2015 EMPLOYMENT LAW UPDATES; - PowerPoint Presentation

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2015 EMPLOYMENT LAW UPDATES;WORKER MISCLASSIFICATION AND OTHER ISSUES OF CONCERN

By: Sarah R. Johnson and Daniel N. Janich

Holifield & Associates, PLLC Greensfelder, Hemker & Gale11907 Kingston Pike, Suite 201 200 W. Madison, Suite 2700Knoxville, Tennessee 37934 Chicago, IL 60606sjohnson@hapc-law.com dnj@greensfelder.comPhone: (865) 566-0115 Phone: (312) 345-5003Fax: (865) 566-0119 Fax: (312) 419-1930www.holifieldlaw.com www.greensfelder.com

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WHAT WE WILL ADDRESS

EMPLOYER CONSEQUENCES OF WORKER MISCLASSIFICATION UPDATES TO EMPLOYEE HANDBOOKSEMPLOYEE BACKGROUND CHECKSTENNESSEE DISCRIMINATION AND RETALIATION CLAIMSTENNESSEE EMPLOYEE ONLINE PRIVACY ACT OF 2014

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WORKER MISCLASSIFICATION;WHY IS IT OF CONCERN?

INCREASED USE OF A CONTINGENT WORKFORCE (See: “Shocker: 40% of Workers Now Have ‘Contingent’ Jobs, Says U.S. Government by Elaine Pofeldt, Forbes, May 24, 2015, http://www.forbes.com/sites/elainepofeldt/2015/05/25/shocker-40-of-workers-now-have-contingent-jobs-says-u-s-government/)INCREASE IN WORKER MISCLASSIFICATION LITIGATION (FedEx; Uber)MISCLASSIFICATION IS IN THE CROSS-HAIRS OF THE DOL AND IRSINCREASE IN IRS AND DOL AUDITSCOSTLY CIVIL PENALTIES FOR EMPLOYERS FOUND TO HAVE MISCLASSIFIED WORKERS

POTENTIAL CRIMINAL PENALTIES 3Slide4

WHO IS A CONTINGENT WORKER?

Contingent worker is any individual working in a capacity other than as a common law employee:Independent contractors: self-employed workers or freelancers paid directly by service recipient Leased employees: hired and paid by staffing company that contracts with service recipient to provide workers for a fee; considered common law employees of the leasing organization Seasonal, temporary and part-time employees: hired for a limited duration as common law employees, independent contractors, or leased employeesContingent workers are more prevalent in the following industries or professions:

Construction; trucking; “on-demand” workers including technology workers; house cleaners; drivers; in-home health care providers 4Slide5

WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Right to Control TestRIGHT TO CONTROL TEST: The employer controls the result and the “manner and means” of the worker’s performance:

ERISA: Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318, 112 S. Ct. 1344 (1992)Subjective multi-factor test focusing on the hiring party’s right to control and the manner and means by which the work is performedIRS: 20 factor test focusing on the following aspects as indicative of the hiring party’s control: behavioral control (right to direct how and where the worker performs the tasks); financial control (the hiring party has the right to control the business and economic aspects of the worker’s job); type of relationship (how the business and the worker view their mutual relationship – the intent regarding control over the work)

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WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Economic Realities Test

Economic Realities Test applies to the FLSA. The test focuses on six factors (none of which is dispositive) to ascertain a worker’s status:Is the work performed an integral part of the employer’s business?Does the worker have opportunity for profit and loss?Does the worker have overhead?Is there a significant personal investment that the worker brings to the job?

Does the work require special skills or initiative?What is the length of engagement?How much control does the employer have over the job? 6Slide7

WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Economic Realities Test (cont.)

DOL Guidance on the Economic Realities Test: Wage and Hour Division: Administrator’s Interpretation 2015-1 ( July 15, 2015) provides guidance on how the economic realities test should be used by courts to determine whether an independent contractor should be classified as an employee. Whether a worker is an employee under the FLSA is to be determined by “the economic realities of the working relationship between the employer and the worker, not by job title or any agreement that the parties may make.” The factors are not to be “applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.”

The goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor). 7Slide8

WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Economic Realities Test (cont.)

Implications of DOL’s Recent Action: Worker misclassification is in the DOL’s crosshairs leading to aggressive pursuit of employers of independent contractors through audits; Increased scrutiny of independent contractor arrangements at the state level through legislation and the “DOL Misclassification Initiative” (cooperation between individual states and the DOL to combat employee misclassification) that in FY 2014 resulted in more than $79 million in back wages for more than 109,000 employees in the janitorial, temporary help, food service, day care, hospitality and garment industries;Introduction of the Payroll Fraud Protection Act of 2015 that would amend FLSA

DOL also will continue to work with the IRS and 23 states on the misclassification issue through information sharing and coordinated enforcement8Slide9

EMPLOYER PENALTIES FOR MISCLASSIFICATION: IRSPenalties depend on whether the DOL and the IRS determine that the misclassification was unintentional or willful (intentional)

:IRS Unintentional Violations: $50 for each Form W-2 that the employer failed to file because of misclassification; since the employer failed to withhold taxes: 1.5% of the wages plus 40% of FICA and 100% of the matching FICA the employer should have paid; interest on these penalties accruing daily from the date they should have been deposited; failure to pay taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liabilityIRS Intentional Violations (suspicion of fraud or intentional misconduct)

: 20% of all the wages paid, plus 100% of the FICA taxes, both the employee’s and the employer’s share; criminal penalties for up to $1000 per misclassified worker and 1 year in prison 9Slide10

EMPLOYER PENALTIES FOR MISCLASSIFICATION: IRS – Section 530 Safe Harbor

Section 530 relieves a business taxpayer from paying employment taxes on workers previously treated as independent contractors and for whom the business was not paying employment taxes. The business has no employment tax liability if it can show that: it had a reasonable basis for treating the workers as independent contractors by meeting the following criteria:judicial precedent, published rulings or technical advice past IRS audit of the business resulting in no tax assessment on similarly situated independent contractorslong-standing industry practice in the industry in which the worker was engaged It treated all similarly situated individuals as independent contractors; and

It filed all required tax returns including information returns, consistent with the treatment of such workers as independent contractors10Slide11

EMPLOYER PENALTIES FOR MISCLASSIFICATION: DOLFLSA Violations :

Back wages under the supervision of the Wage and Hour Division; lawsuit brought by the Secretary of Labor for back pay and an equal amount as liquidated damages; private lawsuit brought by employee for back wages plus an equal amount as liquidated damages plus attorney’s fees and court costs;Secretary of Labor may obtain injunction to restrain any person from violating FLSA;two-year statute of limitations for recovery of back pay and three-year for willful violations;criminal prosecution for willful violations

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RECENT DEVELOPMENTS IN IMPROPER CLASSIFICATION LITIGATIONFedEX:

In June 2015 FedEx confirmed agreed to create a $228 million fund to settle the decade long California independent contractor case involving about than 2300 FedEx Ground and FedEx Home Delivery pickup and deliver drivers after the ninth circuit ruled in 2014 that FedEx misclassified them as independent contractors. This settlement only covers California drivers, but could impact the resolution of dozens of other FedEx misclassification lawsuits nationwide.On July 8, 2015 the Kansas Supreme Court ruled that FedEx drivers in Kansas are employees as a matter of law under the Kansas Wage Payment ActUBER:On September 1, 2015 Judge Edward M. Chen of the Northern District Court of California issues a 68 page ruling that the Uber drivers could maintain a class action suit on one of their improper classification claims

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The “common law rules applicable in determining the employer/employee relationship” referred to in § 50-7-207(b)(2)(B) were stated in Masters v. Arrow Transfer & Storage Co., 639 S.W.2d 654 (Tenn. 1982) as follows:

“There are a number of indicia to be considered by a trier of fact in determining the existence or nonexistence of an independent contractor relationship, such as (1) the right to control the conduct of the work, (2) the right of termination, (3) the method of payment, (4) the freedom to select and hire helpers, (5) the furnishing of tools and equipment, (6) self-scheduling of work hours, and (7) being free to render services to other entities.” Id., at 656.13

WHO IS AN EMPLOYEE UNDER TN LAW: Common Law TestSlide14

A worker is presumed to be an employee unless it is shown that:(A) Such individual has been and will continue to be free from control and direction in connection with the performance of such service, both under any contract for the performance of service and in fact;

and(B) Such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and(C) Such individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.See Tenn. Code Ann. § 50-7-207(e); see also Stratton v. United Inter-Mountain Tel.,

695 S.W.2d 947, 953 (Tenn. 1985).14WHO IS AN EMPLOYEE UNDER TN LAW: ABC TestSlide15

The Tennessee Supreme Court has stated that a taxpayer must satisfy each of the three parts in the “ABC test” above to establish that a worker is not an employee. The Beare

Co. v. State, 814 S.W.2d 715, 719 (Tenn. 1991).15

WHO IS AN EMPLOYEE UNDER TN LAW: ABC TestSlide16

CONTINGENT WORKERS AND ACA16

Both “small” and “large” employers may be motivated to reduce the number of full time employees through the use of contingent workers either hired or reclassified as independent contractors. Small employers may want to keep the number of full time employees under 50, so that they would not have to provide health insurance.Large employers that do not want to provide health insurance, may want to reduce the number of full time employees to minimize penalties.Slide17

ACA INCREASES MISCLASSIFICATION RISKS – Proceed With Caution!!!

17Unintended consequences of misclassification:Substantially increased risk of DOL and IRS scrutinyPotential “Domino” effect of scrutiny from other governmental agencies

Potentially very high penalties if independent contractors are reclassified by the IRS as employeesPotential need to modify business practicesNOTE: The Final Regulations do not provide Section 530 safe harbor relief because employers need to ascertain who their employees are based on the common law standardSlide18

STAFFING AGENCIES AND ACA18

IRS presumes temporary staffing agencies are the true common law employers of their leased workers and as such ultimately responsible for pay-or-play compliance.Risks – Possibility that user of staffing agency will be deemed “true” common law employer obligated to offer coverage to employees of staffing agency.Recommendation: Include indemnification for “pay-or-play” penalties in contract with agency.Slide19

STAFFING AGENCIES AND ACA (cont.)19

Final IRS Regulations: Applicable when staffing agency is not the common law employer— When the agency makes an offer of coverage to the employee on behalf of the client under the agency plan, the offer is treated as made by the client for pay-or-play purposes

only if the fee the client would pay to the agency for an employee enrolled in health coverage is higher than the fee the client would otherwise pay the agency for the same employee if that employee did not enroll in health coverage.Slide20

WHAT EMPLOYERS SHOULD DO TO MINIMIZE MISCLASSIFICATION RISKS20

Exercise prudence when classifying workers or reclassifying regular full-time employees as independent contractors.Correct any possible misclassifications before the IRS or DOL audits uncover such misclassificationsRe-examine independent contractor relationship to ascertain whether they may be vulnerable to DOL’s broad construction of who is an employee.Review independent contractor contracts and ascertain whether the contingent worker has his or her own business.

Use employee leasing agencies to hire workers, but beware of the risk of having the business and the staffing agency deemed as “joint employers.”Slide21

WHAT EMPLOYERS SHOULD DO TO MINIMIZE MISCLASSIFICATION RISKS (Cont.)21

Ensure that contingent workers perform duties distinguishable from those performed by regular common law employees. Review the language of all employee benefits plans to confirm that they provide a clear exclusion of independent contractors and all leased employees from plan eligibility. The exclusion should make it clear that any reclassifications of such workers by any government agency as common law

employees shall not result in retroactive eligibility for benefits.Review leased employee arrangements to ensure that they comply with IRS rules governing such arrangements.Slide22

ACA REPORTING REQUIREMENTS FOR EMPLOYERS SUBJECT TO “PAY OR PLAY” RULES22

August 7, 2015: IRS issued new draft forms and instructions for use by health coverage providers and employers required to report coverage under ACA. Annual reporting required annually beginning in 2016 for coverage in 2015. ACA reporting requirements are addressed in Internal Revenue Code Section 6055 (for health insurers and sponsors of self insured group health plans), and Section 6056 (for employers with 50 or more full time employees, i.e., “applicable large employers” or “ALEs”). Slide23

ACA REPORTING REQUIREMENTS FOR EMPLOYERS SUBJECT TO “PAY OR PLAY” RULES (Cont.)23

The forms 1094 and 1095 are very detailed and the IRS instructions are complex. Reporting with these forms will be a time consuming and complex process for most employers.The first due date for filing the reporting forms withthe IRS is February 29, 2016 (March 31, 2016 if filing electronically). Reporting entities can obtain an automatic 30- day extension of the filing deadline by submitting a Form 8809 (“Application for Extension of Time To File Information Returns”) to the IRS on or before the due date. Slide24

ACA REPORTING REQUIREMENTS FOR EMPLOYERS SUBJECT TO “PAY OR PLAY” RULES (Cont.)24

For furnishing individual statements (due by February 1, 2016), draft instructions provide that the responsible entity may seek an extension of up to 30-days by sending a written request (not the Form 8809) to the IRS’ Information Returns Branch that is postmarked prior to the original due date. Effective January 31, 2015, a reporting entity may be subject to a $250 per failure (previously $100) penalty, subject a calendar- year maximum of $3,000,000 (previously $1,500,000).

If a “good faith” effort is made by the reporting entity to complete the forms correctly, and errors are subsequently found, the IRS will waive the penalties for now if incorrect submissions are subsequently corrected. Slide25

EMPLOYEE HANDBOOK: Important Provisions – Annual Review

25Vacation timeSick payBenefits

Severance payFMLA leave (if applicable)COBRASlide26

EMPLOYEE HANDBOOK: Important Provisions – Annual Review

26Harassment policiesPrivacy policiesDisciplinary procedures

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EMPLOYEE HANDBOOK: Same-Sex Marriage27

Does your Employee Handbook define spouse or marriage? Update these definitions to be in line with Obergefell v. Hodges – gender neutral definitionsFMLA Leave is now available to eligible employees in all same-sex marriages

COBRA benefits extend to same-sex spousesSlide28

EMPLOYEE HANDBOOK: ADA Issues

28Must allow a reasonable accommodation, i.e. leaveHowever, a “No-Restrictions Policy” (requiring an employee with a disability to stay out of work until 100% healed is a per se

violation of the ADA)Slide29

EMPLOYEE HANDBOOK: ADA Issues

29A “No-Restrictions Policy” does not allow a case-by-case assessment of an individual’s ability to perform essential functions of the individual’s job, with or without accommodationEEOC v. Brookdale Senior Living Communities, Inc., Civil Action No. 14-cv-02643-KMTSlide30

EMPLOYEE HANDBOOK: FLSA Issues

30Work done on smartphones/tablets after work hours must be at the request of the employer to be eligible to be “on the clock.”This policy must be clearly set out in the

Employee Handbook to avoid any misinterpretation and to appropriately defend any overtime pay claimsSlide31

Tennessee Discrimination &Retaliation Claims

31Effective July 1, 2014; State law discrimination and retaliation claims under the Tennessee Human Rights Act (“THRA”), Tennessee Public Protection Act (“TPPA”), and the Tennessee Disability Act are subject to compensatory damages caps as follows:8-14 employees: $25,000

15-100 employees: $50,000101-200 employees: $100,000201-500 employees: $200,000501+ employees: $300,000Slide32

Tennessee Discrimination &Retaliation Claims

32State law retaliatory discharge claims have been eliminatedPlaintiffs can prevail on Tennessee state law whistleblower claims (under the TPPA) only if they show that their protected activities were the sole cause of their termination rather than a substantially motivating factor under the common lawPlaintiffs cannot pursue claims in state and federal court at the same time based on the same facts

Managers and supervisors are no longer liable individually under the THRAIn line with Title VII under federal lawSlide33

Tennessee Employee OnlinePrivacy Act of 2014

33Employers cannot request an employee or applicant to disclose a password to a personal internet accountEmployers cannot compel an employee or applicant to access a personal internet account in the presence of the employer so that the content can be seenEmployers cannot penalize for failure to provide password or refusal to access account in employer’s presenceSlide34

Tennessee Employee OnlinePrivacy Act of 2014

34Exceptions. Employers may:Request usernames and passwords to gain access to devices and accounts that are supplied or paid for by the employer or used for employerDiscipline employees for transferring employer’s proprietary or confidential information to employee’s personal account without employer’s authorization;

Restrict or prohibit an employee’s access to certain websites while using an employer’s network;Slide35

Tennessee Employee OnlinePrivacy Act of 2014

35Exceptions. Employers may:Monitor, review, access or block data stored on an electronic device supplied by or paid for by the employer, or stored on an employer’s network; Comply with a duty to screen employees or applicants before hiring or to monitor or retain employee communications: (a) that is established under federal law or by a “self-regulatory organization” (e.g., FINRA); (b) for purposes of law enforcement; or (c) for purposes of an investigation into law enforcement conduct;

View, access, or use information about an employee or applicant that is available in the public domainSlide36

Tennessee Employee OnlinePrivacy Act of 2014

36Employers may conduct investigations if:(a) there is specific information on the employee’s personal account regarding the subject of the investigation (so long as the investigation involves potential legal violations or work-related misconduct); or (b) the employer has specific information about an unauthorized transfer of the employer’s confidential or proprietary information to the personal account.Slide37

Criminal Background Checks37

EEOC Guidance. In deciding whether a particular offense should be qualifying, consider the following:the nature and gravity of the criminal offense or conduct; how much time has passed since the offense or sentence; and

the nature of the job (including where it is performed, how much supervision and interaction with others the employee will have, etc.)Slide38

Credit Background Checks38

Fair Credit Reporting Act. Employers must:Get the applicant’s written consent before requesting a background check.Give

the applicant notice if the employer plans to screen him or her out based on the contents of the report. In this situation, the employer must also give the applicant a copy of the report.Notify the applicant once the employer makes a final decision not to consider the applicant based on the report.Slide39

ANY QUESTIONS?39

Additional information is available at www.holifieldlaw.com. If you have questions or concerns about any issues discussed, please contact us.