Sullivan University System, Inc. learned the hard way that U.S employers that misclassify workers as independent contractors, as exempt for wage and hour law purposes or otherwise increasingly risk investigation and enforcement from federal and state agencies targeting perceived misclassification abuses.
Following an investigation by the Labor Department’s Wage and Hour Division, Kentucky based Sullivan University System Inc. will pay $483,201 in back wages to 248 employees who the Department found it wrongfully denied overtime pay while working as admissions officers and high school representatives. The investigation found that employees were incorrectly classified as exempt from the overtime provisions of the Fair Labor Standards Act and the employer failed to keep accurate records of the employees’ hours.
The Sullivan University System, Inc. settlement provides another example of the growing risks that U.S. employers face from misclassifying workers as exempt employees for purposes of wage and hour and overtime laws. As a result of the mischaracterization of workers as contractors that the Labor Department determined to qualify as employees for purposes of wage and hour and overtime laws, the Labor Department found the employer failed to pay required overtime and to maintain required time records in violation of the Fair Labor Standards Act.
Wage and hour laws are only one of a myriad of areas in which the Department of Labor, Internal Revenue Service and other federal and state regulators increasingloy 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 Obama Administration is targeting employers that misclassify workers for enforcement.
Agency officials and members of Congress have sent numerous messages to U.S. employers to clean up their worker classification practices. For instance, Labor Department enforcement actions increasingly show its employer misclassification audit and enforcement emphasis. See, e.g.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.
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 MOUs 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.
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 found this update of interest, you also may be interested in reviewing some of the other updates and publications authored by Ms. Stamer available including:
- New DOL Final Rules Tighten Requirements For Employers To Hire Alien Workers Using H-2B Visas
- OSHA $1Million Award Against AirTran Airways Highlights Retaliation Risks
- HHS Chides Trustmark Life Insurance Company For “Excessive” Health Premium Increases After Affordable Care Act Rate Audit
- Labor Department Final Rule Defines Recreation Vehical For Longshore & Harbor Workers’ Compensation Act
- Manufacturer’s Excessive I-9 Documentation Triggers Discrimination Liability
- Stamer Dallas Bar Journal Article Cautions Employers Must Take Holistic Approach To Address Worker Misclassification Risks
- New Labor Department Retaliation Guidance Reminder Of Retailiation Risks
- HR Key Player In Managing Countrywide & Other US Discrimination Exposures
- Senator Tells IRS To Fix Proposed Health Care Exchange Premium Tax Credit Regulations
- Labor Department Proposes Changing Minimum Wage & Overtime Rules For Home Caregivers, Keeps Heat On Health Care Employers
- New Guidance On Fiduciary Duties In Handling ACA Group Health Plan Premium Rebates Highlight Advisability Of Tightening Funding Terms & Fund Handling Practices To Manage Fiduciary Risks
- New Obama Administration Affirmative Action Guidance Highlights Organization’s Need To Tighten Nondiscrimination Practices
- Incentives To Get Employee Into Wellness Education Requires Legal Risk Management
- HR Key Player In Managing Rising Risk of Disability, Other Discrimination Suits Under Obama Administration Justice Department
- Big Penalty for Lender Shows Risks of Violating Military Service or Vets Rights
- OCR 1st HIPAA Privacy, Security & Breach Notification Compliance Audits Begin
- Employers Face New Labor-Management Exposures Under Activist National Labor Relations Board
- Unions Gaining New Power From National Labor Relations Board’s New Activism
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