Times article, Nancy J. Leppink, DOLs Acting Director of its

Wage & Hour Division, rattled the world of unpaid internships when she was quoted asstating the following:

If youre a for-profit employer or you want to pursue an internship with a for- profit employer, there arent going to be many circumstances where you can havean internship and not be paid and still be in compliance with the law.

a. The article is available at http://www.nytimes.com/2010/04/03/business/03intern.html.

2. Ms. Leppink cited to a Wage & Hour Divisions fact sheet ( available at http://www.dol.gov/whd/regs/compliance/whdfs71.pdf) that provides a six-part test for for-

profit employers to determine whether an internship need be paid. If the six-part test is met,an employment relationship does not exist under the FLSA, and minimum wage andovertime provisions do not apply to the intern. WH Op. Letter FLSA2004-5NA (May 17,2004); WH Op. Letter 254 (Feb. 22, 1974); DOL Field Operations Handbook 10b11.

a. The six-part test is as follows:

i. The internship, even though it includes actual operation of thefacilities of the employer, is similar to training which would be givenin an educational environment ;

On this factor, the fact sheet further advises:

In general, the more an internship program is structured around aclassroom or academic experience as opposed to the employersactual operations, the more likely the internship will be viewed asan extension of the individuals educational experience (this oftenoccurs where a college or university exercises oversight over theinternship program and provides educational credit). The more theinternship provides the individual with skills that can be used inmultiple employment settings, as opposed to skills particular to oneemployers operation, the more likely the intern would be viewedas receiving training. Under these circumstances the intern doesnot perform the routine work of the business on a regular andrecurring basis, and the business is not dependent upon the work of the intern. On the other hand, if the interns are engaged in theoperations of the employer or are performing productive work (for example, filing, performing other clerical work, or assistingcustomers), then the fact that they may be receiving some benefitsin the form of a new skill or improved work habits will not exclude


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them from the FLSAs minimum wage and overtime requirements because the employer benefits from the interns work.

ii. The internship experience is for the benefit of the intern ;

iii.

The intern does not displace regular employees, but works under closesupervision of existing staff ;

The fact sheet further advises:

If an employer uses interns as substitutes for regular workers or toaugment its existing workforce during specific time periods, theseinterns should be paid at least the minimum wage and overtimecompensation for hours worked over forty in a work week. If theemployer would have hired additional employees or requiredexisting staff to work additional hours had the interns not

performed the work, then the interns will be viewed as employeesand entitled compensation under the FLSA. Conversely, if theemployer is providing job shadowing opportunities that allow anintern to learn certain functions under the close and constantsupervision of regular employees, but the intern performs no or minimal work, the activity is more likely to be viewed as a bonafide education experience. On the other hand, if the intern receivesthe same level of supervision as the employers regular workforce,this would suggest an employment relationship, rather thantraining.

iv. The employer that provides the training derives no immediateadvantage from the activities of the intern; and on occasion itsoperations may actually be impeded ;

v. The intern is not necessarily entitled to a job at the conclusion of theinternship ; and

The fact sheet further advises:

The internship should be of a fixed duration, established prior tothe outset of the internship. Further, unpaid internships generallyshould not be used by the employer as a trial period for individualsseeking employment at the conclusion of the internship period. If an intern is placed with the employer for a trial period with theexpectation that he or she will then be hired on a permanent basis,that individual generally would be considered an employee under the FLSA.


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vi. The employer and the intern understand that the intern is not entitledto wages for the time spent in the internship .

3. For more information on these unpaid intern developments, see, e.g. :

a.

David Yamada, The Employment Law Rights of Student Interns , 35 Conn. L. Rev.215 (2002).

b. Workplace Prof Blog, Unpaid Internships , April 4, 2010, available at http://lawprofessors.typepad.com/laborprof_blog/2010/04/unpaid-internships.html.

c. Minding the Workplace, News Flash! Unpaid Internships May Be Illegal , April3, 2010, available at http://newworkplace.wordpress.com/2010/04/03/news-flash-unpaid-internships-may-be-illegal/.


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STATUS OF DOL OPINION LETTERS

1. On March 24, 2010, DOLs Wage & Hour Division released its first Administrator Interpretation, in which it found that employees who perform the typical job duties of amortgage loan officer do not qualify as bona fide administrative employees exempt under the provisions of the FLSA Administrator Interpretation, No. 2010-1, Mar. 24, 2010,available at http://www.dol.gov/WHD/opinion/adminIntrprtn/FLSA/2010/FLSAAI2010_1.pdf.Simultaneous to this finding, DOL announced that Administrator Interpretations willreplace the formerly used opinion letters, which were geared towards addressing detailed,fact-specific situations under the FLSA and other statutes.

2. The Wage & Hour Divisions move towards these Administrator Interpretations was predicated on the belief that they will be a much more efficient and productive use of resources than attempting to provide definitive opinion letters in response to fact-specificrequests submitted by individuals and organizations, where a slight difference in theassumed facts may result in a different outcome. U.S. Dept of Labor, Wage & Hour Division, Rulings and Interpretations , available at http://www.dol.gov/whd/opinion/opinion.htm.

3. Seyfarth Shaw, in its One Minute Memo of March 26, 2010, entitled DOL Eliminates Issuance of Wage & Hour Opinion Letters While Finding Mortgage Loan Officers Non- Exempt Contrary to Prior Administration Rulings , provides the following analysis of

DOLs decision to eliminate its use of opinion letters:

The substance of WHDs guidance and WHDs departure from the practice of issuingindividual Opinion Letters should be troubling to employers in many industries. Asan initial matter, employers have long submitted individualized, fact-specificinquiries and relied on responsive Opinion Letters as part of their good-faith efforts tocomply with wage-and-hour laws. Indeed, the Portal-to-Portal Act provides that anemployer is not subject to liability, including liquidated damages, under the FLSA if it can establish good-faith reliance on a written administrative regulation, order,ruling, approval, or interpretation of WHD. There is presently a backlog of approximately 400 requests for Opinion Letters.

Moreover, the AI, in contrast to prior WHD Opinion Letters, lacks any transparentfactual inquiry and instead relies upon WHDs generalized understanding of theduties that commonly accompany a position in an industry. Yet, for years, WHD hasacknowledged that job titles alone are not dispositive in determining whether anexemption applies and recognized that the law requires a specific factual inquiry to beconducted into the actual duties an employee performed. Likewise, prior Opinion


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Letters have taken account of the reality that actual duties performed in a particular position often vary.

4. On May 20, 2010, in response to a request for an explanation of the delegation whichgives the Deputy Wage and Hour Administrator power to issue Administrator

Interpretations, the Acting Deputy Administrator for Enforcement claimed this power was found in Secretarys Order 9-2009 (published at 74 Fed. Reg. 58836 (Nov. 13,2009)). That order delegated the responsibility of issuing official departmental rulingsand interpretations of the FLSA to the Wage and Hour Administrator. When, as is thecase now, there is no Administrator, the Administrators duties fall to the Administratorsfirst assistant under the Federal Vacancies Reform Act of 1998. 5. U.S.C. 3345, etseq. The Secretary of Labor has designated the Deputy Wage and Hour Administrator asthe first assistant to the Wage and Hour Administrator. Secretarys Order 04-2008(published at Fed. Reg. 46524, 46527 (Aug. 8, 2008)). Thus, until the position of Wageand Hour Administrator is filled, the Deputy Wage and Hour Administrator has theauthority to issue Administrator Interpretations.


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Documents

FLSA Developments: Misclassification as Independent Contractors, Unpaid Interns, the Status of DOL Opinion Letters, and the Meaning of Clothes Under Section 3(o)