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.

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.

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

Secretary of Labor Hilda L. Solis inadvertently just got a little help from her friends over at Homeland Security.  ICE dropped off more than 650 audit notices yesterday and to pull off that number of audits it will take a heap of cash!

Solis should have no trouble obtaining the funds she needs to help get her own house in order.  Solis is on a mission after receiving a copy of the release of a Governmental Accountability Office (GAO) report she announced the department’s system for receiving and responding to wage and hour complaints is ineffective and discourages wage-theft complaints.   “The department’s Wage and Hour Division has already begun the process of adding 150 new investigators to its field offices to refocus the agency on these enforcement responsibilities.” In addition, under the American Recovery and Reinvestment Act, the agency will hire 100 investigators to ensure that contractors on stimulus projects are in compliance.

The DOL is poised to receive a whopping $1.7 Billion dollars to help bolster worker protection programs putting every employer on notice. Sneak peek at who gets what if Solis has it her way. Leading the pack the Wage & Hour division is to receive $228 million and 200 new auditors, and then there is OSHA – $560 million and 160 new auditors.

Ouch!

Last week Minneapolis based Michelle Drake, attorney for a troupe of strip club dancers, filed suit against a strip club in federal court.  Drake claims this s a clear case of worker misclassification and in violation of both state and federal wage and hour laws. Drawing similarities between the strippers and hair stylists citing the only difference between the two ”the stylist is considered an employee and gets a wage, whereas the dancer is forced to work only for tips and “pay for the pole. Drake is demanding the same protections for her clients automatically supplied to hourly employees. 

All workers deserve protections from opportunistic employers who take advantage of unsuspecting employees. This case is certainly interesting when applying the smell test and control factors to determine worker status. Several characteristics of an independent contractor are present and perhaps the culprit. Renting a pole or a chair, freedom to choose the costumes/uniform of the day or night and payment at the end of the job may have been enough for the employer to decide to pay as freelancers. Although similar cases have been filed and won by dancers in California, Alaska and Texas this industry continues to operate outside the laws.  Legacy industry standards are often difficult for some employers to abandon especially when the service offering is as lucrative as this. With no regulation or industry watchdogs worker violations can easily be overlooked or simply missed.

Employers must remember to exercise caution when classifying workers. Evidence of control of a worker regardless of execution can result in an unfavorable outcome. Although no evidence an employer ever exercises control, the mere fact the right to control exists can be enough to reclassify to employee status.