The DOL has recently begun targeting industries which rely heavily on subcontractors and 1099 labor.  Inspections are often unannounced and aggressive tactics are the norm. They can range from liquidated (double) damages and civil penalties to World Wide Web scarlet letters, press releases, searchable databases and iPhone Apps listing violators.

Download the new DOL iPhone application “Eat, Sleep, Shop” which will link to the hugely popular Yelp.com.  When looking up a local restaurant, store or hotel, you can now read health, safety & labor violations right beside customer reviews.

Wage and hour lawyers don’t seem to need an App (or maybe employers should be happy Plaintiffs’ lawyers haven’t devised one yet!).  According to NERA’s Trends in Wage and Hour Settlements: 2011 Update, there has been an over 500% increase in the number of publicized settlements since 2007.

Get control of your independent contractor compliance before the DOL comes knocking. Go to ICon.

A link to the presentation, including all slides and statistics, can be found here.

In the past eighteen months there has been unprecedented coordination between state agencies, the IRS and the Department of Labor; a wide-ranging White House labor compliance initiative; higher court rulings and changes to the fundamental dynamic of class action lawsuits; and a significant increase in state employment legislation.
As a result, complying with contingent labor laws and regulations is more complex than ever for private companies, in-house counsel and human resource departments. Interagency information sharing agreements and memoranda of understanding between the IRS, the Department of Labor, and dozens of state labor agencies and officials have sparked multimillion-dollar lawsuits, fines and penalties. Companies have experienced sharp increases in labor compliance and tax audits, Form I-9 “silent raids” by the U.S. Immigrations and Customs Enforcement Agency (up from 1,444 in 2009 to 2,496 in 2011), crippling stop-work orders, and a significant increase in class action lawsuits.

Topics will include: recent collaboration between the IRS, the Department of Labor, and state labor agencies, recent enforcement efforts in California including the new Criminal Investigations Unit and S.B. 459, the effect of “four more years” of the Obama administration given current and past labor enforcement trends and agency spending, state-by-state regulatory updates including the most active state legislatures and attorney generals since January 2011, independent contractor class action litigation including a discussion of the implications of Perry v. AT&T, Hilton v. Apple, the recent Brinker decision by the California Supreme Court, Arnold v. Mutual of Omaha and a state-by-state analysis of recent legislation, regulations and court rulings in California, Connecticut, Illinois, Massachusetts, New York, Texas and Washington.

Navigating Recent Developments in Worker Classification

In two recent cases, “virtual” at-home call center workers claim that their employers, Apple and AT&T, devised illegal schemes to avoid paying them as employees.  Although questioned for some time, independent contractor compliance appears to no longer have the easy fix of using shell corporations and LLCs to convert would-be employees into independent contractors.

Workers say that AT&T and Apple forced them to form individual Virtual Services Corporations as part of a scheme to insulate AT&T and Apple from paying wages, business expenses, costs including training, and taxes.

The case against AT&T began in March of last year. The case against Apple was filed this past December.

Judging by the courts refusal to grant any of AT&T’s attempts to dispose of the case, this scheme does not appear to have insulated AT&T whatsoever. And remember, this case was brought again AT&T and Arise (to which AT&T subcontracted the hiring of these workers) so even going through an intermediary hiring entity has not insulated AT&T.

Did AT&T and Apple intend to misclassify these workers? Did they intend to use them as a scheme to avoid paying taxes, filing a 1099, or complying with any number of California labor laws?

If so, they may come face-to-face with California’s recently enacted SB 459 which dramatically increases the penalties for intentionally misclassifying workers to as much as $25,000 per incidence.

No one factor is determinative when it comes to independent contractor compliance. And these practices may be deemed fraudulent by many more taxing and regulatory authorities, not just individual plaintiffs in multimillion-dollar class actions.

For a complete solution and answers to your independent contractor compliance questions, not a one-size-fits-all approach or an unproven shortcut, go to ICon.

Last month, the parties notified the court that the case has been settled for an undisclosed amount. Lazarin et al. v. PrO Unlimited Inc. et al., (No. 5:11-cv-03609, N.D. Cal., Jul. 22, 2011).

For federal and state overtime compliance, more and more often we are seeing both the buyers and providers of temporary labor held liable for alleged violations.

Companies often mistakenly rely upon payroll agreements, independent contractor agreements, or staffing contract descriptions to evaluate whether a worker may be deemed exempt or an independent contractor is properly classified. Many companies presume their labor suppliers or those managing temporary and contract labor on-site bear the burden of proper classification. But many staffing firms focus on staffing first with no audits of the work actually being done by contracted workers.

1099 contractors are similarly ignored and often slip through the cracks on vaguely worded purchase orders avoiding any independent contractor compliance procedures and internal business practices. What’s more, these types of claims are commonly excluded from general liability and employment practice insurance.

For more information on the importance of having a dedicated partner whose primary mission is independent contractor compliance and the independent payrolling of contractors, go to ICon.

If only.

As of June 5^th, add West Virginia to the existing 14 states which require independent contractor new hire reporting (once required only for employees).  And naturally, each state, as with employee new hires, has unique reporting requirements.

The fines however, are fairly uniform – ranging from around $25 (unintentional failure to report) to $500 (conspiracy not to report).  Further, reporting is championed as an accurate method for enforcing child support obligations.

Who could argue with that?

Nebraska uses independent contractor new hire reports as an unemployment insurance anti-fraud measure.  And West Virginia’s Bureau of Employment Programs and Workers’ Compensation Commission will apply new hire reports to employment security and workers’ compensation programs, as well as by determining eligibility for federally funded programs such as Medicaid.

But what these 14 states don’t mention is that nine have signed information sharing agreements with the IRS, and four have signed memoranda of understanding with Department of Labor under last year’s independent contractor Misclassification Initiative.

Misclassification can amount to hundreds of thousands of dollars in fines from the IRS, $25,000 from certain state agencies, and exposure to multimillion-dollar class actions for back wages, overtime, benefits, civil penalties and attorneys’ fees.

Now that the government has more visibility into your freelancers, consultants and independent contingent workforce, shouldn’t you?

For more information on securing independent contractor compliance, go to ICon.

Plan/Prevent/Protect Compliance Strategy

The Department has already published several regulatory actions toward the completion of requirements that employers develop programs to address specific issues of worker protection, security, and equity. Some of these issues have included controlling the spread of infectious diseases, examining work areas in underground coal mines for mandatory violations, and identifying patterns of violations in mines. The collection of regulatory actions in the Department’s Plan/Prevent/Protect strategy is designed to ensure employers and other regulated entities are in full compliance with the law every day, not just when Department inspectors come calling. As announced with the Spring 2010 Regulatory Agenda, this strategy requires employers and other regulated entities to:

“Plan”: Create a plan for identifying and remediating risks of legal violations and other risks to workers; for example, a plan to inspect their workplaces for safety hazards that might injure or kill workers. Workers will be given opportunities to participate in the creation of the plans. In addition, the plans would be made available to workers so they can fully understand them and help to monitor their implementation.

“Prevent”: Thoroughly and completely implement the plan in a manner that prevents legal violations. The plan cannot be a mere paper process. This will not be an exercise in drafting a plan only to put it on a shelf. The plan must be fully implemented.

“Protect”: Verify on a regular basis that the plan’s objectives are being met. The plan must actually protect workers from health and safety risks and other violations of their workplace rights.

Employers and other regulated entities who fail to take these steps to comprehensively address the risks, hazards, and inequities in their workplaces will be considered out of compliance with the law and, may be subject to remedial action.”

“Miranda Rights” for exempt workers: the initial announcement with regard to the strategy included a change in record-keeping under the Fair Labor Standards Act (FLSA) to require employers to give written explanation to employees of how their worker status (exempt from overtime or not, independent contractor or not) was determined. The Notice of Proposed Rulemaking (NPRM) has been not been published for this as yet.  The last estimated publication date was October 2011.

Under the original plan, still in the process of being rolled out, department by department, these are the likely record-keeping requirements which will be introduced with regard to worker status:

“This proposal would establish a requirement that employers provide workers with basic information about their employment, including how their pay is calculated. Any employers that seek to exclude workers from the FLSA’s coverage would be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to WHD enforcement personnel who might request it. The proposal will also address burdens of proof when employers fail to comply with records and notice requirements. In addition to serving the Department’s “Plan/Prevent/Protect” strategy, this initiative also contributes to the Labor Department’s efforts to prevent misclassification that denies workers employment law protections to which they are entitled.”  Read the complete DOL Fall 2011 statement of regulatory priorities update here.

Of those 227,000 jobs, “professional and business services” accounted for 82,000.  And over one-half of that increase occurred in “temporary help services”.  Now consider the more than 41,000 jobs “in food services and drinking places”, 35,000 retail jobs, and an overwhelming 8.1 million workers holding down part-time jobs, and that 227,000 reveals anything but traditional hiring.  Some improvement is better than none at all. But industry studies evidence structural inefficiencies within corporate hiring practices fueled by systemic uncertainty over the strength of the recovery.  Our top competitor in global markets however, does not appear to be experiencing any such hesitations, embracing temporary labor as a flexible method for handling uncertain market demand.

Changes Abroad

Sixty-million of China’s more than 300-million urban employees are temporary labor-dispatch workers.[1] According to the All-China Federation of Trade Unions, this number is up more than twofold since China’s 2008 Labor Contract Law came into effect. Labor-dispatch workers are a clever and highly suspect method for companies in China to avoid social security payments, severance payments, and eliminate liability for workplace injuries.[2] The result: increased profits and widespread calls for tighter restrictions on dispatch workers.

Sound familiar? Those cost-savings mirror the integral benefits of many independent contractors and employer of record organizations[3] in the U.S.  Of course, our complex legal and regulatory structure affords American workers considerably more protection than China’s rudimentary 2008 law.  However, regardless of their whereabouts, as with any contingent workforce, companies are free of long-term fixed costs and maintain the flexibility to expand and contract their workforce with fluctuations in market demand.

Surprisingly, even with far fewer concerns over the legality of contingent labor, the U.S. has experienced only modest increases in temporary and contract labor in recent years.  Fortunately, some of our nation’s industry-leading companies have forged ahead, embracing temporary and contract labor on a much larger scale.

Changes at Home

Home Depot recently announced plans to hire 70,000 temporary workers at its U.S. stores to handle its spring selling season.[4]   It’s that kind of flexibility and adept workforce management that positioned Home Depot as the nation’s largest home improvement chain with 1,974 U.S. stores and more than 300,000 employees worldwide.  Even the number two home improvement chain Lowes plans to hire 40,000 temporary workers at its U.S. stores this year.  In Arizona, New Mexico, Nevada, Oklahoma and Utah, Allstate Insurance will add 80 new sales professionals this spring.[5]   Allstate is the second-largest personal lines insurer in the United States (behind State Farm) and the largest that is publicly held.  Candidates will be interviewed and hired by Allstate’s agents (who are independent contractors).  The newly hired sales professionals will represent Allstate, as employees of the regional agents, and represent a significant savings in the fixed costs typically attributable to direct-hire employees.

Despite recent legal challenges, Allstate appears to be in good hands with the current trend in worker classification law.  The California Court of Appeal recently held that a class of nonexclusive insurance agents for Mutual of Omaha were properly classified as independent contractors. [6] More importantly, the Court drafted a clear roadmap for other companies to follow.

Stagnant Hiring Practices, Workforce Planning, Spend Control and Visibility

Even with strong legal and regulatory guidelines, many U.S. businesses are slow to apply proactive employment strategies.  According to a recent nationwide survey, “structural inefficiencies within the hiring process continue to suppress U.S. employment.”[7]  Out of 100 U.S. companies with revenues greater than $750 million and workforces over 1,500 employees, only 63% reported annual or quarterly staffing evaluations at best.  Sixteen-percent admitted that they do not evaluate staffing levels on any kind of “regular basis”.[8]

U.S. companies have not been silent about their need for well-run workforce management either. The 2009 Contingent Labor Management research study surveyed nearly 200 enterprise companies and found cost and visibility to be the key pressures driving organizations to better manage their contingent labor and independent contractor compliance (42% listed a need to increase spend control and 38% listed a need to increase visibility in their overall contingent labor spend).[9]

The financial incentive is clear – independent contractors amount to a 20-30% cost savings per worker in the United States.  In China, under the current system, a labor dispatch worker can amount to as much as a 40% reduction compared to the cost of a full-fledged employee.[10] Looking ahead, skilled temporary workers continue to be the bellwethers of future economic activity: as the economy strengthens, wages for temporary skilled workers increase as employers add to their ranks to capitalize on demand in advance of adding permanent employees and cementing long-term fixed costs. But recent increases in temporary workforces remain modest.

As companies in the U.S. continue to forego the cost savings of proactive workforce management and reclassification,[11] they should ask themselves whether it is any surprise that many industry leaders are the most prolific users of contract and temporary labor in 2012.

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Michael Visconti, Esq.
Director of Business Solutions
ICon Professional Services, Inc.

Not more than one week into this month, Commission Su showed critics that the CIU wasn’t just spinning its guns. Yesterday, Su filed two separate lawsuits in LA Superior Court totaling in excess of $2,047,464.  The complaints listed numerous violations for failures to provide minimum wage and overtime to employees and seek unpaid wages, penalties and damages.

Some companies attempt to gain an unfair competitive advantage (and save costs) by paying workers less than minimum wage, denying workers overtime, misclassifying workers to avoid overtime costs, and not providing of workers’ compensation coverage and benefits.

Others unknowingly run afoul of these rules either by a failure to update their HR and procurement practices, because they are unable to obtain a competitive price for workers’ compensation, or because they are unfamiliar with how to properly classify their contingent workers as an independent contractors.

In the past few months, we have seen unprecedented coordination between state labor agencies, the U.S. Department of Labor, and the IRS.  And while California may be one of the 13 states who have already signed Memoranda of Understanding with the IRS, and one of the 27 states to sign an information sharing agreement with the IRS, it’s clear from Commissioner Su’s actions that California doesn’t need any federal assistance when it comes to putting alleged labor code violators on the hook for millions of dollars.

California has already whittled its budget deficit from $20 billion to $5 billion last year. And it’s clear from stepped up enforcement, lawsuits and fines, the State Labor Department is doing its part to continue that trend.

Don’t be part of California’s strong-arm budget solution. Read more at ICon about how your company can stay in line and out of the crosshairs.

The White House has made no illusions in this time of tight fiscal policy and restricted agency spending.  They are putting whatever eggs they have in one basket.  Which basket is that? – the one most likely to translate into direct and immediate monetary gains.

The IRS estimates that 15% of all employers have misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated annual revenue loss of $3.4 billion.[ii] So while the Labor Department could end up with its discretionary budget reduced to $12 billion next year (from its current level of $12.5 billion) the federal budget’s proposal for the Department of Labor (DOL) includes increased resources “to continue to detect and deter the misclassification of workers as independent contractors”. This would include $14 million to combat misclassification, $10 million for grants to states to identify misclassification and recover unpaid taxes, and $4 million for investigators at the DOLs Wage and Hour Division (WHD).[iii]

This crackdown began with the 2011 budget and shows no sign of slowing down.  In 2011, the IRS began auditing 2,000 companies per year.   This was accomplished, in part, through 100 new enforcement personnel and a $25 million plan to target the misclassification of workers as independent contractors.  Fast-forward to 2012: the DOL’s Wage and Hour Division has now requested an additional $3.8 million and 35 full-time employees for increased enforcement related specifically to misclassified workers.[iv]

This comes as no surprise after the division collected nearly $4 million in back wages for minimum wage and overtime violations that were a result of employers misclassifying their employees as independent contractors in 2010.[v] This was a significant increase over FY 2008, when WHD collected just over $1.3 million in unpaid back wages for the same reason.

And under the umbrella of the DOL’s ongoing misclassification enforcement initiative, the IRS and state labor agencies are looking to share in this budgetary success story.  Thirteen states[vi] and the IRS have signed memorandums of understanding enabling them to share information and coordinate law enforcement efforts between themselves and with the DOL.[vii] 37 states have signed information sharing agreements with the IRS.  The rationale given flatly champions public policy: “to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.”

Yet, somehow more traditional employee protections are being trimmed from the budget.  Most of the current cuts to the DOL come from a decrease in spending on unemployment insurance programs and the trimming of $450 million from the DOL’s share of a program that helps train older workers for jobs and community service programs (this program would be transferred to the U.S. Department of Health and Human Services).  The agency also is expected to save about $245 million from a reduced work load in processing unemployment benefit claims.

As it now stands, over 70% of the budgeting to curtail misclassification is dedicated to the States to recover unpaid unemployment and income taxes.[viii]  And in recent months, more and more companies are receiving employment inquiries from State Labor Departments about their independent contractor compliance as well as random workforce audits.  Despite the egalitarian message put forth by the DOL, the impetus behind the latest reshuffling of labor spending is clear: spend money to make money.

And with Obama’s plan to rebuild and upgrade the nation’s infrastructure – including roads, subways, city bus systems, airports, the electrical grid and high-speed broadband – in the amount of almost half a trillion dollars over five years, the temptation for widespread misclassification is looming.  The construction industry is highly prone to worker classification abuses.  In Connecticut alone, the latest misclassification enforcement initiative between the DOL and State labor agencies has already netted $3.3 million in back wages and $6 million in unpaid wages, enforced 159 crippling stop-work orders and arrested 75 contractors for non-payment of wages.[ix]

Yet many businesses cannot ignore that fact that most independent contractors amount to a 20-30% cost savings per worker.  And while companies continue to be uncertain of the strength of the recovery, and have been reluctant to hire permanent employees, they continue to hedge their bets with skilled short-term help.  In the past two years alone, over 41% of employers have used more independent contractors than in previous years.[x]  But as companies re-examine their talent management practices in order to align their workforce with updated business strategies, the increased use of independent contractors creates widespread legal compliance concerns.[xi]

Contingent workers remain a quick and cost-effective way to bring in high-level or project-specific talent on a short-term or as-needed basis.   And while the costs faced by interagency enforcement initiatives, fines, and work-stoppages are severe, the costs of withholding federal income, Social Security, Medicare, and unemployment taxes from freelancers’ wages, plus the cost of employee benefits and workers’ compensation that companies currently provided to full-time employees, are equally impossible to bear in a competitive market.

For many companies, the cost savings presented by independent contractors are the only way to remain competitive in both U.S. and foreign markets.  And independent contractor compliance requirements are well-known and navigable. Take the construction industry discussed above.  With China aggressively bidding for, and winning, major construction and engineering projects throughout the United States, independent contractors may be one of the few ways American companies can maintain any semblance of a competitive advantage.[xii]

While it is difficult to predict the future in terms of the strength of the U.S. economy, or the outcome of the 2012 election, companies can remain vigilant with respect to their hiring practices and maintain a competitive advantage through the strategic use of contingent workers.

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On February 9^th, California entered into its third agreement, this time in the form of a Memorandum of Understanding with the Department of Labor (DOL).  This agreement goes beyond any agreement previously signed by the state and covers a variety of joint efforts to audit and penalize employers for misclassifying workers as independent contractors.

The DOL has already entered into similar agreements with Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington.  Further details of each agreement can be found on the DOL’s dedicated worker misclassification web page.

In 2011, the Wage and Hour Division of the DOL collected $5M in back wages alone – not including fines and penalties – that resulted from employees being misclassified as independent contractors.  Expect these efforts to multiply: this was before the DOL got a hefty budget and staff increase for 2012 and had state agencies join their enforcement army.

Is your company ready for a joint state-DOL attack?