The owner of a now-defunct Ohio business, Cascom Inc., will pay a heavy price for now defunct Cascom, Inc.’s misclassification of workers as independent contractors and resulting wage and hour and overtime violations.  U.S. businesses, their owners and their leaders should heed the strong warning to employers about the risks of misclassification of workers provided by the judgment and statements included in the Department of Labor (DOL) announcement of the court’s decision and take appropriate steps to audit and correct as necessary worker classification and other practices that Another in the growing tidal wave of judicial and administrative orders and settlements nailing businesses, their owners and management for misclassifications of workers resulting in violations of Federal employment, tax or other laws, the U.S. District Court for the Southern District of Ohio has ordered Cascom Inc. back wages and liquidated damages totaling $1,474,266 to approximately 250 cable installers that the court ruled that the Cascom Inc. misclassified as independent contractors in violation of the Fair Labor Standards Act (FLSA).

The misclassification of employees as something other than employees, such as independent contractors, presents a serious problem for affected employees, employers and the economy. Misclassified employees are often denied access to critical benefits and protections — such as family and medical leave, overtime, minimum wage and unemployment insurance — to which they are entitled. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers’ compensation funds.  To nix these and other concerns, the DOL, Internal Revenue Services, Department of Health & Human Services, Customs & Immigration and other federal agencies increasingly are going after businesses that misclassify workers as non-employees.

Cascom Inc. In A Nutshell

The Cascom Inc. decision is one of a fast-growing list of situations where DOL or other agencies or private plaintiffs obtained judgments or settlements under the FLSA for employers that failed to comply with these FLSA obligations because the business treated workers that under the facts and circumstances were common law employees as independent contractors or otherwise exempt from the FLSA.  See Solis v. Cascom Inc.

The FLSA generally requires that a business pay covered, nonexempt employees at least the federal minimum wage of $7.25 per hour for all hours worked, plus time and one-half their regular rates, including commissions, bonuses and incentive pay, for hours worked beyond 40 per week. Employers also are required to maintain accurate time and payroll records.

For purposes of determining if a worker is an employee protected by the FLSA, the FLSA distinguishes an employment relationship from an independent contractor or other non-employed contractual relationship.  The protections of the FLSA apply only to employees.  An employee — as distinguished from a person who in a business of his or her own — is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business that he or she serves. For more information, visit here.

The judgment jointly against Cascom Inc. and its owner, Julia J. Gress, arose following a damages hearing held in connection with a lawsuit originally filed by the U.S. Department of Labor (DOL) in 2009 based on a DOL Wage and Hour Division investigation which found that Cascom Inc. failed to pay overtime and engaged in other FLSA violations as a result of its wrongful classification of workers as independent contractors rather than employees.  The court previously ruled in September 2011 that Cascom Inc. and its owner, Julia J. Gress, violated the FLSA by failing to compensate employees for hours worked in excess of 40 per work week because they were misclassified as independent contractors.

The installers were found to be employees covered by the FLSA, rather than independent contractors. The court found Cascom Inc. liable for $737,133 in back wages and an equal amount in liquidated damages, collectible from both from the company and its owner. Since the litigation began, the company has ceased operations.  Consequently, DOL plans to collect damages from owner Gress.

Employer Misclassification Audits & Enforcement Significant Risk For US Businesses

The prosecution by DOL of Cascom Inc. under the FLSA reflects the increased readiness of the DOL and other agencies to scrutinize and challenge the characterization by a business of workers as independent contractors exempt from the FLSA or other federal requirements on the obligations of an employer to an employee.  DOL and other federal agencies increasingly scrutinize the treatment by employers of a worker as an independent contractor and prosecute employers when DOL determines that FLSA or other legal obligations that the employer violated because the employer misclassified the workers.

Wage and hour laws are only one of a myriad of areas where the Department of Labor, Internal Revenue Service and other federal and state regulators increasingly are scrutinizing worker classifications to uncover violations of applicable law resulting from the mischaracterization of workers as exempt or as non-employee service providers.

The enforcement record of the Labor Department confirms that employers that improperly treat workers as exempt from the FLSA’s overtime, minimum wage and recordkeeping requirements run a big risk.  The Labor Department and private plaintiffs alike regularly target employers that use aggressive worker classification or other pay practices to avoid paying minimum wage or overtime to workers.  Under the Obama Administration, DOL officials have made it a priority to enforce overtime, record keeping, worker classification and other wage and hour law requirements.  See e.g.,  Boston Furs Sued For $1M For Violations Of Fair Labor Standards Act; Record $2.3 Million+ Backpay Order; Minimum Wage, Overtime Risks Highlighted By Labor Department Strike Force Targeting Residential Care & Group Homes; Review & Strengthen Defensibility of Existing Worker Classification Practices In Light of Rising Congressional & Regulatory Scrutiny; 250 New Investigators, Renewed DOL Enforcement Emphasis Signal Rising Wage & Hour Risks For Employers;  Quest Diagnostics, Inc. To Pay $688,000 In Overtime Backpay; Banks’ $1Million Overtime Settlement Shows Risks of Misapplying FLSA’s Administrative Exemption;  Employer Charged With Misclassifying & Underpaying Workers To Pay $754,578 FLSA Backpay Settlement; $1 Million + FLSA Overtime Settlement Shows Employers Should Tighten On-Call, Other Wage & Hour Practices.

Meanwhile, the Internal Revenue Service (IRS) continues to conduct worker classification audits while encouraging employers to self correct existing payroll tax misclassifications by participating in a new Voluntary Worker Classification Settlement Program (“Settlement Program”) announced in September. However the limited scope of the relief provided makes use of the program challenging for most employers. See New IRS Voluntary IRS Settlement Program Offers New Option For Resolving Payroll Tax Risks Of Misclassification But Employers Also Must Manage Other Legal Risks; Medical Resident Stipend Ruling Shows Health Care, Other Employers Should Review Payroll Practices; Employment Tax Takes Center Stage as IRS Begins National Research Project , Executive Compensation Audits.  

While these and other agencies continue to keep the heat up on employers that misclassify workers, Congress also continues to consider legislation that would further clarify and tighten worker classification rules.  See e.g., Review & Strengthen Defensibility of Existing Worker Classification Practices In Light of Rising Congressional & Regulatory Scrutiny; New IRS Worker Classification Settlement Program and Its Risks. 

The uptake in worker misclassification related prosecutions is no accident.  In her November 3, 2011 testimony to the House Subcommittee on Workforce Protections Committee on Education and the Workforce, U.S. Labor Department Wage & Hour Division (WHD) Deputy Administrator (WHD) Nancy Leppink confirmed that the Labor Department is joining a growing list of federal and state agencies that are making ending employee misclassification an audit and enforcement priority.  Ms Leppink testified that “employee misclassification is a serious and, according to all available evidence, growing problem” that the Obama Administration is “committed to working to end.”  See Testimony of Nancy J. Leppink, Deputy Wage and Hour Administrator, Wage and Hour Division, U.S. Department of Labor before the Subcommittee on Workforce Protections, Committee on Education and the Workforce, U.S. House of Representatives (November 3, 2011).

Her testimony also makes clear that interagency coöperation and sharing of information among agencies is an increasingly valuable tool to this effort. Ms. Leppink told the Subcommittee that the Labor Department is a part of a multi-agency Misclassification Initiative that seeks to strengthen and coördinate Federal and State efforts to enforce violations of the law that result from employee misclassification.

According to Ms. Leppink, the WHD’s exchange of information about investigations with other law enforcement agencies is as “particularly important with respect to our efforts to combat the violations of our laws that occur because of employees who are misclassified as independent contractors or other non-employees.” On September 19, 2011 the Labor Department and Internal Revenue Service (IRS) signed a Memorandum of Understanding (MOU) to share information about investigations with each other.  The MOU helps the IRS investigate if employers the Labor Department has found in violation of federal labor laws have paid the proper employment taxes. Similarly, the WHD also entered into memoranda of understandings with several state labor agencies that allow the Labor Department to share information about its investigations and coordinate misclassification enforcement when appropriate.

“These agreements mean that all levels of government are working together to solve this critical problem,” she said.

Statements by the DOL in its announcement of its victory in Cascom Inc. confirm that the DOL’s enforcement resolve remains strong.   The DOL sent a clear warning to employers that DOL and other agencies are targeting employers that violate minimum wage and overtime, tax, and other laws by misclassifying workers that are employees as independent contractors in its press release about the Cascom, Inc. ruling, which states:

“The misclassification of employees as something other than employees, such as independent contractors, presents a serious problem for affected employees, employers and the economy. Misclassified employees are often denied access to critical benefits and protections — such as family and medical leave, overtime, minimum wage and unemployment insurance — to which they are entitled. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers’ compensation funds.”.

Employers Urged To Audit & Strengthen Worker Classification Practices

As Federal and state regulators take aim at misclassification abuses, U.S. employers need to review each arrangement where their business receives services that the business treats as not employed by their business, as well as any employees of their business that the business treats as exempt employees keeping in mind that they generally will bear the burden of proving the appropriateness of that characterization for most purposes of law.

To guard against these and other growing risks of worker classification, employers receiving services from workers who are not considered employees for purposes of income or payroll should review within the scope of attorney-client privilege the defensibility of their existing worker classification, employee benefit, fringe benefit, employment, wage and hour, and other workforce policies and consult with qualified legal counsel about the advisability to adjust these practices to mitigate exposures to potential IRS, Labor Department or other penalties associated with worker misclassification.

Review and management of these issues is particularly timely in light of the opening by the Internal Revenue Service (IRS) of a new settlement program for resolving payroll tax issues resulting from misclassification.  Given broader labor and other risks, however, before taking advantage of a new Internal Revenue Service program offering employers the opportunity to resolve potential payroll tax liabilities arising from the misclassification of workers, employers should consider and develop a risk management their overall worker misclassification liability exposures.  See “New IRS Worker Classification Settlement Program and its Risks,” in the January, 2011 issue of the Dallas Bar Journal To read her article, see page 8 of the January, 2012 Dallas Bar Journal here.

For Help or More Information

If you need help with worker classification or other human resources or internal controls matters, please contact the author of this article, Cynthia Marcotte Stamer.  Board Certified in Labor & employment Law by the Texas Board of Legal Specialization,management attorney, author and consultant  Ms. Stamer is nationally and internationally recognized for more than 24 years of work helping private and governmental organizations and their management; employee benefit plans and their sponsors, administrators, fiduciaries; employee leasing, recruiting, staffing and other professional employment organizations; schools and other governmental agencies and others design, administer and defend innovative compliance, risk management, workforce, compensation, employee benefit, privacy, procurement and other management policies and practices. Her experience includes extensive work helping employers carry out, audit, manage and defend worker classification,union-management relations, wage and hour, discrimination and other labor and employment laws, procurement, conflict of interest, discrimination management, privacy and data security, internal investigation and discipline and other workforce and internal controls policies, procedures and actions.

Widely published on worker classification and other workforce risk management and compliance concerns, the immediate past-Chair of the American Bar Association (ABA) RPTE Employee Benefits & Other Compensation Committee and current Co-Chair of its Welfare Plan Committee, Vice Chair of the ABA TIPS Section Employee Benefits Committee,  a Council Representative of the ABA Joint Committee on Employee Benefits, Government Affairs Committee Legislative Chair for the Dallas Human Resources Management Association, and past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group, Ms. Stamer works, publishes and speaks extensively on management, worker classification, re-engineering, investigations, human resources and workforce, employee benefits, compensation, internal controls and risk management, federal sentencing guideline and other enforcement resolution actions, and related matters.  She also is recognized for her publications, industry leadership, workshops and presentations on these and other human resources concerns and regularly speaks and conducts training on these matters. Her insights on these and other matters appear in the Bureau of National Affairs, Spencer Publications, the Wall Street Journal, the Dallas Business Journal, the Houston Business Journal, and many other national and local publications. For additional information about Ms. Stamer and her experience or to get access to other publications by Ms. Stamer see here or contact Ms. Stamer directly.