BNA Daily Labor Report, November 19, 2010, Friday

BNA Daily Labor Report

November 19, 2010, Friday

BNA Daily Labor Report

Independent Contractors
Labor Solicitor Says Proposed Rule On Misclassification Is ‘Not Imminent'

NEW YORK—Issuance of a Labor Department notice of proposed rulemaking on employee misclassification is “not imminent,” although the issue remains a high priority for the department, Labor Solicitor M. Patricia Smith said Nov. 18.

Speaking at an enforcement update program sponsored by Cornell University, Smith noted that the proposal, which would amend Fair Labor Standards Act recordkeeping rules, was listed on the DOL spring regulatory agenda in April. But a final draft is not complete, she reported.

“It's a long way from the scribe's hand at the Labor Department to publication in the Federal Register, even for a proposed rule,” she said. “Many eyes will look at it, and what ends up in the proposed rule, or whether that proposed rule will be published, remains to be decided.”

Calling the project one of the highest priorities of Labor Secretary Hilda Solis, Smith suggested that “there will be a rule, in one form or another.” If it takes the form of a notice of proposed rulemaking, she said, that “would probably be in the spring” of 2011, she said.

Smith recommended a DOL webpage on the plan and encouraged comments from both the employer and the employee sides. “We really want to hear from people,” she said. “We take these comments very seriously.”

Among other things, the rulemaking project would require an employer that is making a classification to decision to complete a written analysis, notify the employee, and retain the analysis as an FLSA record, Smith said. It would also require wage and hour information on pay stubs, she added.

Asked about certain details in the draft, however, Smith declined to elaborate, calling it “definitely a work in progress.”

Collaboration With States, IRS

As part of its effort to step up misclassification enforcement, DOL has joined with more states in memoranda of understanding for data-sharing, cross-referrals, and joint enforcement, Smith reported. The Obama administration budget proposal calls for $25 million in grant money to aid states in misclassification enforcement, she said.

“Historically, the states have been ahead of us on this,” she said. “We want to learn from them and increase our cooperation.”

DOL is also in discussions with the Internal Revenue Service on making misclassification cross-referrals, Smith said.

Although the IRS cannot share individual tax return information, “they have data from audits that we can use” to better target industries or geographic areas for enforcement, she said.

The talks with the IRS remain in an early stage, Smith suggested.

Regional coordination is also part of the enforcement plan, with a designated misclassification “expert” assigned to each DOL regional solicitor's office, Smith reported.

UI Rule Changes to Help State Audits

The department also will be changing federal unemployment insurance rules to make it easier for states to better target its UI audits for misclassification, replacing a random audit system intended to cover 2 percent of employers annually, she said.

With the states borrowing billions from the federal government to cover UI shortfalls, they both “have an interest in making sure taxes are being paid into the trust funds,” Smith added.

Although the IRS cannot share individual tax return information, “they have data from audits that [DOL] can use” to better target industries or geographic areas for enforcement, Smith said.

On the federal legislative level, Smith said she “would not be surprised” if Congress were to pass a bill to tighten misclassification enforcement, given the potential it would offer to increase tax revenues.

Identical misclassification bills have been introduced in the House (H.R. 5107) and Senate (S. 3254), and another Senate bill (S. 2882) would close a tax law safe harbor for employers hiring independent contractors (129 DLR A-12, 7/7/10).

“Any bill that purports to put more money into the Treasury is more likely to pass,” Smith said.

In another update, Smith said in response to an audience question that the department is “looking very closely at alternative business models” such as franchise relationships, in which it can be unclear what entity employs the workers.

Investigators are being trained to familiarize themselves with an industry's employment relationships “so they'll know what questions to ask” when they look into a franchise operation. Strategies are also being considered to “go up the food chain” to determine ultimate responsibility for employment relationships in a workplace or industry, she indicated.

New York Enforcement

In a presentation on state enforcement, Jennifer Brand, executive director of the New York Joint Enforcement Task Force on Employee Classification, reported that 19 other states have started similar task forces since the New York project's launch in September 2007.

A nine-state regional council also has been established to compare notes and share information, Brand said.

In three years, she reported, the New York effort has uncovered $500 million in unreported wages through enforcement coordination by state agencies.

In one tool, wage cases are now routinely analyzed for tax and UI implications, Brand said. “We're not leaving half the case on the floor anymore,” she said. “We're making sure the workers get their money and the government gets its money too.”

To address “rampant” misclassification and off-the-books employment in construction, Brand reported, the state in August enacted a law setting out new requirements for construction employers to fulfill to rebut a presumption that all their workers are employees (169 DLR A-8, 9/1/10).

The Construction Industry Fair Play Act lays out a three-part “ABC” test to determine whether a worker is an employee or an independent contractor and carries fines of up to $2,500 per misclassified employee, she said.

‘Minefield’ for Employers

Laurie Berke-Weiss, a partner in the New York law firm Berke-Weiss & Pechman, warned management attorneys that “your clients may need you more than ever to navigate through a minefield that has become more dangerous.”

Employee classification violations “have always been costly,” she said, “but enforcement agencies are really getting together to get their piece of the money.”
The business models of some employers could come under greater scrutiny, Berke-Weiss continued.

“Some employers are treading on dangerous ground, and we need to steer them away from that,” she said. “The mere fact of having a written agreement [for an independent contractor relationship] does not get you off the hook.”

Federal and state DOL websites, Berke-Weiss added, “have enough information on this to make you an expert, if you take the time.”

But the factual situations can be quite complicated, she warned. “The relationship is not defined but what the participants call it,” she said. “It depends on the facts. But no one set of facts is conclusive.”

Employers need to ensure that their hiring practices withstand the necessary tests, but the tests “are circular, with no bright line they can look to,” Berke-Weiss said. Moreover, conflicts in the case law can complicate the picture, she said.

Urging practitioners to familiarize themselves with their clients' businesses to better understand the totality of the circumstances, she said: “You have to decide what the best course is to recommend to your clients, and it's not always an easy call.”

The event was presented by the Cornell ILR School's New York-based Labor and Employment Law Program, in conjunction with Cornell Law School.