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Jul 2011
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July 28, 2011

DOL Turns Its Attention To Employee Misclassification


Is the Fair Labor Standards Act, a 73-year-old law that established a minimum wage and overtime rules, meeting the needs of 21st Century America?

Republicans in Congress are pretty sure it isn’t, which is why Rep. Tim Walberg of Michigan called a hearing on the issue on July 14. Also, the U.S. Department of Labor has stepped up FLSA enforcement. That makes this a perfect time to highlight a few aspects of the law with Warner Norcross & Judd labor attorney Steve Palazzolo, an FSLA expert..

Specifically, he says the the DOL Wage Hour Division is cracking down on employee misclassification; that is, whether an employer classifies a worker as an actual employee or an independent contractor.

By classifying workers as independent contractors instead of employees, companies reduce the amount of money they’re paying into Social Security and Medicare. In turn, the worker is losing out on paid vacation, compensation for sick time and access to health-care benefits.

The misclassification of an estimated 7.4 percent of the workforce means federal revenues are diminished by $2.7 billion, the General Accounting Office said in 2009.

Two key factors – control and the economic realities of the situation -- determine whether an employer may classify a worker as an independent contractor, Palazzolo says.

Control pertains to how and when the work gets done, Palazzolo says. The independent contractor provides his/her own tools to get the job done, sets his/her own hours in an attempt to meet deadlines and works outside of the employer’s office.

When a worker is “captive” to one company, as opposed to collecting paychecks from many different employers, the DOL is likely to frown upon classification as an independent contractor, Palazzolo says.

“The DOL and the IRS are looking,” he says. “If you get audited on a regular basis, IRS auditors are looking at 1099s now. You’re going to have to explain why someone is or is not an independent contractor.”

Misclassification means the employer will have to pay all the taxes it should have withheld and also may be subject to penalties.

The other misclassification issue that has the DOL’s attention pertains to exempt (salaried) and non-exempt (hourly) employees. It’s a component of what some are more broadly calling “wage theft.”

“The problem is that the government wants you to get overtime, but the business world does not.” Palazzolo says. A whole lot of companies classify workers as salaried even though they don’t fit into the FLSA’s definition of exempt employees.

“Most employers aren’t necessarily trying to skirt the law. They think they’re doing the right thing, they just don’t know,” he says.

While there are exceptions, in order for an employee to be classified as exempt, the employee must be paid a salary of at least $455 a week and must pass the “duties test.” The most common exemptions are the “white collar” exemptions and include exemptions for executives, professionals or administrative employees. “But don’t let the names fool you, these exemptions are pretty narrow. They don’t include as many types of employees as you might think,” Palazzolo says.

Employers who misclassify employees as exempt when they should be non-exempt can be subject to double damages going back to two years and may have to pay the employee’s legal fees, too.

In the recent hearings, Walberg defended his inquiry into the FLSA, saying the law has led to “unintended consequences.” He pointed out that it was written for a Depression-era workforce, which is dramatically different from “the needs of a workplace shaped by the innovations of Bill Gates.”

Please contact Warner Norcross & Judd labor attorney Steve Palazzolo (616.752.2191 or spalazzolo@wnj.com) if you have questions about the FLSA or the DOL crackdown.
 

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