Employer Faces $2M FLSA Lawsuit For Alleged Worker Misclassification


Health Care Reform Adds Fuel To Enforcement Fire

Employers must ensure they can defend their treatment of workers as as independent contractors or otherwise exempt from wage and hour and overtime requirements and take other steps to manage wage and hour risks that can arise under the Fair Labor Standards Act (FLSA) and other laws to when caught misclassifying workers.  That’s the clear message the U.S. Department of Labor (Labor Department) is sending to employers by filing lawsuits against employers like the one it recently announced against Wang’s Partner Inc., doing business as Hibachi Grill and Supreme Buffet in Jonesboro, and its owner, Shu Wang, to recover $1,997,726 in back wages and liquidated damages for 84 employees.

The FLSA requires that covered employees be paid at least the federal minimum wage of $7.25 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. The requirements generally apply to any workers that the employer who receives its services cannot prove is not its common law employee or an exempt employee within the meaning of the FLSA.  In general, “hours worked” includes all time an employee must be on duty, or on the employer’s premises or at any other prescribed place of work, from the beginning of the first principal work activity to the end of the last principal activity of the workday. Additionally, the law requires that accurate records of employees’ wages, hours and other conditions of employment be maintained. These requirements generally apply for all workers who the facts and circumstances reflect are common law employees and otherwise do not qualify as exempt employees under the FLSA.  Violations of these requirements can result significant backpay and other damage awards to private plaintiffs, backpay and penalties assessments or settlements from Labor Department suits, and, if the violation is found willful, criminal liability.

Wang’s Partner Inc. Suit

The lawsuit against Want’s Partner Inc. shows employers the importance of avoiding improperly classifying workers as independent contractors for purposes of the FLSA. Employers that inappropriately classify workers as independent contractors often fail to maintain appropriate time and other records, pay minimum wage and overtime and violate other FLSA requirements.  In general, a business receiving services of a worker generally bears the burden of providing that the worker is not its common law employee under the applicable facts and circumstances test applicable under the FLSA.

As in many other enforcement areas, the Labor Department Wage and Hour Division in recent years has stepped up its scrutiny of employer relationships with workers treated as independent contractors.  The Labor Department and many other agencies increasingly view the misclassification of workers as something other than employees, such as independent contractors, as a serious problem for affected employees, employers and to the entire economy.  According to the Labor Department, misclassified employees are often denied access to critical benefits and protections, such as family and medical leave, overtime, minimum wage and unemployment insurance and other rights.  The Labor Department also says employee misclassification also generates substantial losses to state and federal treasuries, and to the Social Security and Medicare funds, as well as to state unemployment insurance and workers compensation funds. To address these and other concerns, the Labor Department has joined other agencies like the Internal Revenue Service increasingly is challenging employers’ treatment of workers as exempt from FLSA and other legal obligations as independent contractors or otherwise.

The lawsuit in the Northern District of Georgia against Wang’s Partner, Inc. illustrates this trend.  One of the growing number of lawsuits and other enforcement actions resulting from this trend, the suit shows the significant exposures that an employer risks by misclassifying workers as independent contractors or otherwise exempt from the FLSA. The Labor Department says an investigation revealed that Wang’s Partner Inc. misclassified workers as independent contractors and engaged in numerous violations of the FLSA.  The Labor Department seeks $1,997,726 in back wages and liquidated damages for 84 employees.

The Labor Department says investigators from the division’s Atlanta district office found that the employer misclassified servers as independent contractors, failed to pay servers and kitchen staff at least the federal minimum wage of $7.25 per hour and failed to pay overtime compensation at time and one-half employees’ regular rates for hours worked beyond 40 in a work week. Additionally, the employer did not maintain accurate records of hours worked and wages paid.

In announcing the Wang’s Partner Inc. lawsuit, the Labor Department warned employers against similar misclassification of workers.  “The U.S. Department of Labor is committed to ensuring that all workers receive the wages to which they are legally entitled,” said Secretary of Labor Thomas E. Perez. “We will not stand by while employers use business models that hurt workers, their families and law-abiding employers. This lawsuit illustrates that the department will use every enforcement tool necessary to resolve cases where employees are unlawfully treated as independent contractors, and vulnerable workers are not paid the minimum wage.”

 FLSA Violations Generally Costly;  Enforcement Rising

The Labor Department’s prosecutions against employers arising from misclassification of workers document the Labor Department is acting in accordance with this warning.  In recent years, misclassification of workers increasingly has become an element in its FLSA and other enforcement actions.  According to the Labor Department, misclassified employees are often denied access to critical benefits and protections, such as family and medical leave, overtime, minimum wage and unemployment insurance and other rights.  The Labor Department also says employee misclassification also generates substantial losses to state and federal treasuries, and to the Social Security and Medicare funds, as well as to state unemployment insurance and workers compensation funds. To address these and other concerns, the Labor Department has joined other agencies like the Internal Revenue Service increasingly is challenging employers’ treatment of workers as exempt from FLSA and other legal obligations as independent contractors or otherwise.Whether due to mischaracterization of workers as independent contractors or as common law employees that qualify as exempt under the FLSA rules, the Labor Department increasingly is acting on its promise to go after employers that violate the FLSA based on worker misclassifications.

In 2012, for instance, First Republic Bank paid $1,009,643.93 in overtime back wages for 392 First Republic Bank employees in California, Connecticut, Massachusetts, New York and Oregon after the Labor Department found the San Francisco-based bank wrongly classified the employees as exempt from the FLSA’s overtime and recordkeeping requirements, resulting in violations of the Fair Labor Standards Act’s overtime and record-keeping provisions.  The Labor Department announced the settlement resulting in the payment on November 27, 2012.

The settlement came after an investigation by the Labor Department’s Wage and Hour Division found that the San Francisco-based bank wrongly classified the employees as exempt from overtime, resulting in violations of the FLSA’s overtime and record-keeping provisions.

In announcing the settlement with First Republic Bank, the Labor Department warned employers to confirm the appropriateness of their classification of workers.  “It is essential that employers take the time to carefully assess the FLSA classification of their workforce,” said Secretary of Labor Hilda L. Solis in the Labor Department’s announcement of the settlement. “As this investigation demonstrates, improper classification results in improper wages and causes workers real economic harm.”

The Wang’s Partner Inc and First Republic Bank enforcement actions are not unique.  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 EmployersQuest Diagnostics, Inc. To Pay $688,000 In Overtime Backpay

In an effort to further promote compliance and enforcement of these rules,  the Labor Department is using  smart phone applications, social media and a host of other new tools to educate and recruit workers in its effort to find and prosecute violators. See, e.g. New Employee Smart Phone App New Tool In Labor Department’s Aggressive Wage & Hour Law Enforcement Campaign Against Restaurant & Other Employers.    As a result of these effort, employers violating the FLSA now face heightened risk of enforcement from both the  Labor Department and private litigation.

Health Care Reform Adds Risks, Fuels More Enforcement

The rollout of new health benefit mandates as part of the sweeping reforms enacted under the Patient Protection and Affordable Care Act (ACA) is further expanding the liability of misclassification and the risk of enforcement against employers.

Among other things, the employer mandates of ACA, now delayed until 2015, generally will require employers of 50 or more full-time employees either to provide health coverage meeting the requirements of ACA or pay the “employer penalty” established under Internal Revenue Code Section 4980H.  While the rule now is delayed until 2015, the employment data for 2014 will be used to determine what employees that an employer must take into account for purposes of this rule.  ACA generally relies on the common law employment tests used under the FLSA to make this determination.  It also requires employers provide other rights to workers who are considered common law employees under these rules.

Employers Should Strengthen Practices For Defensibility

 To minimize exposure under the FLSA, employers should review and document the defensibility of their existing practices for classifying and compensating workers under existing Federal and state wage and hour laws and take other actions to minimize their potential liability under applicable wages and hour laws.  Steps advisable as part of this process include, but are not necessarily limited to:

  • Audit of each position current classified as exempt to assess its continued sustainability and to develop documentation justifying that characterization;
  • Audit characterization of workers obtained from staffing, employee leasing, independent contractor and other arrangements and implement contractual and other oversight arrangements to minimize risks that these relationships could create if workers are recharacterized as employed by the employer receiving these services;
  • Review the characterization of on-call and other time demands placed on employees to confirm that all compensable time is properly identified, tracked, documented, compensated and reported;
  • Review of existing practices for tracking compensable hours and paying non-exempt employees for compliance with applicable regulations and to identify opportunities to minimize costs and liabilities arising out of the regulatory mandates;
  • If the audit raises questions about the appropriateness of the classification of an employee as exempt, self-initiation of proper corrective action after consultation with qualified legal counsel;
  • Review of existing documentation and record keeping practices for hourly employees;
  • Exploration of available options and alternatives for calculating required wage payments to non-exempt employees; and
  • Re-engineering of work rules and other practices to minimize costs and liabilities as appropriate in light of the regulations and enforcement exposures.

Because of the potentially significant liability exposure, employers generally will want to consult with qualified legal counsel before starting their risk assessment and assess risks and claims within the scope of attorney-client privilege to help protect the ability to claim attorney-client privilege or other evidentiary protections to help shelter conversations or certain other sensitive risk activities from discovery under the rules of evidence.

For Help With Investigations, Policy Updates Or Other Needs

If you need help in conducting a risk assessment of or responding to an IRS, DOL, Justice Department, or other federal or state agencies or other private plaintiff or other legal challenges to your organization’s existing workforce classification or other labor and employment, compliance,  employee benefit or compensation practices, please contact the author of this update, attorney Cynthia Marcotte Stamer here or at (469) 767-8872 .

Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization, management attorney and consultant Ms. Stamer is nationally and internationally recognized for more than 23 years of work helping employers; employee benefit plans and their sponsors, administrators, fiduciaries; employee leasing, recruiting, staffing and other professional employment organizations; and others design, administer and defend innovative workforce, compensation, employee benefit  and management policies and practices. The Chair of the American Bar Association (ABA) RPTE Employee Benefits & Other Compensation Committee, a Council Representative on the ABA Joint Committee on Employee Benefits, Government Affairs Committee Legislative Chair for the Dallas Human Resources Management Association, past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group, Ms. Stamer often has worked, extensively on these and other workforce and performance 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 more information about Ms. Stamer and her experience or to get access to other publications by Ms. Stamer see here or contact Ms. Stamer directly.

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THE FOLLOWING DISCLAIMER IS INCLUDED TO COMPLY WITH AND IN RESPONSE TO U.S. TREASURY DEPARTMENT CIRCULAR 230 REGULATIONS.  ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN BY THE WRITER TO BE USED, AND NOTHING CONTAINED HEREIN CAN BE USED BY YOU OR ANY OTHER PERSON, FOR THE PURPOSE OF (1) AVOIDING PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW, OR (2) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TAX-RELATED TRANSACTION OR MATTER ADDRESSED HEREIN.

©2012 Cynthia Marcotte Stamer, P.C.  Non-exclusive license to republish granted to Solutions Law Press, Inc.™  All other rights reserved.

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