How to Avoid the Pitfall of
Worker Misclassification
2012 NILG Annual Conference
Waikoloa, Hawaii
August 29, 2012
Presented by:
David S. Fortney, Esq.
Jill M. Smith
Shareholder, Fortney & Scott, LLC
Executive Director, WorkPlace HR
Naomi J. Hackenberg
HR Consultant, WorkPlace HR
Important Legal Notice
This presentation is to provide general information and
updates. These materials are not intended to provide
legal advice.
Federal contractors’ representatives should consult either
with their in-house counsel or, as directed, with an
experienced employment attorney for legal advice about
whether, based on their specific facts and circumstances,
their company complies with the applicable federal and
state laws and regulations.
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What Is Worker Misclassification?

Classifying an “employee” to a status of “nonemployee,” typically as a Consultant or Independent
Contractor (and sometimes a Temp who never leaves!).

Generally, if a worker looks like an employee, is treated like
an employee, and acts like an employee then he/she is an
employee…
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Plethora of Legal Considerations
Title
VII
FLSA
ERISA
Worker
Misclassification
Worker’s
Comp
NLRA
IRC
Federal
Contractor
Obligation
s
Unempl.
Insurance
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So…How Is Employee Status
Determined?
The Supreme Court has ruled that the determination
depends on the totality of the circumstances.
 Fact-specific tests are used to determine whether a
person is an employee or an independent contractor.

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DOL’s “Economic Realities” Test
1.
2.
3.
4.
5.
6.
7.
Extent to which services rendered are an integral part of
the principal’s business.
Permanency of the relationship.
Amount of the alleged contractor’s investment in facilities
and equipment.
Nature and degree of control by the principal.
Alleged contractor’s opportunities for profit and loss.
Amount of initiative, judgment or foresight in open
market competition with others required for the success
of the claimed independent contractor.
Degree of independent business organization and
operation.
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DOL’s “Economic Realities” Test
(cont.)

Immaterial factors:




Place where work is performed.
Absence of formal employment agreement.
Whether the worker is licensed by a state or local
government.
Time and mode of pay.
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Penalties for Misclassification

Potential penalties depend on the law(s) implicated in a
misclassification finding:





Back wages: minimum wages and overtime.
Liquidated damages: back wages x 2, and monetary penalties.
Injunctive relief.
State law penalties.
Individual and class-action lawsuits:
•
•
•




Wages;
Employer-provided benefits; and
Government-mandated benefits.
Loss or suspension of government contracts.
Civil and criminal actions.
Attorneys’ fees, expert fees and court costs.
Negative publicity—always.
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Misclassification Case Examples

FedEx Ground misclassification litigation under
various state laws:


California: Ruling that 203 California drivers were
misclassified as independent contractors.
In 2005, driver misclassification actions were filed in 31
states involving 27,000 drivers; consolidated into multidistrict action in N.D. Indiana.
• Judge in the MDL granted summary judgment against FedEx for
Illinois drivers, but in favor of FedEx as to Kansas drivers.

Vizcaino v. Microsoft Corp.
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Activity:
Are These Workers Employees?
THIS ONE?
THIS ONE?
THIS ONE?
THIS ONE?
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The Situation
ABC Widget Co. is a manufacturing company that has
been proudly supplying widgets to the government
since 1976. In 2005, ABC Widget began to supplement
its R&D team with independent contractors (“ICs”).
 You’ve been tasked to participate as part of an internal
audit team to determine whether there are any
misclassified workers at ABC Widget.

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Your Assignment: Part 1
Review the next slide (“The Stage is Set”).
 Break into groups of 5-6.
 Collectively determine if there are red flags; if so, what
are they?
 In five minutes, be prepared to report on your findings.

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The Stage is Set

Jacob Spangler started working as an IC for the
Company in 2009. Originally, he was performing work
for two companies simultaneously, but in 2011, he
began working for ABC Widget exclusively. He works
from home, 8:30 a.m. - 5:30 p.m., Monday through
Friday, and regularly sends reports of his work to the
R&D Team Leader—an ABC Widget employee. He
recently negotiated a 10% increase to his hourly rate
and participates in weekly staff meetings.
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Your Assignment: Part 2
We’ve identified the red flags.
 Now in your group, collectively determine the
questions you should ask (and documents you may
want to review) to help your team decide if the worker
is appropriately classified as an IC.
 In five minutes, be prepared to report on your findings.

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Now What?
You’ve completed your audit of non-employee workers
at ABC Widget. Congratulations!
 In your self-audit, you identified some workers that
were misclassified as independent contractors, while
some workers are properly classified as independent
contractors.
 Always work with counsel to devise and implement the
best reclassification strategy under privilege.

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Retaining IC Classification

Take steps to:


Document support for independent contractor classification
and retain records to defend in an audit or lawsuit.
If necessary:


Make changes based on factors reviewed to support an
independent contractor classification (e.g., less
supervision/control, remove non-compete restrictions, etc.).
Reassess arrangements, written agreements, indemnification
provisions with staffing agencies/contingent workforce
providers.
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Reclassifying ICs as Employees

Evaluate the best time to make classification changes to
minimize disruption and risk.


The longer misclassification continues, the more risk an
employer incurs.
Evaluate the best way to make classification changes.


Notification process.
Determination of accompanying back pay, if applicable.
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Connecting the Dots
What does this
have to do with
me???
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The DOL/IRS Partnership
“U.S. Labor
Department and
IRS Sign Pacts to
Coordinate….”
“DOL and IRS to Share
Data on Employers Who
Commit Payroll Fraud”
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DOL/IRS Memorandum of
Understanding (MOU)

MOU signed September 19, 2011.

DOL and IRS will share information with each other.

More than 10 states have signed similar agreements
with the DOL and IRS.
“We’re standing united to end the practice
of misclassifying employees.”
- Secretary Hilda Solis
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Key MOU Content

DOL will:


Refer information that may raise IRS employment tax compliance issues
related to misclassification.
IRS will:


Evaluate and classify DOL referrals and conduct examinations to
determine compliance as appropriate…referrals will be shared with state
and municipal taxing agencies at its discretion.
Provide DOL with information (not taxpayer return information) that
may constitute evidence of any Federal criminal law that the DOL
enforces.
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The New OFCCP Scheduling Letter
Proposed Scheduling Letter submitted to the Office of
Management and Budget on September 29, 2011.
 For compensation submission, the definition of
“employee” is greatly expanded…

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The New OFCCP Scheduling Letter
(cont.)

Item 12 of the proposed scheduling letter states:

“Employee level compensation data for all employees
(including but not limited to full-time, part-time, contract,
per diem or day labor, temporary… Provide gender and
race/ethnicity information and hire date for each employee
by job title, EEO-1 Category and job group in a single file.”
(Emphasis added.)
Remember: Information produced in an OFCCP audit may be shared
with Wage and Hour; you could find yourself facing an FLSA audit!
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The Complexities

Non-employee data:




What is the impact on joint employer relationships?



How to gather?
Where to maintain?
How to report?
Who defends potential violations?
Who is responsible for potential remedies?
What is the impact of reclassification on selection
processes?
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What’s Next?
Will this open the door to
expanding the definition
of “employee” for all
EEO and affirmative
action-related obligations?
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Your “To-Do” List
Audit your non-employee workforce.
 Identify possible worker misclassifications.
 Develop and implement corrective actions.
 Redesign related policies and processes as needed.


Train your leadership and HR team accordingly.
Reminder: Consult with legal counsel before embarking on this
adventure…this project should be performed at the direction of
your employment attorney.
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Questions or comments?
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David S. Fortney, Esq.
dfortney@fortneyscott.com
David S. Fortney is a co-founder of Fortney & Scott, LLC, a Washington, DCbased law firm counseling and advising clients on the full spectrum of workplacerelated matters, including employment discrimination and labor matters,
compliance programs, government contracting, international dispute resolution
and counseling matters, and developing strategies for avoiding or responding to
workplace-related crises. Mr. Fortney’s OFCCP practice includes representing
and counseling federal contractors nationwide on complying with contractors’
nondiscrimination and affirmative action obligations enforced by OFCCP,
advising and representing clients facing audits by OFCCP, including corporate
management reviews, compensation audits, on-site audits, desk audits, Functional
Affirmative Action Program audits, and audits performed to assess new federal
contractors’ compliance. Mr. Fortney is a Fellow with the College of Labor and
Employment Lawyers and has been recognized for many years as a leading
employment lawyer in Washington, DC by numerous surveys and organizations,
including CHAMBERS USA and Washington, DC Super Lawyers.
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Jill M. Smith
jsmith@workplacehr.com
Jill Smith is the Executive Director for Workplace HR, LLC,
specializing in equal employment opportunity and affirmative
action matters for federal contractors nationwide. Ms. Smith has
over 25 years of experience in Human Resources with specific
emphasis in the strategic development and effective deployment of
programs that result in improved compliance with the non
discrimination and affirmative action obligations of federal
contractors that are enforced by OFCCP. Ms. Smith is known for
identifying potential problem areas and designing corrective actions
that work: from the design of applicant record keeping processes to
the development and facilitation of training programs. Her
experience covers a wide spectrum of businesses in various stages
of development and her expertise includes the development of selfaudit programs that assist in effectively monitoring compliance.
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Naomi J. Hackenberg
nhackenberg@workplacehr.com
Naomi Hackenberg is a Human Resources Consultant for
Workplace HR, LLC, specializing in equal employment opportunity
and affirmative action matters for federal contractors nationwide.
Ms. Hackenberg’s expertise spans the fields of affirmative action
programs, construction, staffing, industrial organization, and
diversity. She assists federal contractors in developing affirmative
action programs and meeting their federal contract compliance
obligations. Ms. Hackenberg has developed and led training
programs for supervisors and managers in meeting their federal
contractor compliance obligations and assisted service and supply
and construction clients in implementing workplace policies and
programs. Additionally, she has presented webinars on OFCCP
compliance for national audiences.
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Easy Way to Stay Up to Date….

Visit our blog, Workplace FYI, where we discuss these
and other developments:
www.workplacefyi.com
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Fortney & Scott, LLC
Workplace solutions. Legal excellence.
WorkPlace HR
WorkPlace HR. Problem Solved.
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Contact Information
Fortney & Scott, LLC
Washington, DC
www.fortneyscott.com
WorkPlace HR, LLC
Washington, DC
www.workplacehr.com
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