NLRB Regional Director Says Misclassifying Employees As Independent Contractors Violates Federal Labor Law

May 2016
James B. Sherman, Esq.

Treating workers as non-employee, “independent contractors” can land employers in trouble with a wide variety of federal and state government agencies if the workers are determined to be employees under any number of laws, each with its own definition of who is an “employee.” Misclassifying employees as independent contractors typically means that no employment taxes are withheld, no unemployment taxes are remitted worker’s compensation and group health insurance is not provided, among other liabilities.  Consequently, when federal or state agencies such as the IRS or Minnesota Department of Employment and Economic Development challenge employers using independent contractors through an audit or in response to a worker’s complaint, the liability can be massive.

To make matters worse, thanks to a recent unfair labor practice, or ULP complaint issued by one of its Regional Directors in Los Angeles, CA, the National Labor Relations Board (NLRB) can be added to the list of agencies that may challenge an employer’s use of independent contractors and/or other contingency workers. The complaint is unique in that it alleges the employer, Intermodal Bridge Transport, misclassified its drivers as independent contractors and, in doing so, interfered with the protections employees are to enjoy under federal labor law.  This complaint follows a directive from the NLRB’s General Counsel in Washington, D.C., Richard Griffin, for the Board’s Regional Directors to explore issues involving “the employment status of workers in the on-demand economy.”  It also is consistent with the NLRB’s ongoing efforts to expand the agency’s reach into non-union workplaces.

The rationale used by the NLRB’s Regional Director, is that treating workers as independent contractors or other non-employee contingency workers necessarily inhibits rights specifically granted to employees under the National Labor Relations Act, as they are enforced by the NLRB.  Among other things these protected rights include the right to engage in forming or joining a union, as well as other “concerted activities” for their mutual aid and protection.  Workers not identified as employees would not be inclined to understand that they have these rights, according to the Board’s presumed theory.

Independent contractors and other non-employee contingent workers are widely used by American businesses and can form a very beneficial relationship for both parties. However, now more than ever it is essential that businesses take great care to ensure that these relationships are truly independent and do not cross the sometimes nebulous “line” into an employer/employee relationship. It is a fine line that shifts, depending on which federal or state agency is defining it.  Businesses must now add the NLRB to this list of agencies that may question the status of workers.

Given the stakes, where a ruling that workers have been misclassified can threaten a business’ very existence, employers are well-advised to seek advice from an expert in this area of the law before engaging independent contractors. Obviously an audit or complaint should be taken very seriously. 

Questions? Contact Attorney James B. Sherman at (952) 746-1700 or email jasherman@wesselssherman.com. 

Unprecedented Winds of Change at U.S. Department of Labor Aim to Require Overtime Pay for Millions by “Reclassifying” Workers - from Exempt to Non-exempt and from Independent Contractors to Employees

July 2015

By: James B. Sherman, Esq.

Within the past month, the U.S. Department of Labor (DOL) has taken two separate actions to greatly expand the reach of the Fair Labor Standards Act (FLSA) to require overtime pay for millions more workers.  The first action taken on June 30th, was the DOL's release of proposed regulations aimed at doubling the minimum salary needed to meet the so-called white collar exemption to the FLSA's minimum wage and overtime requirements.  If the proposal becomes final it will result in the reclassification of an estimated 4.6 million workers from exempt to non-exempt status, entitling them to overtime pay.  The DOL's second action was taken on July 15th, when the Wage and Hour Division of the DOL released an "Administrator's Interpretation" addressing what was termed the "misclassification" of workers as independent contractors rather than employees.  This interpretation may result in many more workers who presently are treated as independent contractors, being reclassified as employees for purposes of the FLSA and, thus, entitled to overtime pay.

While many employers have heard about the DOL’s proposed new minimum salary for exempt employees, few have heard about its position on “misclassification” of independent contractors.  In either case, employers should brace for the impending changes that these new measures will soon bring.  In addition to keeping records on millions more workers who are expected to be entitled to overtime pay, all of those reclassified individuals represent a new pool of potential plaintiffs to join the ever growing surge of wage and hour lawsuits.    

1.       The Proposed New White Collar Exemption Regulations

This is only the second time in more than 50 years that the DOL has proposed revisions to its regulations implementing the exemption from minimum wage and overtime pay under the Fair Labor Standards Act (FLSA) for executive, administrative, professional, outside sales, and computer employees. The nearly 300 pages of bureaucratic data and legalese of the proposal can be summarized as follows:

• More than doubling the minimum salary for the white collar exemption, from $455/week ($23,660 annually) to a figure equivalent to the 40^th percentile of earnings for all full-time salaried workers.  The current estimate for the first quarter of 2016 when the proposed rule may go into effect, is a new minimum salary requirement of approximately $970/week ($50,440 annually).

• Increasing the “highly compensated employee” definition from $100,000 to $122,148 annually (equal to the 90th percentile of earnings for full-time salaried workers);

• Automatic annual updates to these foregoing minimum salaries based on a fixed percentile of earnings or cost of living indicators; and

• While not yet making specific proposals to modify the “duties test” for white collar exemptions, the DOL is seeking further comments from the public over its concern that some exempt employees may be performing a “disproportionate amount of non-exempt work.”

The DOL is accepting comments from the public on its proposed rule before it issues the final version. Timely comments must be recovered by the Department no later than August 29, 2015. To learn more about these proposed regulations and how they may impact whether employees currently regarded as exempt, may soon be non-exempt and entitled to overtime pay, attend our TIMELY WEBINAR (see below to register).

2.       The Independent Contractor Administrative Interpretation

According to this new interpretation individuals previously thought to be independent contractors rather than employees, will now be assessed under a new standard.  According to the DOL’s new interpretation, the key question in whether a worker is an independent contractor or an employee for purposes of the FLSA is whether the worker is economically dependent on the employer or in business for him or herself. The interpretation goes on to list and describe the following six factors to be considered in determining whether a worker is an employee or independent contractor (with examples for each): (1) Is the work an integral part of the employer’s business?  (2) Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? (3) How does the worker’s relative investment compare to the employer’s investment?  (4) Does the work performed require special skill and initiative?  (5) Is the relationship between the worker and the employer permanent or indefinite?  (6) What is the nature and degree of the employer’s control?  No single factor is determinative, and the interpretation states that these factors should all be interpreted within the broader concept of “economic dependence.” 

The DOL’s new interpretation openly declares that under the foregoing analysis most workers will be considered employees rather than independent contractors.  The close timing of these two measures highlights the DOL’s intention to expand the FLSA’s minimum wage and overtime requirements to millions more workers.  Employers should act now to prepare for the potential of having numerous exempt employees and/or independent contractors who soon may be eligible for overtime pay and all the many related concerns of tracking time worked, lunch breaks, work from home, etc. 

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To prepare for these sweeping changes or for assistance in determining whether your workers are properly classified as employees vs. independent contractors, or exempt vs. non-exempt, contact attorney James Sherman in our Minneapolis office, at (952) 746-1700, or email him at jasherman@wesselssherman.com.

Labor Unions Win Big in Minnesota

By the narrowest of margins (2 votes) the Minnesota legislature voted to give certain in-home child-care providers and personal care attendants (PCAs) the right to unionize.  This comes at a time when nearby states are curbing organized labor’s clout.  For example, last year Wisconsin eliminated union rights to bargain over wages, etc. in public schools and most other public sector jobs, and Indiana and Michigan passed “Right-To-Work” legislation, where union membership cannot be made a mandatory condition of employment.  By contrast, the new Minnesota law stands to benefit two labor unions that lobbied aggressively for its passage.  The American Federation of State, County and Municipal Employees (AFSCME), is organizing the in-home child-care providers and the Service Employees International Union (SEIU) is seeking to represent the in-home PCAs.  As with most hotly contested political issues, opinions on the impact of this legislation depends on who is talking.

The unions and their supporters say the new law merely allows eligible child-care and personal care attendants the option to vote on whether or not they want a union.  Of course they also claim that union representation will translate into higher pay, greater benefits and training (which they equate with improving quality of care).  Left unanswered is a question all too often ignored in politics these days:  Who will pay for all this, including the dues these unions will undoubtedly charge?  The providers of these critical in-home services will have no choice but to raise their rates and the state, with tax dollars, will have to pick up the tab. 

Opponents of this law are left to lick fresh wounds.  They argued, obviously unsuccessfully, that passage of this bill was tantamount to the DFL-controlled Minnesota legislature simply repaying AFSCME and the SEIU for making significant campaign contributions to help elect a DFL majority.  With an estimated 21,000 in-home child-care and personal care attendants now open for organizing, the union dues they would be charged could bring in millions per year in new revenues for these two unions.   Because these union revenues would come, albeit indirectly, from tax payers to cover the necessary price hikes providers must charge, opponents see this new law as diverting public monies to unions as a payback for help in last year’s elections.

Perhaps lost in all the political rhetoric is the fact that this legislation goes beyond simply allowing people a choice.  Anyone who knows how union organizing really works knows that union elections are a far cry from “just letting people vote for or against a union.”  As with any union vote, all the union needs to win are a majority of those who show up to vote.  For example, if only 1,000 of the estimated 21,000 eligible voters actually vote, the unions would need only 501 votes in their favor to win.  What’s more – and few people, including the care providers themselves, realize this – if the unions win, they win representational status for all 21,000 individuals, including those who choose not to vote and those who vote against the union! 

The legislature had to make sweeping changes and redefine relationships across the state to make it possible for these two unions to have a shot at organizing 21,000 new dues-paying members.  Besides changing the legal landscape of well-established laws of union organizing, the new law effectively redefines the covered providers as all being employed by the State of Minnesota.  Yet most in-home care providers work for themselves; that is, they are considered in the eyes of existing law to be so-called “independent contractors” and not employees.  Those that do not work for themselves are employed by hundreds of small employers.  Whereas union organizing has forever sought the union’s status to bargain on behalf of employees, with their employers, the new law groups independent contractors with employees for the purpose of bargaining with the state!  By pure political fiat these diverse groups have been effectively re-designated as employees of the State of Minnesota, all to pave the way for two unions to organize thousands of new members.

Numerous legal challenges to this new law are expected.  If the union-supporting politicians win in court, it begs the question:  Who is next?  If the State of Minnesota can essentially annex entire occupations to make individuals working in those fields employees of the state, what would stop the legislature and governor from going after plumbers, electricians, lawyers, and doctors?  The only requirements seem to be that (1) government monies are flowing their way, and (2) a politically active union wants the ability to organize them.  Unfortunately, today all too often companies in the private sector rely on government monies as government continues to grow as a dominant player in the economy.

One legislator who supported the AFSCME/SEIU bill was asked to respond to the opposition’s claim that people who do not want union representation could be forced into a union by this law.  The legislator glibly replied:  “If they don’t want the union, they can simply choose not to take the government’s money” (state subsidies to pay for child and personal in-home care).  The irony of this is that the new union organizing law was accompanied by tax hikes on many businesses and higher wage earners.  When the government takes more and more of businesses’ money it gets harder and harder for them not to rely for their survival on some of the government’s handouts of that money.  Unfortunately, government handouts come with conditions.  In this case, the conditions appear to have been set by organized labor – allow union organizing or stay away from the government’s money!

Judge Postpones Implementation of Governor Dayton's Executive Order Permitting Daycare Workers to Vote to Unionize