2015 EMPLOYMENT LAW UPDATES;
WORKER MISCLASSIFICATION AND OTHER
ISSUES OF CONCERN
By: Sarah R. Johnson and
Daniel N. Janich
Holifield & Associates, PLLC
11907 Kingston Pike, Suite 201
Knoxville, Tennessee 37934
sjohnson@hapc-law.com
Phone: (865) 566-0115
Fax: (865) 566-0119
www.holifieldlaw.com
Greensfelder, Hemker & Gale
200 W. Madison, Suite 2700
Chicago, IL 60606
dnj@greensfelder.com
Phone: (312) 345-5003
Fax: (312) 419-1930
www.greensfelder.com
WHAT WE WILL ADDRESS
EMPLOYER CONSEQUENCES OF WORKER MISCLASSIFICATION
UPDATES TO EMPLOYEE HANDBOOKS
EMPLOYEE BACKGROUND CHECKS
TENNESSEE DISCRIMINATION AND RETALIATION CLAIMS
TENNESSEE EMPLOYEE ONLINE PRIVACY ACT OF 2014
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WORKER MISCLASSIFICATION;
WHY IS IT OF CONCERN?
INCREASED USE OF A CONTINGENT WORKFORCE (See: “Shocker: 40%
of Workers Now Have ‘Contingent’ Jobs, Says U.S. Government by Elaine
Pofeldt, Forbes, May 24, 2015,
http://www.forbes.com/sites/elainepofeldt/2015/05/25/shocker-40-ofworkers-now-have-contingent-jobs-says-u-s-government/)
INCREASE IN WORKER MISCLASSIFICATION LITIGATION (FedEx; Uber)
MISCLASSIFICATION IS IN THE CROSS-HAIRS OF THE DOL AND IRS
INCREASE IN IRS AND DOL AUDITS
COSTLY CIVIL PENALTIES FOR EMPLOYERS FOUND TO HAVE
MISCLASSIFIED WORKERS
POTENTIAL CRIMINAL PENALTIES
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WHO IS A CONTINGENT WORKER?
Contingent worker is any individual working in a capacity
other than as a common law employee:
Independent contractors: self-employed workers or freelancers
paid directly by service recipient
Leased employees: hired and paid by staffing company that
contracts with service recipient to provide workers for a fee;
considered common law employees of the leasing organization
Seasonal, temporary and part-time employees: hired for a limited
duration as common law employees, independent contractors, or
leased employees
Contingent workers are more prevalent in the following industries or
professions:
Construction; trucking; “on-demand” workers including technology
workers; house cleaners; drivers; in-home health care providers
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WHO IS AN EMPLOYEE UNDER
FEDERAL LAW: Right to Control Test
RIGHT TO CONTROL TEST: The employer controls the result and
the “manner and means” of the worker’s performance:
ERISA: Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318, 112
S. Ct. 1344 (1992)
Subjective multi-factor test focusing on the hiring party’s right to control
and the manner and means by which the work is performed
IRS: 20 factor test focusing on the following aspects as indicative of the
hiring party’s control: behavioral control (right to direct how and where the
worker performs the tasks); financial control (the hiring party has the right to
control the business and economic aspects of the worker’s job); type of
relationship (how the business and the worker view their mutual relationship
– the intent regarding control over the work)
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WHO IS AN EMPLOYEE UNDER FEDERAL
LAW: Economic Realities Test
Economic Realities Test applies to the FLSA. The test focuses on six
factors (none of which is dispositive) to ascertain a worker’s status:
Is the work performed an integral part of the employer’s business?
Does the worker have opportunity for profit and loss?
Does the worker have overhead?
Is there a significant personal investment that the worker brings to the job?
Does the work require special skills or initiative?
What is the length of engagement?
How much control does the employer have over the job?
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WHO IS AN EMPLOYEE UNDER
FEDERAL LAW: Economic Realities Test
(cont.)
DOL Guidance on the Economic Realities Test:
Wage and Hour Division: Administrator’s Interpretation 2015-1 ( July
15, 2015) provides guidance on how the economic realities test should
be used by courts to determine whether an independent contractor
should be classified as an employee. Whether a worker is an employee
under the FLSA is to be determined by “the economic realities of the
working relationship between the employer and the worker, not by job
title or any agreement that the parties may make.” The factors are not
to be “applied as a checklist, but rather the outcome must be
determined by a qualitative rather than a quantitative analysis.” The
goal of the economic realities test is to determine whether a worker is
economically dependent on the employer (and is therefore an
employee) or is really in business for him or herself (and is therefore
an independent contractor).
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WHO IS AN EMPLOYEE UNDER FEDERAL
LAW: Economic Realities Test (cont.)
Implications of DOL’s Recent Action:
Worker misclassification is in the DOL’s crosshairs leading to aggressive
pursuit of employers of independent contractors through audits;
Increased scrutiny of independent contractor arrangements at the state
level through legislation and the “DOL Misclassification Initiative”
(cooperation between individual states and the DOL to combat employee
misclassification) that in FY 2014 resulted in more than $79 million in
back wages for more than 109,000 employees in the janitorial, temporary
help, food service, day care, hospitality and garment industries;
Introduction of the Payroll Fraud Protection Act of 2015 that would
amend FLSA
DOL also will continue to work with the IRS and 23 states on the
misclassification issue through information sharing and coordinated
enforcement
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EMPLOYER PENALTIES FOR
MISCLASSIFICATION: IRS
Penalties depend on whether the DOL and the IRS determine that the
misclassification was unintentional or willful (intentional):
IRS Unintentional Violations:
$50 for each Form W-2 that the employer failed to file because of
misclassification;
since the employer failed to withhold taxes: 1.5% of the wages plus
40% of FICA and 100% of the matching FICA the employer should have
paid; interest on these penalties accruing daily from the date they
should have been deposited; failure to pay taxes penalty equal to 0.5%
of the unpaid tax liability for each month up to 25% of the total tax
liability
IRS Intentional Violations (suspicion of fraud or intentional misconduct):
20% of all the wages paid, plus 100% of the FICA taxes, both the employee’s
and the employer’s share; criminal penalties for up to $1000 per
misclassified worker and 1 year in prison
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EMPLOYER PENALTIES FOR
MISCLASSIFICATION: IRS –
Section 530 Safe Harbor
Section 530 relieves a business taxpayer from paying employment
taxes on workers previously treated as independent contractors and for
whom the business was not paying employment taxes. The business has
no employment tax liability if it can show that:
 it had a reasonable basis for treating the workers as independent
contractors by meeting the following criteria:
 judicial precedent, published rulings or technical advice
 past IRS audit of the business resulting in no tax assessment on similarly situated independent
contractors
 long-standing industry practice in the industry in which the worker was engaged
It treated all similarly situated individuals as independent
contractors; and
It filed all required tax returns including information returns,
consistent with the treatment of such workers as independent
contractors
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EMPLOYER PENALTIES FOR
MISCLASSIFICATION: DOL
FLSA Violations :
Back wages under the supervision of the Wage and Hour
Division;
lawsuit brought by the Secretary of Labor for back pay and an
equal amount as liquidated damages;
private lawsuit brought by employee for back wages plus an
equal amount as liquidated damages plus attorney’s fees and
court costs;
Secretary of Labor may obtain injunction to restrain any
person from violating FLSA;
two-year statute of limitations for recovery of back pay and
three-year for willful violations;
criminal prosecution for willful violations
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RECENT DEVELOPMENTS IN
IMPROPER CLASSIFICATION
LITIGATION
FedEX:
In June 2015 FedEx confirmed agreed to create a $228 million fund to settle the
decade long California independent contractor case involving about than 2300
FedEx Ground and FedEx Home Delivery pickup and deliver drivers after the ninth
circuit ruled in 2014 that FedEx misclassified them as independent contractors.
This settlement only covers California drivers, but could impact the resolution of
dozens of other FedEx misclassification lawsuits nationwide.
On July 8, 2015 the Kansas Supreme Court ruled that FedEx drivers in Kansas are
employees as a matter of law under the Kansas Wage Payment Act
UBER:
On September 1, 2015 Judge Edward M. Chen of the Northern District Court of
California issues a 68 page ruling that the Uber drivers could maintain a class
action suit on one of their improper classification claims
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WHO IS AN EMPLOYEE UNDER TN LAW:
Common Law Test
The “common law rules applicable in determining the
employer/employee relationship” referred to in § 50-7207(b)(2)(B) were stated in Masters v. Arrow Transfer &
Storage Co., 639 S.W.2d 654 (Tenn. 1982) as follows:
◦ “There are a number of indicia to be considered by a
trier of fact in determining the existence or nonexistence
of an independent contractor relationship, such as (1)
the right to control the conduct of the work, (2) the right
of termination, (3) the method of payment, (4) the
freedom to select and hire helpers, (5) the furnishing of
tools and equipment, (6) self-scheduling of work hours,
and (7) being free to render services to other entities.”
Id., at 656.
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WHO IS AN EMPLOYEE UNDER TN
LAW: ABC Test
A worker is presumed to be an employee unless it is
shown that:
(A) Such individual has been and will continue to be free
from control and direction in connection with the
performance of such service, both under any contract for
the performance of service and in fact; and
(B) Such service is performed either outside the usual
course of the business for which the service is performed
or is performed outside of all the places of business of the
enterprise for which the service is performed; and
(C) Such individual is customarily engaged in an
independently established trade, occupation, profession, or
business of the same nature as that involved in the service
performed.
See Tenn. Code Ann. § 50-7-207(e); see also Stratton v. United
Inter-Mountain Tel., 695 S.W.2d 947, 953 (Tenn. 1985).
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WHO IS AN EMPLOYEE UNDER TN
LAW: ABC Test
 The Tennessee Supreme Court has
stated that a taxpayer must satisfy
each of the three parts in the “ABC
test” above to establish that a
worker is not an employee.
The Beare Co. v. State, 814 S.W.2d 715, 719
(Tenn. 1991).
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CONTINGENT WORKERS AND ACA
 Both “small” and “large” employers may be motivated to
reduce the number of full time employees through the use of
contingent workers either hired or reclassified as independent
contractors.
 Small employers may want to keep the number of full time
employees under 50, so that they would not have to
provide health insurance.
 Large employers that do not want to provide health
insurance, may want to reduce the number of full time
employees to minimize penalties.
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ACA INCREASES MISCLASSIFICATION
RISKS – Proceed With Caution!!!
 Unintended consequences of misclassification:
 Substantially increased risk of DOL and IRS scrutiny
 Potential “Domino” effect of scrutiny from other governmental
agencies
 Potentially very high penalties if independent contractors are
reclassified by the IRS as employees
 Potential need to modify business practices
 NOTE: The Final Regulations do not provide Section 530 safe
harbor relief because employers need to ascertain who their
employees are based on the common law standard
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STAFFING AGENCIES AND ACA
 IRS presumes temporary staffing agencies are the true
common law employers of their leased workers and as
such ultimately responsible for pay-or-play compliance.
 Risks – Possibility that user of staffing agency will be
deemed “true” common law employer obligated to offer
coverage to employees of staffing agency.
 Recommendation: Include indemnification for “pay-orplay” penalties in contract with agency.
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STAFFING AGENCIES AND ACA
(cont.)
 Final IRS Regulations: Applicable when staffing agency is not
the common law employer—
 When the agency makes an offer of coverage to the employee
on behalf of the client under the agency plan, the offer is
treated as made by the client for pay-or-play purposes only if
the fee the client would pay to the agency for an employee
enrolled in health coverage is higher than the fee the client
would otherwise pay the agency for the same employee if that
employee did not enroll in health coverage.
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WHAT EMPLOYERS SHOULD DO TO
MINIMIZE MISCLASSIFICATION RISKS
 Exercise prudence when classifying workers or reclassifying
regular full-time employees as independent contractors.
 Correct any possible misclassifications before the IRS or DOL
audits uncover such misclassifications
 Re-examine independent contractor relationship to ascertain
whether they may be vulnerable to DOL’s broad construction of
who is an employee.
 Review independent contractor contracts and ascertain whether
the contingent worker has his or her own business.
 Use employee leasing agencies to hire workers, but beware of the
risk of having the business and the staffing agency deemed as
“joint employers.”
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WHAT EMPLOYERS SHOULD DO TO
MINIMIZE MISCLASSIFICATION RISKS
(Cont.)
Ensure that contingent workers perform duties
distinguishable from those performed by regular common
law employees.
 Review the language of all employee benefits plans to
confirm that they provide a clear exclusion of independent
contractors and all leased employees from plan eligibility.
The exclusion should make it clear that any reclassifications
of such workers by any government agency as common law
employees shall not result in retroactive eligibility for
benefits.
Review leased employee arrangements to ensure that they
comply with IRS rules governing such arrangements.
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ACA REPORTING REQUIREMENTS FOR
EMPLOYERS SUBJECT TO “PAY OR PLAY”
RULES
 August 7, 2015: IRS issued new draft forms and
instructions for use by health coverage providers
and employers required to report coverage under
ACA. Annual reporting required annually beginning
in 2016 for coverage in 2015.
 ACA reporting requirements are addressed in
Internal Revenue Code Section 6055 (for health
insurers and sponsors of self insured group health
plans), and Section 6056 (for employers with 50 or
more full time employees, i.e., “applicable large
employers” or “ALEs”).
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ACA REPORTING REQUIREMENTS FOR
EMPLOYERS SUBJECT TO “PAY OR PLAY”
RULES (Cont.)
 The forms 1094 and 1095 are very detailed and the IRS
instructions are complex. Reporting with these forms will
be a time consuming and complex process for most
employers.
 The first due date for filing the reporting forms with
the IRS is February 29, 2016 (March 31, 2016 if filing
electronically). Reporting entities can obtain an automatic
30- day extension of the filing deadline by submitting a
Form 8809 (“Application for Extension of Time To File
Information Returns”) to the IRS on or before the due date.
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ACA REPORTING REQUIREMENTS FOR
EMPLOYERS SUBJECT TO “PAY OR PLAY”
RULES (Cont.)
 For furnishing individual statements (due by February 1, 2016),
draft instructions provide that the responsible entity may seek
an extension of up to 30-days by sending a written request
(not the Form 8809) to the IRS’ Information Returns Branch
that is postmarked prior to the original due date.
 Effective January 31, 2015, a reporting entity may be subject
to a $250 per failure (previously $100) penalty, subject a
calendar- year maximum of $3,000,000 (previously
$1,500,000). If a “good faith” effort is made by the reporting
entity to complete the forms correctly, and errors are
subsequently found, the IRS will waive the penalties for now if
incorrect submissions are subsequently corrected.
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EMPLOYEE HANDBOOK:
Important Provisions – Annual
Review






Vacation time
Sick pay
Benefits
Severance pay
FMLA leave (if applicable)
COBRA
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EMPLOYEE HANDBOOK: Important
Provisions – Annual Review
 Harassment policies
 Privacy policies
 Disciplinary procedures
 Absences
 Tardies
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EMPLOYEE HANDBOOK:
Same-Sex Marriage
 Does your Employee Handbook define spouse
or marriage? Update these definitions to be
in line with Obergefell v. Hodges – gender
neutral definitions
 FMLA Leave is now available to eligible
employees in all same-sex marriages
 COBRA benefits extend to same-sex spouses
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EMPLOYEE HANDBOOK:
ADA Issues
 Must allow a reasonable
accommodation, i.e. leave
 However, a “No-Restrictions
Policy” (requiring an employee
with a disability to stay out of work
until 100% healed is a per se
violation of the ADA)
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EMPLOYEE HANDBOOK:
ADA Issues
 A “No-Restrictions Policy” does
not allow a case-by-case
assessment of an individual’s
ability to perform essential
functions of the individual’s job,
with or without accommodation
EEOC v. Brookdale Senior Living Communities, Inc., Civil Action No. 14-cv-02643-KMT
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EMPLOYEE HANDBOOK:
FLSA Issues
 Work done on smartphones/tablets
after work hours must be at the
request of the employer to be eligible
to be “on the clock.”
 This policy must be clearly set out in
the Employee Handbook to avoid any
misinterpretation and to appropriately
defend any overtime pay claims
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Tennessee Discrimination &
Retaliation Claims
 Effective July 1, 2014; State law discrimination and
retaliation claims under the Tennessee Human
Rights Act (“THRA”), Tennessee Public Protection
Act (“TPPA”), and the Tennessee Disability Act are
subject to compensatory damages caps as follows:
 8-14 employees: $25,000
 15-100 employees: $50,000
 101-200 employees: $100,000
 201-500 employees: $200,000
 501+ employees: $300,000
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Tennessee Discrimination &
Retaliation Claims
 State law retaliatory discharge claims have been
eliminated
 Plaintiffs can prevail on Tennessee state law
whistleblower claims (under the TPPA) only if they show
that their protected activities were the sole cause of
their termination rather than a substantially motivating
factor under the common law
 Plaintiffs cannot pursue claims in state and federal court
at the same time based on the same facts
 Managers and supervisors are no longer liable
individually under the THRA
 In line with Title VII under federal law
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Tennessee Employee Online
Privacy Act of 2014
 Employers cannot request an employee or applicant to
disclose a password to a personal internet account
 Employers cannot compel an employee or applicant to
access a personal internet account in the presence of
the employer so that the content can be seen
 Employers cannot penalize for failure to provide
password or refusal to access account in employer’s
presence
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Tennessee Employee Online
Privacy Act of 2014
 Exceptions. Employers may:
 Request usernames and passwords to gain access to
devices and accounts that are supplied or paid for by the
employer or used for employer
 Discipline employees for transferring employer’s
proprietary or confidential information to employee’s
personal account without employer’s authorization;
 Restrict or prohibit an employee’s access to certain
websites while using an employer’s network;
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Tennessee Employee Online
Privacy Act of 2014
 Exceptions. Employers may:
 Monitor, review, access or block data stored on an electronic
device supplied by or paid for by the employer, or stored on
an employer’s network;
 Comply with a duty to screen employees or applicants before
hiring or to monitor or retain employee communications: (a)
that is established under federal law or by a “self-regulatory
organization” (e.g., FINRA); (b) for purposes of law
enforcement; or (c) for purposes of an investigation into law
enforcement conduct;
 View, access, or use information about an employee or
applicant that is available in the public domain
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Tennessee Employee Online
Privacy Act of 2014
 Employers may conduct investigations if:
 (a) there is specific information on the employee’s
personal account regarding the subject of the
investigation (so long as the investigation involves
potential legal violations or work-related
misconduct); or
 (b) the employer has specific information about an
unauthorized transfer of the employer’s confidential
or proprietary information to the personal account.
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Criminal Background Checks
 EEOC Guidance. In deciding whether a
particular offense should be qualifying,
consider the following:
 the nature and gravity of the criminal offense or
conduct;
 how much time has passed since the offense or
sentence; and
 the nature of the job (including where it is
performed, how much supervision and interaction
with others the employee will have, etc.)
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Credit Background Checks
 Fair Credit Reporting Act. Employers must:
 Get the applicant’s written consent before
requesting a background check.
 Give the applicant notice if the employer plans to
screen him or her out based on the contents of the
report. In this situation, the employer must also give
the applicant a copy of the report.
 Notify the applicant once the employer makes a final
decision not to consider the applicant based on the
report.
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ANY QUESTIONS?
 Additional information is available at
www.holifieldlaw.com.
 If you have questions or concerns about any
issues discussed, please contact us.
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