DOL Enforcement On Employee Misclassification
by Courtney Barksdale Perez and Stacey Cho
Since announcing its Misclassification Initiative in September 2011, the U.S. Department of Labor (DOL) continues to make employer compliance with the Fair Labor Standards Act (FLSA) a top priority, with particular focus on the misclassification of employees as independent contractors. In July 2013, the DOL confirmed its commitment to the Misclassification Initiative, characterizing employee misclassification as “workplace fraud.”
From the DOL’s perspective, misclassification deprives the government of valuable tax and unemployment insurance revenue. As part of the Misclassification Initiative, the DOL works closely with other agencies including the IRS to share information in a coordinated effort to reduce employee misclassification. The DOL has also initiated Memoranda of Understanding with 14 states (excluding Texas) to uncover and remedy misclassification.
The Misclassification Initiative has dramatically changed wage and hour litigation and increased the number of FLSA cases filed across the country. Since the Misclassification Initiative was launched, the number of FLSA cases filed in the federal courts increased 27.8 percent from 6,336 in 2011 to 8,152 in 2012. As such, misclassification issues provide fertile soil for individual actions and collective actions filed by similarly classified workers. These cases are proving profitable for plaintiff’s attorneys and the DOL. The Wage and Hour Division (WHD) has collected more than $9.5 million for than 11,400 misclassified workers since 2011, reflecting an 80 percent increase in back wages paid and a 50 percent increase in the number of workers receiving back wages. The DOL shows no signs of curbing its enthusiastic enforcement efforts, setting aside $10 million of its FY 2013 budget to detecting and deterring employee misclassification.
This focus has also influenced legislation. At the federal level, lawmakers have proposed the Employee Misclassification Act, Payroll Fraud Prevention Act, Fair Playing Field Act, Rebuild America Act, and the Independent Contractor Tax Fairness and Simplification Act addressing misclassification issues. Most recently, the DOL proposed a $1.9 million survey of more than 10,000 workers to explore the extent of misclassification by gauging workers’ awareness of employment laws, job classifications, rights and benefits associated with their job status and the consequences of being misclassified as an independent contractor. The DOL hopes that the results will support its proposed “Right to Know” regulations that would change the FLSA recordkeeping requirements to require employers to expressly inform workers of their work status and how their pay is computed.
At the state level, in July 2013, Governor Rick Perry signed House Bill 2015, which establishes penalties for those who misclassify employees as independent contractors on state contracts. The law was passed after a study conducted by the University of Texas revealed that 40 percent of construction workers in Texas were misclassified as independent contractors. Like the construction industry in Texas, the WHD is focused on industries that historically have employed vulnerable workers, including transportation and warehousing, agriculture, home healthcare, childcare, janitorial, meat and poultry processing, hotel/motel, personnel services, landscape, restaurants, catering, guard services and healthcare facilities.
Employers, and those who represent them, should carefully evaluate employee classification. Review the treatment and classification by each group and ensure consistent treatment of those providing similar services to avoid expensive FLSA collective actions. If a court must decide the issue, the Fifth Circuit applies the Economic Realities Test to determine whether an individual is an employee or independent contractor, and therefore not covered under the FLSA. The factors include: (1) degree of control exercised by the employer; (2) extent of the relative investments of the worker and the employer; (3) degree to which the worker’s opportunity for profit or loss is determined by the employer; (4) skill and initiative required in performing the job; and (5) permanency of the relationship. This determination is not always clear, and no single factor controls, but a well-written agreement that speaks to these factors can help establish an independent contractor relationship. These steps can minimize exposure by ensuring that the relationships between employers and workers are properly structured, documented and implemented.
Courtney Barksdale Perez is Of Counsel and Stacey Cho is an Associate at Carter Stafford Arnett Hamada & Mockler, PLLC, and can be reached at email@example.com or firstname.lastname@example.org, respectively.