Worker Classification Could Have Huge Impact on Employers

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WASHINGTON—The U.S. Department of Labor (DOL) is continuing its aggressive enforcement push—challenging the misclassification of employees as independent contractors—and employers need to be attentive to the trend, an employment attorney warned an audience of Society for Human Resource Management (SHRM) members March 14, 2011.

Howard M. Radzely, a partner in the Washington, D.C., office of Morgan, Lewis & Bockius, told attendees at SHRM’s 2011 Employment Law & Legislative Conference that DOL leadership is determined to pursue misclassification cases aggressively, and he urged businesses to carefully examine their compliance with the law. Radzely served as solicitor of labor and deputy secretary of labor during the Bush administration.

Radzely reminded the audience of the Obama administration’s regulatory and enforcement agenda “Plan, Prevent, Protect,” intended to be a fundamental department-wide shift away from “catch me if you can” compliance to one of placing the onus on employers to “assemble plans, create processes and designate people charged with achieving compliance.”

Dismissing Plan, Prevent, Protect as a “rhetorical, overarching rubric,” Radzely advised HR personnel to focus more on specific rules and enforcement techniques to stay in compliance, such as the Wage and Hour Division’s (WHD) “Right to Know Under the Fair Labor Standards Act,” that, if promulgated, would require employers to perform a written classification analysis for every worker that is excluded from Fair Labor Standards Act (FLSA) coverage. (Read Right-to-Know Regulations Expected from DOL).

'Right to Know'
“ ‘Right to know’ is the most worrisome thing out there on the employment enforcement horizon,” Radzely said, calling it “a major concern for employers and raising a significant number of attorney-client problems.”

Radzely said he expects that “right to know” would require employers to notify employees of their status under the federal wage and hour law, including the basis for treating them as FLSA-exempt workers, and might require employers to provide similar notice to individuals classified by the business as independent contractors. The rule also could require employers to turn over to DOL, on request, their analyses of workers’ statuses as employees or independent contractors, he said.

Radzely cautioned that adoption of such a rule could pose difficult issues of attorney-client privilege for employers whose lawyers provide advice concerning classification of workers.

In light of the recent “Bridge to Justice” DOL-American Bar Association Attorney Referral Program—in which the DOL refers claimants to plaintiffs’ lawyers when the department decides not to investigate claims itself—there is every reason to anticipate that information compiled under the requirements of the right-to-know regulations will wind up in the hands of claimants and their lawyers, Radzely said.

The proposal might also provide that a negative presumption would be applied against an employer that failed to perform a required analysis of a worker’s status, a development Radzely said could be a distinct negative for employers.

Currently employers are not required keep a written analysis of why an employee is exempt. Generating these records will be a time-consuming task for employers who have a large number of exempt workers, “creating a nightmare for HR professionals,” Radzely said.

The right-to-know proposed rulemaking is scheduled for April 2011, with a likely 60- to 90- day comment period, but the DOL is unlikely to meet that date, Radzely said, predicting the proposed rulemaking “sometime later this year.”

Precautionary Measures
Radzely offered practical suggestions for employers, advising them to consider self-audits of job classifications and job descriptions to determine if employees are properly classified. Equally important, review pay policies including bonuses and deductions to ensure properly paying on a salary basis or properly calculating overtime, and to make sure that there are no improper deductions that could jeopardize an exemption, he said.

He also advised employers to be more cautious when approaching DOL for a supervised settlement if a possible FLSA violation is discovered.
“Consider having outside counsel approach DOL initially without identifying the client,” he said.

In addition, employers should examine all independent contractor relationships and take steps to maintain independent contractor status, including but not limited to:
• Not treating employees and independent contractors the same.
• Not over-utilizing independent contractors
• Not allowing independent contractors to perform core functions.

Source: Society for Human Resources Management