Contingent Workers: The Continuing Dilemma of the Non-Employee Workforce

Presented by: Gil Abramson | Jackson Lewis | Baltimore, MD Emily Glendinning | BAE Systems, Inc. | Arlington, VA June 6, 2012 Contingent Workers:The Continuing Dilemma of the Non-Employee Workforce

How Big Is This Issue? 10 million independent contractors 7% of total employment

Federal Statistics Relied Upon By IRS And DOL • Up to 30% of employers misclassify workers. • 3.4 million workers are contractors, when they should be employees. • Revenue loss to U.S. Treasury is $3.4 billion, annually: • Income tax. • Social Security. • Medicare. • Unemployment Insurance Trust Fund.

What Is The DOL Doing? • 129 FTEs for multi-agency audit and enforcement. • Wage and Hour Division hires 107 new investigators for targeted industry investigations. • FY 2012 budget includes $15 million for the hiring of new personnel within DOL’s Wage and Hour Division to investigate misclassification. • FY 2012 budget makes $25 million available to states to enhance their mechanisms for conducting misclassification audits.

More DOL Initiatives • OFCCP allocates $3.6 million and 11 FTEs to address misclassification in government contract operation. • Office of the Solicitor allocates $1.4 million and 7 FTEs to bring multi-state litigation against large employers determined to “abuse” independent contractor status. • OSHA adds 2 FTEs to train inspectors on worker classification issues.

Now That We Have Your Attention . . . Today we will be covering: • Definition of independent contractor: • Understand and recognize the factors that differentiate between “contractors” and “employees;” • Review the various laws that are impacted by improper classification of workers; • Review the consequences of misclassification. • Joint/co-employment issues. • Practical takeaways. • National Labor Relations Act initiatives regarding union organizing and quickie elections.

Reasons For Classifying Workers As Independent Contractors • “We’ve always done so.” • “Our business model requires it to remain competitive.” • “That is what these workers prefer.” Reality check: The reasons are totally irrelevant to the legitimate (legal) reasons that support a valid independent contractor classification.

Tests To Determine Status • Common Law Right to Control Test. • IRS Category Test (replaced IRS “20-Factor” Test). • FLSA “Economic Realities” Test. • “ABC” Test.

Common Law Right To Control Test • Hiring party’s control over details of the work • Worker’s occupation and skill • Relevance of work to company’s business • Worker’s investment, materials and tools • Location of work • Duration of the relationship • Control of work hours • Method of payment • Right to hire assistants • Taxes, employee benefits • Parties’ intentions Most critical issue who controls the manner and means of work.

Former IRS “20-Factor” Test • Instructions • Training • Integration • Services Rendered Personally • Hiring, Supervising, Paying Assistants • Continuing Relationship • Set Hours of Work • Full-Time Required • Working on Business Premises • Order or Sequence Set • Oral or Written Reports • Payment by Hour, Week, Month • Payment of Business/Traveling Expenses • Furnishing Tools and Materials • Significant Investment • Realization of Profit or Loss • Working for More than One Business at a Time • Making Services Available to the General Public • Company’s Right to Discharge • Worker’s Right to Terminate

Current IRS Category Test • Behavioral control: Amount of control of where, when and how the job is done. • Financial control: Worker’s pay, business expenses, and facility investment. • Type of relationship of the parties: Written agreements, benefits, length of relationship.

FLSA “Economic Realities” Test • “Economic reality” rather than “technical concepts.” • The U.S. Supreme Court has held that it is the total activity or situation that controls. Significant factors: • The extent to which the services rendered are an integral part of the principal’s business. • The permanency of the relationship. • The amount of the alleged contractor’s investment in facilities and equipment. • The nature and degree of control by the principal. • The alleged contractor’s opportunities for profit and loss. • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor. • The degree of independent business organization and operation.

“ABC” Test Under the “ABC” test, used in about half of the states to determine unemployment eligibility, a worker is an employee unless: • The worker is free from controlanddirection in performing the services (by contract and in fact); • The service is performed outside the usual course of the company’sbusiness or outside places where such service is performed; and • The worker is customarily engaged in an independentlyestablished trade, occupation, profession or business of the same nature as that involved in the service performed.

“ABC” Test (cont’d) • “Freedom from Control” “Free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact.” • Employment contract/job description indicating that individual is free from supervisory direction of control is insufficient. • Look at actual activities and duties, which should be carried out with minimal instruction.

“ABC” Test (cont’d) • “Service Outside Usual Course of Employer’s Business” • If the worker’s services form a regular and continuing part of employer’s business, then individual is considered employee. • Almost impossible to meet in many cases.

“ABC” Test (cont’d) C. Independent Trade, Occupation, Profession or Business • The worker has to be engaged in independent trade or business. • The worker can sell his services to a number of entities in community. • Worker cannot be dedicated to one employer.

“ABC” Test (cont’d) Irrelevant Factors Under “ABC” Test: • Failure to withhold taxes; • Contribute to unemployment compensation; • Provide workers’ compensation; • Employer’s belief/employee’s belief. • Strict liability statute.

State Laws • Maryland: • ABC Test – Unemployment (Md. Code, Lab. & Emply. § 8-205) and Workplace Fraud Act of 2009 (Md. Code, Lab. & Emply. § 3-901 et seq.). • Virginia: • Old 20 factor test – Unemployment. (Va. Code § 60.2-212). • Real estate salespersons and appraisers performs services pursuant to an IC agreement and paid solely by commission or fee are not employees for purposes of unemployment. (Va. Code § 60.2-212). • District of Columbia: • No applicable statutory definitions.

Specific Laws Each Statute and Enforcement Agency Has Slightly Different Tests for Determining Independent Contractor Status: • IRS: U.S. Tax Code (federal income tax withholding). • U.S. Department of Labor: • FLSA (Fair Labor Standards Act – minimum wage and overtime); • FMLA (Family and Medical Leave Act); • ERISA (Employee Retirement Income Security Act). • State Unemployment Laws/Agencies. • State Workers’ Compensation Laws/Agencies. • State Income Tax Withholding. • Federal Anti-Discrimination Laws (Title VII, ADA). • State and Local Anti-Discrimination Laws. • NLRA (National Labor Relations Act).

Employee Benefits FLSA Liability: Consequences • Retroactive entitlement to overtimepay by the contractor for two to three years. • Employer likely has not kept accurate time records, leading to inability to defend claims. • Liquidated (double) damages are applied; attorney’s fees can be awarded. • DOLaudits and investigations can result. • Class actions can result in exorbitant costs and settlements. • Liability for overtime. • Joint and several liability. • If team with staffing agency, must be “completely disassociated with respect to the employment of a particular employee.”

Consequences of Misclassification: State Laws: • Employer’s share of Federal payroll taxes going back three years, plus penalties and interest. • Possibility the employee’s share of taxes, which should have been withheld, plus penalties and interest. • Information sharing programs with the states likely will result in state income tax withholding penalties, unemployment tax liability, and disability program taxes. • State tax liability often will trigger investigation into unpaid workers’ compensation and unemployment benefits. This also can result conversely when contractors apply for such benefits after termination.

Consequences of Misclassification(cont’d): ERISA Liability: • Class actions. • Retroactive entitlement to benefits by the contractor. • Plan may fail coverage or discrimination tests, or may be deemed to violate minimum participation standards. • Plan may be liable for wrongful denial of benefits and breach of fiduciary duty claims.

Temporary Staffing: EEOC Guidance • EEOC Enforcement Guidance: Application of EEO Laws to Contingent Workers Placed by Temporary Employment Agencies and Other Staffing Firms: • Covers temporary employees, leased employees and project management. • Staffing firms must hire and make job assignments in a non-discriminatory manner. • Both staffing firms and their clients share EEO responsibilities. • Both client and staffing company are considered employers if they have the right to control the work and have the statutory minimum number of employees.

Temporary Staffing: Potential Exposure • Litigation – FLSA/Wage & Hour. • Eligibility for benefits. • Unknown employment issues: • Discrimination; • Harassment; • Immigration; • Retaliation.

The National Labor Relations Act The National Labor Relations Act applies only to employees. A common tactic of labor unions seeking to organize workers is to challenge the independent-contractor status of a group of workers that perform a certain function for companies in a particular industry. The unions then seek a court determination that the workers are employees entitled to the right to organize and bargain for the terms and conditions of their work.

Statutory Issues Title VII: • Risk of liability based on joint employment. ADA – Inquiries and Medical Examinations: • “Pre-Offer” stage or “employment” stage? • EEOC: “Offer” occurs when assignment is given. Family and Medical Leave Act: • “Primary employer” (staffing company): Authority to hire and fire, assign and place, make payroll, provide benefits? Responsible for notice, leave benefits, and job restoration. • “Secondary employer” (on-site employer): Must accept returning employee; may not retaliate.

Practical Steps • Determine who are legally independent contractors: • Do they meet the criteria of the tests? • Review written agreements. • Examine the facts on the ground – actual job duties. • Train managers in how to deal properly with contractors. • Know the legal risks.

Practical Solutions Virtually any independent contractor classification could come under scrutiny if: • The work is part of the company’s normal business; • The company exerts significant control over the manner in which the work is performed, as opposed to the quality of the goods or service provided; • The worker cannot or does not work for other clients or customers; and/or • The worker cannot subcontract the work.

Practical Solutions (cont’d) • Consider whether to terminate all independent contractor agreements and rehire as employees. • Consider hiring independent contractors through temporary agency or other company. • Loosen restrictions and control; allow subcontracting or work for other clients.

Managing and Minimizing Risk 1. Do not negotiate pay rates. 2. Do not provide training. 3. Do not negotiate vacation days or personal days off. 4. Do not provide performance evaluations or career guidance. 5. Do not issue business cards with firm name or logo.

Managing and Minimizing Risk (cont’d) 6. Do not permit use of facilities or recreational activities. 7. Do not regularly include in departmental social functions. 8. Do not directly investigate allegations of harassment, discrimination, or related issues. 9. Do not discipline or terminate. 10. Do not provide severance payments or employee benefits.

Managing and Minimizing Risk(cont’d) 11. Do not provide tools, equipment, uniforms. 12. Do not pay business expenses of contractors. 13. Do not allow contractors to perform the same functions of the company’s business. 14. Do not enter into non-compete and exclusivity arrangements that limit the control of work for other clients. 15. Do not enter into unlimited engagements with no regular end to the term of the contract.

Drafting Staffing Agreements • Make the agreement with the staffing company, not the contingent worker. • Clearly designate the responsibilities and services of each party — hiring, firing, training, assigning work, making work rules, etc. • Specify job descriptions. • Indicate situations under which employer may terminate the contract. • Delineate all confidentiality requirements. Source: U.S. Chamber of Commerce Small Business Nation

Drafting Staffing Agreements(cont’d) • Stipulate which party is responsible for payroll, withholding, and payment of taxes for the individuals. • Clarify who has primary responsibility for paying and providing workers’ compensation insurance. • Indicate the extent to which employee benefits will be provided by the staffing company and the employees’ level of contribution. Source: U.S. Chamber of Commerce Small Business Nation

Questions? Gil AbramsonJackson Lewis LLPPartner – Baltimore Office(410) 415-2023gil.abramson@jacksonewis.com Emily GlendinningBAE Systems, Inc.Assistant General Counsel for Employment and Labor(703) 894-3720emily.glendinning@baesystems.com

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Contingent Workers: The Continuing Dilemma of the Non-Employee Workforce