Employers who want to (or need to) use independent contractors often scratch their heads at a disconnect – how do you determine who is an independent contractor?  I recall at one speaking engagement years ago, an employer who came up to me and asked: “So are you saying that there are TWO tests to determining if someone is an independent contractor?”

Yes, that’s exactly what I was saying.

The Connecticut Department of Labor and the Connecticut Department of Revenue Services (the state equivalent to the IRS) have each developed tests for determining if someone is an employee vs. an independent contractor.

And they are not the same.

I’ve looked at this before, but my colleagues at Shipman & Goodwin — who now host a terrific new little blog on tax law (www.cttaxalert.com) — have posted about it too — but this time from the perspective of tax lawyers. 

Worth your time.

Back in 2011, I wondered aloud: Might the impact of new arbitration decisions from the U.S. Supreme Court bring about the end to big wage & hour class actions?

At the time, I said it would be premature.

Seven years later – what’s changed?

Well, as it turns out, wage & hour class actions are not dead. Indeed, based on some statistics, they’re as costly as ever.

Earlier this year, the Workplace Class Action Litigation report noted that just the top ten class action settlements totalled over $2.72 billion in 2017. I’d say the class action is still very much alive and well.

Yet there are still signs on the horizon that employers may be able to fight back a bit on these claims.

Late last month, the Ninth Circuit shot down a potential class action against Uber, on the grounds that the arbitration provision barred class actions.  

It’s a significant victory for the company and highlights a way for companies to push back against the threat of class actions.

But the company may still have another obstacle. According to The Verge, counsel for the Uber drivers, are encouraging the drivers to seek arbitration on an individual basis. Indeed, it is seeking thousands of them.  Consider it the “death by a thousand paper cuts” approach.  Will it work?

Stay tuned.  In the meantime, companies ought to still consider arbitration provisions with class action waivers as I noted earlier this year.

Making Lemonade Out of Lemons
Making Lemonade Out of Lemons

Are you tired of lawyers commenting already on the new overtime rules?

(The answer should be no, of course, since you’re reading this blog and thus have room for one more view.)

But I think it’s fair to say that we haven’t seen a feeding frenzy like this on employment law in many, many years.  And with the massive publicity of this rule comes an opportunity, as I’ll explain too.

So, dear readers, deep breath time.   We’ll get through it together.

There’s already been lots of pixels spilled about how employers can “solve” their overtime issues that will arise under this rule by making various changes in their workplace.

For example, employers can increase an employee’s salary to $47,476 annually if that employee otherwise meets the duties test, to keep an employee “exempt” from overtime.

Or the employer can limit the overtime that the employee can work, explaining that it is concerned with controlling costs.

But in all the analysis, I think one big thing has been overlooked: Employers can use this announcement as an opportunity to review and re-classify all sorts of employees — even if they are not directly impacted by the new rule.

Too often, employers who discover that they have misclassified employees believe that they are in a conundrum. Keep their head down and hope no one notices, or properly classify the employee and keep their fingers crossed that they don’t get sued for back pay.  Neither option is a great one for employers who need to get into compliance. (I once proposed an amnesty proposal to solve this dilemma.)   Sometimes, employers have legitimate reasons why an employee has been classified as non-exempt but wants to avoid any future issues. Perhaps in other situations the employee isn’t working overtime anyways.

But here is where the opportunity comes in: As I highlighted at the start, the new overtime rule has received unprecedented amounts of publicity in the workplace. No doubt most of your employees have now heard something about it.  So, some won’t be surprised if they are notified that things are changing for their position as a result of the new rule.

While the rule doesn’t provide amnesty for employers who make such changes, the new rule does remove some of the suspicions employees may have about the changes — even when those changes are perfectly legal.  Employees may be more understanding.  Employers can explain truthfully that the new rule has required them to review the classification of all of its employees and the changes are as a result of the rule.

So, yes, the rule may be difficult to comply with. But don’t miss out on the opportunities that may arise from this rule as well.  Full compliance with the law will be so much cheaper than paying for a massive wage-and-hour suit.  And as I’ve said before, compliance is the ultimate goal. You should not be looking for ways to circumvent the law.

So ultimately, perhaps you’ll view the new overtime rule as more about lemonade than lemons, as the saying goes.

starrAs I return from some time off, my colleagues, Gary Starr and Chris Engler, have dug a bit deeper into the Connecticut Supreme Court decision from last week and issued this alert which we have also sent to clients. 

A deeply divided Connecticut Supreme Court recently issued a long-awaited decision, Standard Oil v. Administrator, regarding who is an independent contractor.  The reason this is significant is that companies that utilize the services of independent contractors are not responsible for, among other taxes, unemployment compensation contributions.  The Board of Review of the Employment Security Appeals Division has long interpreted the statute liberally and in this case concluded that the first two prongs of the “ABC” test required that the workers be treated as employees.  The Connecticut Supreme Court overturned that ruling, finding that the workers were indeed independent contractors.

(For background on the cases, see my prior posts here and here.)

The ABC test requires a company seeking an exemption from the tax to meet all aspects of the statute.

  • Part A focuses on the company’s direction and control over the workers.
  • Part B looks at whether the work was performed at the company’s place of business or whether the work performed is integral to the company’s business.
  • Part C, which was not at issue in the case, is focused on whether during and after providing services to the company, the independent contractor held himself out as offering the same services to others and has continued in the business of providing the same services.

Installers/technicians performed installation and repair work on oil furnaces and security systems that were sold by Standard Oil.  Standard Oil treated them as independent contractors.

The Connecticut Supreme Court found that the installers/technicians owned their own tools and vehicles, were licensed and certified, and were not supervised at their worksites by a representative of Standard Oil.  The work of the installers/technicians was not inspected by the company, either during or after the work.  The installers/inspectors were allowed to hire their own assistants.  The installers/technicians were free to accept or reject any assignment without adverse consequences and determined when they were available to work, but once they accepted an assignment, they had to perform the work within the time frame set by the customer and the company.  The installers/technicians performed the same work as part of their own businesses.  The company provided no employee benefits.  The installers/technicians were not required to be trained by the company nor were they required to display the company’s logo on their clothing or vehicles.  They were not paid by the hour.  Each signed an independent contractor agreement.  Based on these factors the Court concluded that the company satisfied the exemption under Part A.

There was a significant dispute between the majority and dissent opinions on whether Part B was satisfied.

The focus of the dispute and the critical factor was whether the work was performed at the company’s “place of business.”  This was a matter of statutory interpretation that involved analyzing the plain words, examining the language in the context of the broader statute, and reviewing the legislative history and case law from other states.

The majority’s ultimate conclusion was that “the meaning of ‘places of business’ in the present context should not be extended to the homes in which the installers/technicians worked, unaccompanied by the [company’s] employees and without . . . supervision.”  Thus, the company satisfied the criteria for the exemption under Part B.

This decision is welcome news for companies that use independent contractors.

But while there is euphoria in the ultimate decision, it is important to realize that Part C was not at issue in the case, but may be for other companies who use independent contractors.

Additionally, the Department of Labor may seek to have the statute amended to reverse this decision and to compel companies to pay into the unemployment compensation trust fund.

For companies who use independent contractors it is critical to obtain and follow legal advice to make sure such relationships can hold up under scrutiny of the ABC test, while also recognizing that federal agencies use other criteria in determining whether the worker is an employee or independent contractor.

Late this morning, the Connecticut Supreme Court released one of its most important decisions on employment law in years. I’ve been talking about it prior posts but its decision is a welcome surprise for employers who feared the worst. 

Because I’m out of the office for a few days, I’ve asked my colleague Chris Engler to give a brief recap.  My thanks to him.   We will have more in the upcoming days. 

The long-awaited decision in Standard Oil v. Administrator, Unemployment Compensation has arrived, and it brings good news for employers.

As you might recall, the Board of Review of the Employment Security Appeals Division had found that certain workers were employees of Standard Oil instead of independent contractors. The Board of Review’s analysis concluded that all three prongs of the ABC test rendered the workers to be employees.

The Connecticut Supreme Court has disagreed. Regarding part A, which focuses on the employer’s direction and control over the workers, the Court relied on the fact that the workers owned their own tools and vehicles, were independent licensed and certified, and were not supervised at their worksites by a representative of Standard Oil. As the Court further noted, “the installers/technicians were free to accept or reject any assignment offered to them without adverse consequences.”

Turning to part B of the test, which looks at whether the work was performed at the employer’s place of business, the Court looked at the case law from numerous states to guide its analysis. Its ultimate conclusion was that “the meaning of ‘places of business’ in the present context should not be extended to the homes in which the installers/technicians worked, unaccompanied by the plaintiff’s employees and without the plaintiff’s supervision.” (The “plaintiff” here was Standard Oil, the employer.) The Court specifically stated its goal of avoiding a broad interpretation of this part of the ABC test.

This decision is pleasant news for employers, especially those who use independent contractors to visit and service customers’ sites. It also suggests that the Supreme Court is taking a firmer stance against the Employment Security Division’s broad interpretations of who is eligible for unemployment benefits.

Employers who use independent contractors should breathe a sigh of relief.  But employers who use them should be sure to follow legal advice to make sure the relationships can hold up under court scrutiny

worker3A while back, I got this question: Can we still use independent contractors for our business?

This answer is certainly yes. But you wouldn’t know it from all the headlines of late.

And you wouldn’t think so by the attacks on the use of independent contractors by government agencies.  Take this quote from the U.S. Department of Labor page on the subject:

The misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy.

Grave stuff.

Indeed, the DOL and the IRS have a memorandum of understanding between the two agencies to help “reduce the incidence of misclassification of employees as independent contractors.”

In Connecticut, we’ve had a Joint Enforcement Commission on Employee Misclassification in place for several years.

And more than that, a significant Connecticut Supreme Court case (Standard Oil of Connecticut v. Administrator, Unemployment Compensation Act) should be decided this year on the subject.

I talked about that case in a lengthy post back in August 2015.    Oral argument on that case was held back in October 2015.

So what’s an employer to do in the meantime? Here are three things.

  1. Understand the ABC Test.  What is it? Well, it’s not as easy as ABC, but in Connecticut, it’s the controlling test to determine whether someone is an employee or independent contractor according to the CTDOL.

    According to the CTDOL: A. The individual must be free from direction and control (work independently) in connection with the performance of the service, both under his or her contract of hire and in fact; B. The individual’s service must be performed either outside the usual course of business of the employer or outside all the employer’s places of business; and C. The individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service performed.

    But don’t forget: the USDOL uses an “economic realities” test. Try to determine whether your relationship fits BOTH tests.

  2. Prepare a contract.  A contract isn’t going to solve all the issues of whether someone is an independent contractor or employee, but it may solve some of them. A contract can outline the responsibilities of the contractor and set up the fences that the relationship shouldn’t cross.

    For example, the contract may dictate a project to be completed, but won’t dictate how it should be done or the hours which the contractor has to work.  Or it could say that the contractor must bring their own tools to the project.  And please, get your contract reviewed by a lawyer.

  3. Use independent contractors sparingly.  This is a general rule and there are exceptions to it, but when your workforce is seemingly made up of independent contractors (see: Uber), you’re more susceptible to attack.  If you’re not sure, I like Jon Hyman’s “duck” rule:

Despite these specific criteria, I have reached the conclusion that the best test to determine whether a worker is an employee or an independent contractor is the “duck” test—if it looks like an employee, acts like an employee, and is treated like an employee, then it’s an employee

Independent contractor relationship remain under attack, but don’t be afraid to use them in legitimate purposes.

And finally, as the legislature considers the issues this year, I’m reminded of a quote from a Hartford Business Journal column in 2010 that said this:

By characterizing all of us that depend on a flexible workforce as abusers of the system who purposely “misclassify” workers, the state has the potential to destroy a lot of businesses. And, it does a tremendous disservice to the tens of thousands of businesses that rely on us to provide the flexibility, service and responsiveness that independent contractors offer us.

The point is this: Not all independent contractors are “misclassified” employees. It is a bad business decision for the state of Connecticut to wage some kind of war on every small business that relies on independent contractors to get the job done.

Sharon Palmer, the Commissioner of the Connecticut Department of Labor, will retire at the end of this year, news that was first reported by the CT Mirror website.

According to CT Mirror:

In an interview, she described her decision to retire as driven by age and circumstance, not politics or a consequence of overseeing the Department of Labor at a difficult juncture. She laughed and added, however, “It’s tired me out, that’s for sure.”

Governor Dannel Malloy issued a press release announcing the retirement and commending the service of Commissioner Palmer:

Governor Dannel P. Malloy today announced that Connecticut Department of Labor Commissioner Sharon M. Palmer has opted to retire from the agency at the end of this year.  Commissioner Palmer began her position as the head of the department in August 2012 and was reappointed earlier this year when the Governor began his second term in office.

“I have always known Sharon to be an advocate for helping others, and have been impressed with her focus on workforce and education issues in our state, because both create good jobs and deliver a strong economy for Connecticut,” Governor Malloy said.  “Under Sharon’s tenure, many successful employment programs and services were developed and launched. I thank her for her unwavering dedication and her service.”

While Palmer’s background was as a teachers’ union president and AFL-CIO offer, her tenure at the CTDOL was marked by the lack of any major new department worker initiatives similar to those announced on a federal level. Instead, the Department has continued to focus on grants and training programs.

Indeed, while the press release says that the department “ramped up efforts to fight misclassification” of workers as independent contractors, we haven’t seen nearly the same publicity or efforts that have been attached to the United States Department of Labor activities.

Malloy said that a search for her successor begins now and presumably one will be named before Palmer’s departure.

Time to find your happy place.
Time to find your happy place.

Whatever happened to summer vacation? You remember, that downtime, when nothing much happened?

First, there were new proposed OT rules. Then, word came out EARLY (I got an alert at 6a!) today that the U.S. Department of Labor issued new “guidance” that will try to limit the misclassification of employees as indpendent contractors.

The goal is nothing less than ensuring that most of these workers qualify as employees under the federal Fair Labor Standards Act.

Here’s the key quote:

In sum, most workers are employees under the FLSA’s broad definitions… The very broad definition of employment under the FLSA as ‘to suffer or permit to work’ and the act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor.

It states elsewhere:

This Administrator’s Interpretation first discusses the pertinent FLSA definitions and the breadth of employment relationships covered by the FLSA. When determining whether a worker is an employee or independent contractor, the application of the economic realities factors should be guided by the FLSA’s statutory directive that the scope of the employment relationship is very broad. This Administrator’s Interpretation then addresses each of the factors, providing citations to case law and examples. All of the factors must be considered in each case, and no one factor (particularly the control factor) is determinative of whether a worker is an employee. Moreover, the factors themselves should not be applied in a mechanical fashion, but with an understanding that the factors are indicators of the broader concept of economic dependence. Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor). The factors are a guide to make this ultimate determination of economic dependence or independence.

I’ve talked about the economic realities test before.  This not a new issue.

In fact, the USDOL had a fact sheet in 2014 stating almost the exact same thing.

But the USDOL’s new “interpretation” is certainly going to force employers to take a new look at their relationships to determine whether independent contractors should be better classified as employees.  And it’s going to raise some questions on enforcement as well.

So, to remind you, what are those factors under the “economic realities” test?

  1. Is the work an integral part of the employer’s business?
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  3. How does the worker’s relative investment compare to the employer’s investment?
  4. Does the work performed require special skill and initiative?
  5. Is the relationship between the worker and the employer permanent or indefinite?
  6. What is the nature and degree of the employer’s control?

But, and here’s where we all need to take a deep breath, this type of analysis isn’t all that new or surprising.  Courts have been using it for a while.  And it shouldn’t cause you to drop everything you’re doing today to look at this.

In fact, if you’re in Connecticut, I would actually suggest taking an even deeper breath because the issue is even more complicated than that.

There is a case now pending at the Connecticut Supreme Court — Standard Oil of Connecticut v. Administrator, Unemployment Compensation Act, that is examining whether certain contractors are “employees” under a different test — the ABC Test, and the proper application of that test under Connecticut’s own misclassification laws).

As explained by the CTDOL:

The ABC Test applies three factors (A, B, and C) for determining a worker’s employment status. To be considered an “independent contractor,” an individual must meet  all three of the following factors:
A. The individual must be free from direction and control (work independently) in  connection with the performance of the service, both under his or her contract of hire and in fact;
B. The individual’s service must be performed either outside the  usual course of business of the employer or outside all the employer’s places of business; and
C. The individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service performed

Yes, in addition to the USDOL’s “Economic Realities” test, the Connecticut Department of Labor uses a different test for unemployment compensation purposes named the “ABC” test.

And don’t even get me started on the IRS’s “20 factor” test.

Are you in your happy place yet?

Maybe it’s time for that vacation after all.

Or, if you’re an employer, just take this latest news in stride. If you have independent contractors, the guidance is really just another reminder that the use of these contractors continues to be heavily disfavored by government agencies.

But if you’ve been reading this blog (see this post, for example, from 2010), you’ve known that, right?

Consistent readers of the blog will no doubt know of my weaving in pop culture into blog posts. So it was with some good fortune that as I began to write this post, the song “Dog Days are Over” popped up on my iPhone speakers in typical Shuffle-mode fashion.  Seems only appropriate as I pass along a quick update from my colleague, Jon Orleans, about the increase in audits that we’ve been seeking lately on misclassification issues.

It’s old news that the U.S. Department of Labor has stepped up enforcement of the rules distinguishing independent contractors from employees.

You probably know that the more control you exercise over a worker, the more likely it is that the person will be considered your employee for purposes of the Fair Labor Standards Act (governing such issues as overtime pay), employee benefit plans, and tax laws. Misclassification can have severe consequences.

Word has been circulating among our colleagues in the Law Firm Alliance – a nationwide law firm network of which Pullman & Comley is a member – that at an American Bar Association Labor & Employment Section meeting late last year, a representative of the Department of Labor identified the following industries as targets for worker misclassification investigations:

  • drywall
  • property management
  • landscaping
  • security guards
  • restaurants
  • cleaning companies
  • nail salons

And at a meeting last year of the Labor & Employment Section of the Connecticut Bar Association, we were told by a U.S. Department of Labor official that in our geographic area, the construction industry in general is considered a high priority target. Moreover, the official said, the Department is aggressively seeking liquidated (i.e., doubled) damages, and penalties, when workers are found to have been misclassified.

While its little unscientific, we’ve also been seeing more audits among our clients — and it just so happens that they seem to be falling disproportionately among restaurants and day spas. 

Forewarned is forearmed.  If you’ve avoided reviewing your classification policies and practices and been fortuante to avoid government scrutiny, your luck may run out soon.  The time is now to get to it.

We had another great turnout last week  for my firm’s seminar on labor & employment law.  Many of the topics would be familiar to avid blog readers, but there were three interesting points that I haven’t talked much about that I thought were also notable.

1.  In September, the IRS announced a Voluntary Classification Settlement Program which allows employers who have misclassified employees as “independent contractors” to escape some tax consequences for re-classifying them as employees.  There are downsides to this program (including opening yourself up to a wage & hour lawsuit by the employee) but it might work for some employers in some circumstances.

Interestingly, Deputy Labor Commission Dennis Murphy indicated at the seminar that Connecticut is exploring a similar program which may (or may not) get announced in early 2012.

2.  The DOL has an active Rapid Reemployment Initiative that connects employers with unemployed workers.  In doing so, the state also is providing financial incentives to employers who hire unemployed workers.  Details can be found on the DOL’s website.

3. There are also changes to the NLRB’s election rules that got passed last week.  Labor Relations Today has all the details. Among the approved changes

  • giving hearing officers the discretion to deny requests by parties to submit post-hearing briefs
  • eliminating the 25 day period between the issuance of a decision and direction of election by a regional director and the holding of an election
  • giving the Board the discretion to refuse to review a regional director’s resolution of post-election disputes

If you signed up for the seminar and were unable to attend (or attended) and would like a copy of the materials, please send me a note at dschwartz@pullcom.com.

My thanks to all who attended and made the program a big success.  Stay tuned for details on our next program in Spring 2012.