Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

During her testimony, (pdf) McCutchen stated that the WHD has taken a more combative stance towards employers, regardless of whether these businesses have a history of FLSA violations. Such examples include the fact that the agency has been conducting more unannounced investigations of employers with clean wage and hour records, sometimes even sending multiple investigators to conduct an investigation of a single facility. As listed in her testimony, other examples of punitive behavior by the WHD include:

• Demanding that employers produce documents that they are not currently obligated to maintain under the recordkeeping regulations – such as the basis for an employer’s claimed exemptions – and threatening to bring subpoena actions in federal court against employers that fail to respond to broad document requests within 72 hours;
• Prohibiting field career staff from using the “self-audit” investigation method, “which is the most efficient way of determining back wages due in large cases where an employer has already agreed to pay 100% of back wages, and instead requiring investigators to conduct ‘full’ investigations in almost every case”;
• Mandating that the career field staff impose civil money penalties and liquidated damages in almost every case; and
• Refusing to issue WH-58 waiver forms, or issuing only limited waiver forms, even when the employer agrees to pay 100% of back wages as calculated by the WHD.

During the hearing, McCutchen explained that the WH-58 forms – which inform employees that they waive their right to bring a private lawsuit if they accept the payment of back wages as calculated by the WHD – provide employers with a strong incentive to voluntarily come forward and report their often honest mistakes. By refusing to issue these forms, the WHD is discouraging employers from self-reporting, and has created an environment in which “there is no path for a good faith employer to voluntarily correct violations.” According to McCutchen, the lack of WH-58 receipts has created “legal uncertainty” for employers, as without them agreeing to pay 100% back wages as calculated by WHD does not guarantee that the employee will not file a lawsuit or join a class action after receiving the payment in order to claim additional back wages or liquidated damages.

Moreover, McCutchen emphasized that the goal of the WHD is to “punish bad actors” while ensuring that there are “all possible resources for good faith employers” to understand and comply with the law. As she testified, the WHD “cannot do so through enforcement only.”

Notably, McCutchen criticized the WHD’s decision to reduce its compliance efforts, claiming it has “closed its doors to employers that are seeking guidance on what the FLSA actually requires.” According to McCutchen, the agency has taken a number of steps that have left well-intentioned employers without a means for determining whether they are in violation of the law. Such measures include the withdrawal of nearly 20 Opinion Letters, for the sole reason they were not put in the mail before inauguration day, and the decision to stop issuing new opinion letters. These letters respond to fact-specific employer questions, thereby fleshing out and explaining the complexities of the FLSA and how the law applies to particular fact patterns. According to McCutchen, opinion letters are the “primary means for employers to learn what the Department of Labor believes what is required by the FLSA.”

In addition, McCutchen asserted that the WHD has refused to enter into compliance partnerships with employers or otherwise assist employers with the calculation of back wages once mistakes have been discovered. McCutchen explained that the WHD has more manpower and funding to enforce the FLSA than it did nearly a decade ago, but is recovering less in back wages, therefore “doing less with more.”

Other panelists and lawmakers agreed with McCutchen, particularly with the need for more guidance from the WHD on what constitutes an employee versus an independent contractor. While WHD Deputy Administrator Nancy J. Leppink touted the Memorandum of Understanding (MOU) and other cooperative efforts between the DOL and IRS to ferret out misclassification violations, a hearing witness pointed out potential problems with this arrangement. Specifically, the IRS uses a 20-factor test to determine whether a worker should be treated as an employee for tax purposes, while the DOL uses an “economic realities” test under the FLSA. As stated by one hearing panelist, the application of those legal tests in determining whether a worker is an employee is a very complicated analysis. Rep. Lynn Woolsey (D-CA) stated that the agencies are currently working together to create a more uniform standard of making this assessment.

Another difference between the two agencies’ handling of the misclassification issue is the fact that the IRS has implemented a limited amnesty program for employers that voluntary come forward with their worker classification mistakes, while the DOL does not offer an analogous program. During her testimony, McCutchen recommended that the DOL implement such a voluntary correction program whereby “employers who disclose a violation and pay 100% of back wages for two years can get the certainty of a WH-58 waiver form as an incentive for doing so.”

Others at the hearing criticized the WHD’s Bridge to Justice program, whereby the DOL refers complainants to private sector attorneys. One attorney witness explained that this program rewards lawyers only, and “has turned compliance upside down, because the referral by DOL to private attorneys for enforcement follow-up should be a last resort—after an employer has had an opportunity to respond and to undertake any necessary corrective actions.”

In addition, Subcommittee Chairman Tim Walberg (R-MI) opened the hearing by criticizing the WHD’s recent investigatory focus on the home building industry, as well as its development of a “Right to Know” regulation that will require employers to create written explanations as to why certain workers are classified as independent contractor or other non-employees. According to Walberg, “This may stimulate demand for lawyers, but it will cost businesses time and money.” Walberg also found fault with the agency’s intended proposal to eliminate the exemption for certain home care workers: “These workers provide invaluable services to the elderly and infirm at private residences, yet this regulatory effort may increase the cost of care – forcing some individuals to abandon their homes and enter institutional support.”

A few members at the hearing, however, argued in favor of the WHD doing more to combat wage theft. One panelist, although acknowledging that the majority of employers want to do the right thing, claimed that there are certain employment sectors – such as the restaurant and home construction industries – where violating the FLSA is the norm.

A complete list of the panel members, links to their testimony, and access to an archived webcast of the hearing can be found here.

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Leppink similarly avoided direct responses to questions about the agency’s worker misclassification initiatives. She noted that by April 2011, the WHD intends to publish a proposed rule updating the recordkeeping regulation issued under the FLSA “to assist employers in planning to protect workers' entitlement to wages that they have earned and bring greater transparency and openness to the workplace.” According to Leppink, the proposal would address notification of workers' status as employees or some other status such as independent contractors, and state whether that worker is entitled to the protections of the FLSA. Leppink also said the WHD is “exploring” whether to require employers to provide a wage statement each pay period to their workers.

Leppink was also asked about the process and type of information that will be provided to plaintiffs’ attorneys under the new DOL-ABA attorney referral. In response, Leppink stated that WHD and the American Bar Association have announced an unprecedented collaboration providing for an Attorney Referral System. When FLSA or FMLA complainants are informed that the WHD is declining to pursue their complaints, they may also be given a toll-free number to contact the newly created ABA-Approved Attorney Referral System. In addition, Leppink said that WHD will provide prompt relevant information and, where available, documents on the case may be provided to complainants and representing attorneys, but she provided no further details on the program.

Additionally, Leppink said that the agency is currently conducting directed investigations and increasing its presence in a number of key industries where, she claims, worker misclassification is most prevalent: construction; janitorial; home health care; child care; transportation and warehousing; meat and poultry processing; and other professional and personnel service industries.

With respect to another item on the WHD’s regulatory agenda, Leppink said she anticipates the issuance of a final rule addressing a number of statutory amendments and proposed changes to several different FLSA regulations “soon.” 

Earlier versions of these bills, which were introduced in 2009 as the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408, S. 2882), but have languished in committee, also took aim at employee misclassification and the section 530 safe harbor. The section 530 safe harbor provision provides that it would be considered “reasonable” to classify an individual as an independent contractor for federal employment tax purposes if the employer relies on: (a) a past IRS audit with respect to the taxpayer; (b) published rulings or judicial precedent; or (c) long-standing recognized practice in the industry. Moreover, the employer must not have treated the individual as an employee for any period. For any time after 1978, all of the employer’s federal tax returns must reflect that the workers were classified as independent contractors. Along the same vein, in order to benefit from the safe harbor provision, the employer must not have classified workers performing substantially similar work as employees. The updated version of the legislation would exempt certain skilled workers from the application of the proposed new safe harbor rules.

As summarized in a press release, the Fair Playing Field Act aims to “close a tax loophole currently allowing businesses to misclassify workers as ‘independent contractors,’ thereby creating an unfair environment for businesses that play by the rules and an unfair environment for workers,” by doing the following:

• End the moratorium on Internal Revenue Service (IRS) guidance addressing worker classification. The Secretary of Treasury would be directed to issue prospective guidance clarifying the employment status of individuals for federal employment tax purposes.
• Amend the provisions of the tax code that provide for reduced penalties for failure to deduct and withhold income taxes and the employee’s share of FICA taxes.
• Require persons who contract independent contractors on a regular and ongoing basis to provide a written statement to each independent contractor of the federal tax obligations of independent contractors, the labor and employment law protections that do not apply to independent contractors, and the right of the independent contractor to seek a status determination from the IRS.
• Require the Secretary of the Treasury to issue annual reports on worker misclassification.

The Senate bill has been referred to Senate Finance Committee, while the House companion bill has been referred to the House Committee on Ways and Means.

Worker misclassification has recently received increased attention by both the Administration and Congress. The President’s budget for the 2011 fiscal year includes provisions that target the misclassification of employees as independent contractors and are estimated to raise more than $7 billion in revenue over 10 years. In June, the Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing on this issue. Specifically, the HELP Committee debated the merits of the Employee Misclassification Prevention Act (H.R. 5107, S. 3254), legislation that would, among other things, amend the Fair Labor Standards Act (FLSA) to require employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification.

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In April, a bill was introduced in both the House and Senate that specifically targets misclassification. The Employee Misclassification Prevention Act (H.R. 5107, S. 3254), introduced by Rep. Lynn Woolsey (D-CA) and Sens. Sherrod Brown (D-OH) and Tom Harkin (D-IA), would, among other things, amend the Fair Labor Standards Act (FLSA) to require employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification. Other bills introduced this legislative term that address worker misclassification include the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) introduced by Sen. John Kerry (D-MA), and a similar bill (H.R. 3408) with the same name introduced by Rep. Jim McDermott (D-WA). Both bills would revise section 530 of the Revenue Act of 1978, known as the “safe harbor” provision, which currently allows employers to designate certain workers as independent contractors for federal employment tax purposes.

On the regulatory side, the DOL’s 2011 budget contains a number of provisions for programs to address this problem. For example, the DOL recently launched a public awareness campaign targeting worker misclassification. As mentioned by Sen. Harkin, in January the DOL hired more investigators to pursue misclassification, and the Internal Revenue Service “is working on a comprehensive nationwide employment tax audit program aimed, in part, to catch companies that improperly fail to withhold taxes and pay Social Security and Medicare premiums on the wages of workers misclassified as independent contractors.”

In his testimony, Deputy Labor Secretary Seth Harris highlighted a number of the DOL’s other regulatory activities aimed at reducing worker misclassification, such as the “Plan/Prevent/Protect” compliance strategy, which will require employers to (1) create a “plan” for identifying and remediating risks of employment law violations and make the plans available to workers so they can participate in their creation, fully understand them, and help to monitor their implementation; (2) thoroughly and completely implement the plan in a manner that “prevents” legal violations; and (3) ensure that the plan’s objectives are met on a regular basis so that it actually “protects” workers from violations of their workplace rights. Harris also noted that the DOL’s Wage and Hour Division (WHD) is considering a rule that would require an employer to disclose the analysis it used to determine that a worker is an independent contractor to the affected individual, and keep a record of the analysis for review should a Wage and Hour investigator seek this information. Harris concluded his testimony by stating that the DOL “strongly endorses” the Employee Misclassification Prevention Act, and that this legislation “is needed to provide DOL with additional tools that the Department cannot use without action by the Congress.”

Other panelists also spoke in favor of the DOL’s enforcement efforts and the misclassification legislation. For instance, Frank Battaglino, a business owner speaking on behalf of the Sheet Metal and Air Conditioning Contractors’ National Association as well as the Campaign for Quality Construction, testified that companies that regularly misclassify employees as independent contractors can offer bids for projects that are 20 to 30% below those offered by businesses that do not use this practice. He urged “responsible employers and government alike” to “partner for this cause.”

Not every panelist, however, approved of the bill. Gary Uber, co-founder of Family Private Care, Inc., a licensed nurse registry, testified on behalf of Private Care Association, Inc., a member of the Coalition to Preserve Independent Contractor Status. Uber expressed concern that “the increasingly intensified government efforts to identify misclassified workers and punish the firms that do business with them can result in firms . . . deciding that the regulatory risks of doing business with independent contractors have become intolerable.” Additionally, Uber claimed that the legislation’s proposed recordkeeping requirements are unworkable for a caregiver registry; that the proposed notice requirement would adversely affect the working relationship between an independent contractor and the contractor’s clients; that the proposed anti-retaliation provision could reward unethical conduct; and that the legislation itself is “premised on the false assumption that the decision whether an individual will work as an employee or independent contractor is made by a firm doing business with the individual, rather than by the individual.”

A complete list of the panelists and copies of their testimony can be found here.

• Impose civil penalties under the FLSA (up to $1,100 per employee for first offenders; $5,000 per employee for repeat or willful violations) on employers that misclassify employees as independent contractors;
• Amend the Social Security Act to establish administrative penalties for misclassifying employees, or paying unreported wages to employees without proper recordkeeping, for unemployment compensation purposes;
• Mandate state unemployment insurance agencies to conduct audits to identify employers who are misclassifying employees;
• Direct the Department of Labor (DOL) to perform targeted audits focusing on employers in industries that frequently misclassify employees;
• Allow the DOL and the Internal Revenue Service to share information on cases where employers misclassify workers;
• Track and monitor states’ effectiveness in identifying employers who misclassify employees; and
• Require the DOL to create a website summarizing employee rights under this Act.

In a statement, Secretary of Labor Hilda Solis praised this bill, adding that:

The Department of Labor is working with the Vice President's Middle Class Task Force and the Department of Treasury on a multi-agency initiative to develop strategies to address this issue [of worker misclassification]. The administration's budget request for fiscal year 2011 includes $25 million for the Department of Labor as part of this initiative, including $12 million for increased enforcement of wage and overtime laws in cases where employees have been misclassified. 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.

Other bills introduced this legislative term that address worker misclassification include the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) introduced by Sen. John Kerry (D-MA), and a similar bill (H.R. 3408) with the same name introduced by Rep. Jim McDermott (D-WA). Both bills would revise section 530 of the Revenue Act of 1978, known as the “safe harbor” provision, which currently allows employers to designate certain workers as independent contractors for federal employment tax purposes.

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The budget proposal follows previous efforts by President Obama to address the issue of worker misclassification. As a Senator, President Obama introduced legislation similar to the current budget proposal that would make it more difficult for businesses to treat individuals as independent contractors rather than employees. Later versions of this legislation are now pending in Congress. Sen. John Kerry (D-MA) and Rep. Jim McDermott (D-WA) have introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882, H.R. 3408), legislation that would revise the Revenue Act of 1978’s “safe harbor” provision to make it more difficult for employers to classify workers as independent contractors for employment tax purposes, and significantly increase employer penalties in the event of misclassification, among other things. The President’s budget proposal is expected to build momentum for such legislation and bring greater scrutiny to independent contractor classification.

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Under the terms of this legislation, an employer’s decision to classify a worker as an independent contractor would be deemed “reasonable” if the employer reasonably relied on a written determination addressing the employment status of the individual or another individual holding a substantially similar position with the employer, or a concluded employment tax examination that did not find that the individual (or one holding a substantially similar position) should be considered an employee. In addition, the employer or its predecessor must not have treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977. The assessment of whether an individual holds a substantially similar position held by another would be made using criteria established by the Fair Labor Standards Act.

This legislation would also strengthen employer reporting requirements. Businesses that pay more than $600 during the year to corporate providers of property and services would be required to file an information report with each provider and the Internal Revenue Service (IRS). In addition, the bill would allow individuals deemed independent contractors to petition the IRS for a determination of whether they are properly classified as independent contractors, and would significantly increase employer penalties in the event of misclassification. Such misclassification penalties include the following:

• Minimum of $250 (up from the current $50) per incorrect tax return, up to $3,000,000 (currently $250,000) per year. Lower penalties would be imposed if the returns are corrected within a specified period of time, although the amounts are significantly greater than those currently imposed on employers for misclassification.
• Smaller employers (those with gross receipts not exceeding $5,000,000) would be subject to fines of up to $1,000,000 per year, up from the current $100,000 limitation.
• In the event of intentional disregard for the filing requirement, employers would be subject to a $500 fine per tax return, up from the current $100 amount. The $3,000,000 per year penalty ceiling would not apply in this instance.

A similar measure with the same title was introduced in the House of Representatives in July. The new Senate companion bill has been referred to the Senate Committee on Finance.

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