Employee Versus Independent Contractor: EMPA

On April 22, 2010 new legislation aimed at remedying employee misclassification was introduced in both the House and Senate. The bills, H.R. 5107 and S. 3254, are called the "Employee Misclassification Prevention Act" (EMPA). The purpose of EMPA is to curb the practice of misclassifying employees as independent contractors. EMPA would modify the Fair Labor Standards Act, and if enacted in its current state, would have the following effects:

• require every company covered by the law to provide a written notice to all workers who perform labor or services informing them that they have been classified as either (a) employee or (b) non-employee;
• require companies to keep records of hours worked by and compensation paid to independent contractors;
• make it a "prohibited act" for an employer to misclassify an employee as a non-employee;
• impose a penalty from $1,100 to $5,000 per worker for a violation of the notice requirement, recordkeeping requirement, or a misclassification;
• impose triple damages in the event of willful violations of the minimum wage or overtime laws where an employee has been misclassified.

Regarding this legislation, Secretary of Labor Hilda Solis stated:

One of my goals as secretary of labor is to secure minimum and overtime wages and to help middle class families remain in the middle class. Working on the issue of misclassification is key to attaining these goals because the misclassification of employees as independent contractors deprives employees of critical workplace protections and employment benefits to which they are legally entitled... The Wage and Hour Division is currently considering how to best target its FY 2011 enforcement efforts and is emphasizing misclassification in its ongoing FY 2010 enforcement strategy. The department is also exploring all possible options for addressing this problem, including ways to better provide guidance to both workers and employers, and to increase information sharing between Department of Labor agencies and the states that are also working on this issue.

According to an article by Richard Reibstein, all businesses would be affected by EMPA "because it imposes upon every company that uses either employees or independent contractors a recordkeeping and a notice requirement. Any business that fails to provide the required notice would be subject to fines, even if its independent contractors are properly classified."

EMPA has implications for all organizations. Even if you don't use independent contractors, you would still be governed by the notice requirement, and would have to notify all of your employees that they are classified as 'employees'. The bills are in their early stages. As they develop, there will no doubt be much discussion. But one thing is clear - employee misclassification is an issue that is not going to disappear any time in the near future.

Managing the Risk of Wage and Hour Litigation

Federal and state wage and hour class actions have increased dramatically over the past 10 years. In 2009, the top ten private wage and hour settlements under the FLSA totaled nearly $364 million, an increase of 44% from the previous year.

In their April 2010 Labor and Employment Law newsletter,Vedder Price notes that "[s]mart employers are not sitting idle. Rather, they are proactively auditing wage and hour practices and implementing policies and procedures to prepare for and prevent wage and hour claims (including class actions) before those claims are filed." Vedder Price recommends the following:

(1) Ensure compliance with state and federal law - employers should periodically examine their policies and practices, including but not limited to, appropriate exempt / nonexempt classification, payment of all compensable work time for nonexempt employees, correct overtime calculations,  compliance with meal and rest break requirements, and appropriate employee / independent contractor classification.

(2) audit and update record keeping practices - the successful defense of any class action wage and hour lawsuit is contingent on accurate and detailed record keeping. An audit of an employer's record keeping practices is necessary to ensure that records are being maintained correctly and for the appropriate period of time.

(3) Provide wage and hour training for human resources, supervisors, and employees - supervisors in particular should be trained regularly on employer wage and hour policies. Many wage and hour lawsuits arise after supervisors interpret and apply employer policies in an individualized and inconsistent manner.

(4) Implement an effective "open door" wage and hour complaint reporting system - frequently, the most cost-effective way to resolve wage and hour issues is to address the employee's concerns directly. Employers should consider implementing a complaint reporting system that invites discussion about these issues and provides for a timely and fair resolution of employee concerns.

While focusing on policies is certainly important, the real emphasis should be placed on practices. An employer's policies could be in compliance, but in practice those policies are not being followed. One useful tool in assessing how well your organization is implementing its wage and hour policies is an examination of the underlying data. For example, time sheet and clock in / clock out data can be studied to determine whether employees are receiving - and recording - meal breaks and rest breaks in accordance with policy. This data can also be evaluated to ensure that rates of pay are properly calculated. A statistical audit of clock in / clock out data and payroll data can assess whether employees are being paid correctly for overtime hours. Statistical analyses can help you determine whether your policies are in fact being followed in practice.