Earlier this month, I gave a presentation about the U.S. Department of Labor’s recently heightened scrutiny of employers’ characterization of their workers as “independent contractors,” which led naturally into a discussion of the new employee overtime rules scheduled to take effect on December 1, 2016. Since this is important for many Adelman on Venues readers, I will hit the highlights for anyone who could not join us in Las Vegas.
On July 15, 2015, DOL issued new guidance regarding who qualifies as an “employee” under the Fair Labor Standards Act (FLSA). To be clear, the government was not making any new law, or redefining any terms of art. Instead, it was (1) clarifying the meaning of existing legal terms, and (2) declaring that it intended, for the first time, to take those legal distinctions seriously in enforcing U.S. employment law.
THE PERILS OF MISCLASSIFICATION
Without putting too fine a point on it, DOL aims to eliminate the misclassification of workers as independent contractors. Employers who hire independent contractors do not pay those workers’ unemployment insurance, workers’ compensation insurance, Social Security and Medicare taxes, or minimum wages and overtime premiums, as they are required to do for employees. As my co-panelist, retired IATSE counsel Jim Varga succinctly put it, misclassification is wage theft. Another co-panelist, Paul Kush of ProSight Specialty Insurance, noted that an employer’s insurer could rescind their coverage in a way that denies either workers’ compensation or general liability coverage for a workplace injury. So the stakes are high, particularly in light of the impending overtime rule changes discussed further below.
Instead, when a company raises a worker’s independent contractor status as a defense, as in a workers’ compensation claim, the key is whether the company has retained the right to control the manner and means of the work. Regardless of who writes the worker’s checks, if the right to control the manner and means is left with the company for whom the service is performed, then an employer/employee relationship exists.
THE ECONOMIC REALITIES TEST
There are criteria to figure this out. In order to determine by whom a worker is “employed” for FLSA purposes, 29 U.S.C. §203(g) relies on what is called the “Economic Realities” test, basically sifting through the facts of someone’s work situation to figure out which party actually controls the work. The following issues are often considered under the Economic Realities test:
- Have the parties expressly agreed to an independent contractor relationship?
- Who sets the hours and days worked?
- Who selects and/or provides working tools and materials?
- For traveling employees, who selects the routes?
- Who selects the length of employment?
- Who selects the method of payment? Hourly? Commission? By the job?
- Is the work performed differently by independent contractors than employees?
Although I am not giving legal advice here, I will offer some ideas to consider. Procedurally, companies that hope to establish independent contractor relationships that will withstand a misclassification charge should have a written agreement that lists the respective rights and obligations of the parties, paying particular attention to the issues generally considered in the Economic Realities test. Substantively, company supervisors should acknowledge the independent contractor relationship on the job site and not direct the work of hired labor the same way as company employees. Finally, companies that engage independent contractors should require the labor provider to present evidence of workers’ compensation coverage before beginning work.
The Department of Labor will err on the side that a hired worker is an “employee,” at least for their purposes, so you should plan accordingly.
THE NEW OVERTIME RULE
This planning should include making provisions for the overtime payment rules set to take effect on December 1, 2016. The new rule updates the salary and compensation levels for “executive, administrative, and professional” workers who are currently ineligible to receive overtime pay for extended work (usually referred to as “exempt employees”). Here are the two key provisions:
- The maximum compensation of employees exempt from overtime (greater than 40 hours per week) rises from $455/week, or $23,660/year salary, to $913/week, or $47,476/year, which is the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, the South; and
- Automatic adjustments every three years to maintain these percentiles.
These salary levels apply to all employees, regardless of one’s job title or whether one is paid a salary or an hourly wage. Relevant to readers of this article, employees within the scope of the new salary rule include those whose work “requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.” Do you see yourself in that picture?
As with enforcement of the distinction between employees versus independent contractors, news of these minimum wage and overtime changes has been available for more than a year. The Department of Labor published a “Notice of Proposed Rulemaking” in the Federal Register back on July 6, 2015. Even if you didn’t notice that, more than 270,000 people did, and they provided comments. The “Final Rule,” which includes the provisions described above, was published on May 18, 2016 to provide time before the scheduled December 1 implementation date.
Every event and venue professional has dealt with people who, despite all the signs and warnings, still act surprised when you insist on enforcing a rule — this is no exception. On September 28, the U.S. House of Representatives passed HR 6094, the “Regulatory Relief for Small Businesses, Schools and Nonprofits Act,” sponsored by Rep. Tim Walberg, R-Mich. It would delay the implementation date to June 1, 2017, and entirely remove the automatic three-year adjustment to minimum compensation levels.
As with much else, the election results have raised questions about the future of the Final Rule. I will follow breaking developments and keep you apprised. In the meantime, keep your eyes open.