Federal Court in Dayton Finds Employer Liable for Not Paying Overtime to Employees Misclassified as Independent Contractors

The federal government has taken a renewed interest in the misclassification of employees as independent contractors. In my view, this is one of the most common management faux pas I see. Employers do not need to pay overtime or taxes, provide insurance benefits, withhold taxes or worry about unemployment compensation liability in connection with independent contractors and this provides a powerful financial incentive for employers to take risks concerning legal requirements when everyone else is doing it. However, if it quacks like a duck . . . . . . About a decade ago, this was a very hot issue because Microsoft found itself on the wrong side of the IRS on this issue (and then had to provide stock to the misclassified employees under its benefit plants because of how it defined eligible “employees.”). Then the issue disappeared. On September 19, 2011, the DOL entered into a highly publicized arrangement with the IRS and 11 state tax agencies to turn over employers who misclassify employees as independent contractors. A recent federal case in the Dayton demonstrates that employers cannot rely on the “but everyone else is doing it” defense – (aka industry practice) to avoid or minimize its liability.

Near the end of September, the United States District Court concluded that an employer and its president misclassified employees as independent contractors and would be, therefore, liable for unpaid overtime and failing to maintain records of hours worked. Solis v. Cascom, Inc., Case No. 3:09-cv-257 (S.D. Oh, 9/21/11). The Fair Labor Standards Act essentially classifies everyone as an employee who is permitted to work and expects compensation (i.e., not true volunteers). However, it impliedly does not include paying overtime to independent businesses (such as those firms advertising in the yellow pages or on their own commercial websites). Courts typically apply the economic realities test, and the outcome depends on a number of factors and the facts of each individual case.

In this case, the Court found a number of factors weighed strongly in favor of finding the individuals to be employees and not independent contractors:

1) Employer’s right to control the manner in which the work is performed.

This factor weighed heavily in favor of employee status. The individuals completed employment applications, were hired for indefinite periods under terms that could be changed at any time by the defendant employer and, for liability reasons, were not allowed to hire their own assistants without the employer’s permission. Moreover, the employer controlled both the manner and means of performing the work: scheduling their appointments on a take-it-or-leave it basis, requiring them to remain on each job until dismissed by their supervisors, providing detailed training and instructions and requiring the completion of the employer’s forms. The employer also required mandatory attendance at meetings, required them to wear shirts and drive cars with the company logo and required them to seek permission in advance to take a day off work. In addition, the employer also made deductions from pay for errors and other customer issues that were sometime beyond the employee’s control. Most importantly, the individuals were performing the primary work of the company. Indeed, they were the only individuals performing the work that constituted the company’s core business: cable installation.

2) Alleged Employee’s Opportunity for Profit or Loss Depending upon Own Managerial Skill

This factor also weighed in favor of employment status because there were no opportunities for the individuals to increase their profit based on managerial skill (such as scheduling, material acquisition, hiring assistants, etc.). The only way to earn more money was to work longer hours.

3) Alleged Employee’s Investment in Equipment or Materials Required for His Task, or His Employment of Helpers

The Court found this factor to be neutral. The individuals did not invest in advertising or hold themselves out as independent entrepreneurs. They were, however, required to purchase their own tools (and could do so from the employer through payroll deduction) and to supply their own vehicle (or lease one from the employer). The employer provided the materials to be installed.

4) Requirement of a Special Skill to Render the Service

This favor also weighed in favor of employment because the job required minimal skill which could be apparently taught to anyone with six weeks of on-the-job training.

5) Degree of Permanence of the Working Relationship

This favor also weighed in favor of employment because the individuals were treated like at-will employees and remained employed for as much as several years.

6) How Integral the Services Are to the Employer’s Business

This favor weighed very heavily in favor of employment. “More than integral, more than core, cable installation was the entirety of Cascom’s business.”

Finally, the Court rejected the employer’s good faith defense that it was simply following an industry practice: “As for industry standards, “the law...is that ‘simple conformity with industry-wide practice’ fails to demonstrate good faith under the FLSA.”

Employers who are found to have misclassified employees as independent contractors can find themselves liable for unpaid overtime (for the past 2-3 years), unpaid state and federal employment taxes, tax penalties and possible liability under health insurance and pension plans. When the DOL announced its new enforcement agreement with the IRS, the IRS also announced an amnesty program encouraging employers to fix misclassified employees by paying only 1% fines, but does not cover any potential liabilities to state tax agencies or to the individual employees for back pay and pension obligations.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

NLRB Delays New Posting Requirement Until 2012

[Editor's Note: Just in time for Xmas, the NLRB announced that the new requirement would be delayed yet again (at the request of a federal court hearing an employer challenge to the new rule) until April 30.]

Yesterday, the NLRB announced that it was delaying from November 14 until January 31, 2012 the new requirement for employers to post a notice explaining employees' rights under the National Labor Relations Act. The reason given is to give the NLRB time to reach out and educate small and medium sized employers as to who is and is not subject to the NLRA.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Compensation Records Concerning Non-Profit Employees Can Be Public Records in Ohio

Last week, the Ohio Supreme Court issued a unanimous public records decision involving a private non-profit organization/joint insurance pool for 66 counties. State ex rel. Bell v. Brooks, Slip Opinion No. 2011-Ohio-4897. The plaintiff had submitted a public records request to the entity seeking a wide variety of records. The entity responded that it was not subject to Ohio’s Public Records Act because it was not a public office. It was a private, non-profit that was exempt from federal taxation as a governmental instrumentality. 88% of its funding came from contributions from the member counties. However, its governing board consisted only of nine individual county commissioners. Examining a number of factors, the Court had no trouble concluding that it was not the functional equivalent of a public office, was not the alter ego of a governmental entity and did not perform traditional government functions.

However, one provision of Ohio’s Public Records Act applies to private, non-profit entities which receive more than 50% of their funding from government entities. With certain exceptions for confidential client/patient records, Ohio Revised Code §149.43 provides in relevant part that:

Any governmental entity or agency and any nonprofit corporation or association, except a corporation organized pursuant to Chapter 1719 of the Revised Code prior to January 1, 1980 or organized pursuant to Chapter 3941 of the Revised Code, that enters into a contract or other agreement with the federal government, a unit of state government, or a political subdivision or taxing unit of this state for the provision of services shall keep accurate and complete financial records of any moneys expended in relation to the performance of the services pursuant to such contract or agreement according to generally accepted accounting principles. Such contract or agreement and such financial records shall be deemed to be public records as defined in division (A)(1) of section 149.43 of the Revised Code and are subject to the requirements of division (B) of that section, . . . .

Any nonprofit corporation or association that receives more than fifty per cent of its gross receipts excluding moneys received pursuant to Title XVIII of the “Social Security Act,” 49 Stat. 620 (1935), 42 U.S.C. 301, as amended, in a calendar year in
fulfillment of a contract or other agreement for services with a governmental entity shall maintain information setting forth the compensation of any individual serving the nonprofit corporation or association in an executive or administrative capacity. Such information shall be deemed to be public records as defined in division (A)(1) of section 149.43 of the Revised Code and is subject to the requirements of division (B) of that section.

(italics emphasis added by Court).

Because the respondent entity arguably fit within this statutory section, the Court remanded the matter back to the trial court to determine whether the plaintiff was entitled to financial
and employee compensation records under the Ohio Public Records Act.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Franklin County Court of Appeals Affirms Dismissal of ADA Claim Brought by Former Drug Addict Who was Fired After Volunteering for Strip Search After Theft Accusation.

Last week, the Franklin County Court of Appeals upheld a summary judgment in favor of a fast food employer concerning a claim for disability discrimination brought by a former employee who had been fired for theft. Turner v. Shahed Enterprises., 2011-Ohio-4654.
The plaintiff was a recovered drug addict and convicted drug offender who was hired by the restaurant after she successfully passed a pre-employment drug screen (which was apparently not administered to any applicants who had not identified prior drug convictions). After an employee identified the plaintiff as being seen placing $50 in her pocket shortly after money went missing from the manager's desk, the plaintiff was confronted with the accusation. She volunteered to undress to disprove the accusation and the assistant manager permitted her to do so in the restroom. The money was later found near the plaintiff's work station in an area where all of the other employees also had access. The plaintiff was interviewed and release by police officers, but was still fired the next day. The plaintiff claimed that she was discriminated against on account of her former addiction when she was required to submit to a drug test when other employees were not, when she was required to undress to disprove the theft accusation, and when she was fired for attempted theft.

First, the Court found that requiring the plaintiff to submit to a pre-employment drug test was not a material adverse job action that could support a claim for discrimination. Further, the Court found it permissible for employers to adopt reasonable drug testing procedures to ensure that recovered addicts did not (or had not) relapsed. The ADA specifically provides that it shall not be a violation of the ADA for an employer to adopt or administer reasonable policies or procedures, including but not limited to drug testing, designed to ensure that recovered or recovering individuals are no longer engaging in the illegal use of drugs. 42 U.S.C. §12114(b).

Second, the Court found that the employer lawfully terminated the plaintiff because it believed that she had attempted to steal $50 based on the accusation of a co-worker and the fact the money was eventually found near her work area. While another employee could have placed the money there and it was not found on the plaintiff, that the employer may have been mistaken does not mean that it was not motivated by its belief that she was a thief. The plaintiff could identify no evidence that her status as a recovered addict was the actual reason that she was terminated in light of the theft investigation.

Finally, the Court dismissed her invasion of privacy claim because she had volunteered to undress in front of the assistant manager to prove her innocence even after she was told that it would not be necessary:

Based upon the undisputed evidence, appellant voluntarily undressed in front of an assistant manager, while in a private bathroom, in order to show that she did not have the missing money on her person. Nobody asked her to undress. Rather, appellant was instructed that she did not have to undress, and she insisted in an attempt to exonerate herself. The expectation of privacy appellant now seeks to protect was lost when she undressed on her own volition.

The outcome would probably have been different if she had been threatened with termination if she did not agree to a strip search.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

NLRB Makes Union Organizing Easier in Long-Term Care Facilities

In late August, the NLRB issued a 3-1 decision overruling the 1991 Park Manor Care Center decision, which has governed the scope of new bargaining units outside the acute care (i.e., hospital) setting and held that parties who object to the scope of a new bargaining unit in long-term care facilities must demonstrate “an overwhelming community of interest” between the employees included in the petitioned unit and the excluded employees. In other words, a petitioned unit will be deemed appropriate if it contains employees who are readily identifiable as a group and who share a community of interest. Specialty Healthcare and Rehabilitation Center of Mobile and United Steelworkers, 357 N.L.R.B. No. 83 (Aug. 26, 2011). In Specialty Heathcare, the union sought a nursing home unit that consisted only of 53 certified nursing assistants, but the employer contended that the unit should consist of all non-professional and service employees, including maintenance workers, cooks, dietary aides, recreational aides, medical records clerks and clerical employees. This would add 33 additional employees to the unit. The decision is significant because it will make organizing employees in nursing homes much easier for unions if they can convince a majority of a smaller group of employees to vote in favor of the union and then slowly and steadily expand the unit over time to include additional groups. It will also mean that nursing home employers may face multiple unions among its workforce (and multiple bargaining agreements with differing deadlines and benefits, and multiple strikes, etc.). The Board indicated that this is the general rule for organizing all employees outside of the acute care industry.


NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.