Fighting ‘Wage Theft’ - a Key Dept of Labor Priority

Today, Wage & Hour class actions outnumber all other discrimination class actions combined, with huge settlements averaging $23.5 million at the federal level and $24.4 million at the state level. “It’s been a perfect storm for Wage & Hour class and collective actions against employers,” said Shanti Atkins, president and CEO of ELT. “Employers are being hit from two sides. On one, there is a better funded, more fully staffed Dept. of Labor (DOL) that has made fighting ‘wage theft’ one of its key priorities. On the other side are aggressive plaintiff law firms that literally salivate at these easy-to-identify and easy-to-win, lucrative class actions.”

• 83% of the class/collective action lawsuits filed in federal or state courts in 2009, were Wage & Hour related complaints.
• Non-government Wage & Hour settlements in 2009 grew 44% over 2008.
• Settlements for the top 10 federal Wage & Hour lawsuits increased from $253 million in 2008, to $364 million in 2009.
• Secretary of Labor, Hilda Solis: “Make no mistake, the DOL is back in the enforcement business.”
  • DOL added 250 investigators in 2010 – increasing the total number of investigators by 1/3.
  • DOL is adding 90 more investigators in 2011 with another $20 million increase in the enforcement budget.

DOL’s New Enforcement Strategy – Plan / Prevent / Protect

In addition to the Spring 2010 Regulatory Agenda, the DOL announced a new enforcement strategy; moving from “catch me if you can”, to “Plan/Prevent/Protect.” Employers are required to proactively “find and fix” violations — that is, assure compliance — before a Labor Department investigator arrives at the workplace. Employers should be aware that the burden is on them to obey the law, not on the Labor Department to catch them violating the law.

Requirements for employers include assembling plans, creating processes, and designating individuals who will be charged with achieving compliance. Additionally, employers must move forward with both implementing these plans and evaluating their effectiveness in achieving compliance.  Those who fail to take these steps will be considered out of compliance with the law, and subject to remedial action.

Fifty-four percent of the respondents to a 2010 ELT survey of more than 1,800 senior legal and HR professionals, indicated that despite the troubled economy their organization has increased its 2010 spend on Wage & Hour compliance.

As you can see, it is increasingly imperative for employers to update their Wage & Hour Compliance programs to mitigate Wage & Hour risk in today’s business environment.

When companies mistakenly classify workers as Independent Contractors, the worker looses access to benefits, overtime and other rights they  are entitled to.   Aside from the workers, both state and Federal governments lose out as well.  Often, misclassified workers fail to realize they are obligated to pay their own quarterly taxes and that these obligations, normally withheld from their regular paycheck, are now their burden to pay out.  In fact, an IRS estimate of the tax gap caused by self-employed individuals (including independent contractors) put this figure at a stunning 20.3 billion.  Given this information, it is no small wonder that 23  states have passed legislation over the past few years targeting this specific issue, and why the Federal Government has allocated an additional 25 Million towards hiring enforcement personnel and providing grants to states to encourage legislation.   

If you are even mildly familiar with this topic, you are well  aware of the government’s vested interest in combating misclassification.  However,  were you aware that Labor unions are actively seeking to unionize workers who feel they have been misclassified as  independent contractors? A coalition of labor unions has been backing legislation to prevent the misclassification of employees as contractors. There are several bills the unions are urging their members to support to fight this type of wage theft, including the Wage Theft Prevention Act, the Fair Playing Field Act, and the Wage Theft Prevention and Community Partnership Act.

Businesses who use independent contractors in fields where unions are prevalent should be cautious of this classification.  In backing this legislation, unions seek to limit this use of ICs and as a result, expose more workers to union organizing.  Labor unions take the stance that worker’s rights are being taken away when they are classified as independent contractors.

On Tuesday the Attorneys general from New York, New Jersey and Montana issued a letter of warning to FedEx regarding its current independent contractor driver model.  If FedEx would not abandon its current independent contractor model for home delivery drivers they would be forced to bring suit against the shipping giant. 

The letter contained harsh accusations like “blatantly misclassifying its drivers”; FedEx Ground has denied these individuals the employment rights guaranteed by law. Practices which would support the allegations of worker misclassification and cited by the AG’s; the work performed is a core competency of FedEx Ground, drivers integrated into business functions of the company, determines the hours drivers work, how they load and deliver packages, and limits the drivers ability to compete other employment. The inability to work for the competition clearly creates financial dependency on Fed-Ex similar to that of an employee.  

More than 1,000 drivers would be impacted by the changes should FedEx cave in under the pressure from this powerhouse. FedEx must respond with a decision by October 27, 2009 a deadline that is fast approaching.  Should Fed-Ex disregard the letter the AG’s will have little choice but to file suit. The AG’s are confident they would win the suit based on its findings during the investigation of FedEx worker practices. According to the AG’s there is more than enough evidence of worker misclassification. 

The suit is being called a “multistate effort” and this is not the first time this issue has come up with Fed-Ex. Earlier this year in June attorneys general from six other states wrote to FedEx Ground, demanding changes to the existing driver model. States are teaming up forming a task force in hopes of pressuring FedEx Ground to change its driver business model.

No money to conduct random audits? Are furloughs wreaking havoc on your ability to deploy auditors?  One state finds a creative way to uncover a few employees and drum up payroll taxes simply by advertising free self-classification classes! 

 Iowa Workforce Development is advertising assistance with proper worker classification to contractors. Just think in one hour you too can become an expert in worker classification.  You will learn how to tell the difference between an employee and independent contractor and determine if you are properly classified!  The goal at the end of the class is to make you an expert and help the state reduce the number of misclassified workers in Iowa.  “Getting the classification correct is critical for tax, wage, unemployment, workers’ compensation and other employment issues.   Getting it wrong can cost an employer$$”.

This offering is just another example of what lengths the states will go to in order to demonstrate the renewed emphasis of enforcement by federal and state regulators.  Misclassified workers step forward to be reclassified; employers are identified then fined resulting in a new flow of future payroll tax revenues.  What a great way to get the cash flowing into the state and federal governments empty coffers! 

FedEx plans to challenge the IRS finding from the audit however final resolution any time soon highly unlikely.

“We believe that we have strong defenses to the proposed assessment and will vigorously defend our position, as we continue to believe that all of FedEx Ground’s independent contractors, including those providing the FedEx Home Delivery service, are independent contractors,” FedEx said in the filing.

The IRS is also reviewing Fed-Ex for similar issues related to tax years 2004 - 2008.

Looks like Larry the Cable Guy has company. Communications companies are being bombarded with worker claims of unpaid overtime , worker misclassification and unlicensed workers. Joseph Valdez, cable installer filed a lawsuit against several cable giants claiming he was cheated out of unpaid wages. Attorneys for the plaintiff have accused the cable companies of worker misclassification and unpaid overtime. The overtime claim is not warranted in a case where the workers were hired as independent contractors. Is this a clear cut case of employer intentional misclassification paying the workers as independent contractors to avoid employer obligations? Perhaps it’s a simple case of misinformed cable companies duped by its sub-contractors providing the installers. Often a company finds itself in the middle of a legal dispute due to ignorance of the subcontractor’s actual relationship with its workers. These companies enter into an arrangement with the subcontractors under the impression the workers are paid as employees after all the contract prohibits them from supplying 1099 contractors. The unsuspecting company is totally unaware of any misconduct. Typically an organization will engage a subcontractor and assume they operate a legitimate business.  Only when a worker files a complaint against the subcontractor do they become painfully aware of a bad employment arrangement and stuck in the middle of a hellish nightmare!

In June a former cable installer filed suit against RCN Corp. claiming he was an employee and not an independent contractor. Fritz and more than 1,000 other U.S. installers are paid as “independent contractors and recognize this arrangement has ripped them off for years.  They claimed they have been deprived of overtime and other employee benefits enjoyed by RCN employees.

An unsuspecting business can sidestep these types of legal problems by taking time to run a thorough check on its subcontractors. A couple of phone calls and a few hard hitting questions about its hiring practices may turn out to be time well spent! 

Why would an employer intentionally misclassify a worker and how would they benefit from this practice?