A Glimpse of the 2016 Employee

Original Publication Vol.28 Issue 4 Fall 2015  Published by the Ohio State Bar Association.

SOLO, Small Firms and General Practice Section

 

When is a “newly created” job not new?  When is Employment like Enron accounting?  Answer? When you take employment and you change its scope and category.  On July 15, 2015 the Department of Labor (DOL) changed the definition of a Contracted Worker.

 

Since 2009 a priority of the Federal Government has been to increase employment by ‘creating’ jobs.  Investigators for OSHA[1], EEO[2] and Wage & Hour[3] have been increased with the obvious goal of enforcing safety, eliminating discrimination and reminding business that the 1938 Federal Labor Standards Act (FLSA) is still relevant.  Enforcing the FLSA with emphasis on salaried vs hourly requirements is expected to increase the number of hourly employees and find that companies have abused the salary ‘duties test’ ( violations are costly).  The upcoming changes to the FLSA (no date set, but will occur) are long overdue, but the real push for the change is to ‘create’ more hourly jobs.  More hourly jobs mean more overtime which could result in more hiring to eliminate the overtime.  It worked in 1938, but in today’s health-care-costs environment, overtime has become cheaper than hiring more employees.  This will drastically change as the published increase from $26,650 to $50,440 for a minimum salary of an employee exempt from overtime goes into effect.[4]  So the combination of (1) increased minimum wages and (2) Affordable Care Act (ACA) can generate more hourly jobs with benefits shifted to the employee, thereby again inducing more employment to avoid overtime costs.

 

Now along comes the revamping of the definition of a contracted worker.  The prior test, of whether a worker was an employee or contracted worker, relied on the worker’s support and reporting system.  This began with, Is the worker answerable to a supervisor and/or a timeline?  Are tools and uniforms supplied by the company?  If the answer was ‘Yes’ and the worker was dependent upon the company for his/her direction, support and pay, then the worker was an employee.  This was a reasonable list that one could explain, comprehend, check off, administer, and defend.  All of this has changed as of July 15, 2015.  First- there is no check off list.  There is a list, but the company is required to conduct a “realities” test.  There is no single factor that can be used as determinative.  The company is to conduct a Qualitative and not a Quantitative analysis for each worker that is being considered for contractor classification:

Six Factors[5]

In conducting an economic realities test, an employer should look to six factors, the DOL noted:

  1. The extent to which the work performed is an integral part of the employer’s
  2. The worker’s opportunity for profit or loss depending on his or managerial skill.
  3. The extent of the relative investments of the employer and the worker.
  4. Whether the work performed requires special skills and initiative.
  5. The permanency of the relationship.
  6. The degree of control exercised or retained by the employer.

“In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative,” the DOL noted. “The ‘control’ factor, for example, should not be given undue weight.”

“The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis,” the DOL stated.

“The subjective nature of such a test is a slippery slope and provides no practical, objective criteria on which businesses can rely,” Disbrow said.

Under the department’s analysis of the six factors, positions frequently considered as independent contractors—such as carpenters, construction workers, cable installers and electricians—aren’t necessarily independent contractors if they don’t satisfy the factors.

Other guidelines available when conducting this test are:  NONE.  However, the company is totally liable if found to have made a mistake that avoided the creation of an employee job position.  There is a secondary aim and that is to collect the Social Security, payroll taxes, etc, as well as possible overtime payments that the employer has avoided paying.  [6]

 

According to the DOL they “have entered into partnerships with 26 States… to ensure (they) are using all of their resources to address this significant problem.”[7]  Ohio is presently not one of the 26 states, but is a predominant state of the 24 remaining states.

 

So how should a company evaluate these six (6) ‘Guidelines’?  In one word- CAREFULLY.  It is truly unfortunate that the government does not do a better job of explaining what the end results of a law should be and how a company can avoid the land mines in order to safely get to that desired result.  As this is an extremely new directive, it has not been tested.  Defending one’s decisions can be as costly as the fines and extremely time consuming.  A small business could go bankrupt with just one relevant case.   If we look at all of the six (6) guidelines, they lead us to an open position.  If you take the person you are evaluating and place them in this open position would he/she be fulfilling a vital job for your company?  By ‘vital’ I mean an ongoing, critical component of your business.  Are you therefore hiring a contracted worker rather than increasing your staff?  This addresses # 1 and #5 of the Guidelines.  Is this skill something you require for limited periods or is it ongoing?  This addresses #1, 5, and 4.  Who is making the decisions as the work progresses?  This is reminiscent of the original check off sheet and addresses #6.  Risk is the definition of investment in #3.  Is the worker at a risk to lose their investment of time and expertise as much as the business is?  Is the income of this person dependent upon the work your company provides?  By dependent is it more than 50%+ of their income?  This addresses all six guidelines- or does it?  The DOL states that no signed contract and no incorporated business or license can be used as a defense.   Picture an open employee position.  Can this worker fill that position on an ongoing basis?  If so, would he/she contribute to your bottom line?  If you can answer yes to these two questions, then more than likely the person is an employee, no matter what their title or licensure.

 

The goal of all of these changes is basically to increase employment and provide a living wage.  This is not a bad idea and in fact is a desirable result.  The reality is that none of these steps have moved from the 1938 definition of a job.  We are presently in a work environment that has four to five different generations and work ethics mingled together.  The Baby Boomers (ages 51-69) are delaying their exit as long as possible.  Surprisingly, they are not the largest group of employees according to all projections.  The largest group is the Millenniums (ages 18-34) and they have a very unique concept of work.  As Nicole Berberich, SHRM-CP (Society for Human Resource Management- Certified Professional) stated when she represented SHRM in front of the House Subcommittee on Worker Protections:

“In light of the fact that the Millennial generation will make up the majority of the American workforce in the near future, now is the time to seriously consider amending the FLSA to allow employers expanded workplace flexibility to attract and retain top talent. As I’ve laid out today, SHRM remains concerned about the challenges presented by the FLSA in terms of workplace flexibility, namely comp time and the biweekly workweek. SHRM is also concerned that upcoming changes to FLSA overtime regulations will further exacerbate an already complicated set of regulations for employers, particularly small employers and employers in industries where managers often conduct exempt and nonexempt work concurrently. Substantial changes to the overtime regulations could also further limit workplace flexibility for employees.”[8]

This statement holds true for the contracted worker.  Unemployment may be at 5.1%, but true unemployment is the older worker who was laid off and never found another job.  That person has become the small business owner and often the contracted worker in today’s work force.  The culture and the reality of work have changed along with how we communicate and conduct business.  Initiating a list of six (6) guidelines and directing business owners to fit their workforce culture into those guidelines is 1938 thinking. Unfortunately, the small business owner is impacted the hardest, along with the long term unemployed.  As long as the government can show positive (dollar) results, change is unlikely.[9]

Even unintentionally misclassifying employees as independent contractors may result in significant penalties and interest.  For example: [10]

Violation Potential Fine
Incorrect Filing Penalties  (W-2 or 1099 forms) $50 for each form that you failed to file (W-2 or 1099). $50 per employee for failing to provide employee with a W-2 or 1099 form.
Failure to withhold income taxes 1.5% of the wages plus interest accruing daily, plus 40% of the FICA that the employee should have paid and 100% of the FICA employer should have paid.
Failure to pay taxes 0.5 percent of the unpaid tax liability for each month up to 25 percent of total tax liability.
Failure to obtain Social Security number $50 for each failure to obtain Social Security number

So- Ask yourself- WHO do you have working for you? How are they classified?  If you’re wrong, are you willing to pay the cost?  Remember… The effective date was July15, 2015.

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[1] https://www.leclairryan.com/files/Uploads/Documents/OSHA%20Combined%20slides%2004%2022%2010.pdf

[2] http://www.troutmansanders.com/files/Publication/c24ae248-ff06-496a-9432-42b1dccaa9d5/Presentation/PublicationAttachment/9ae91d80-6c73-4570-b118-c0a5a20d95aa/TROUT%20ETL%20Newsltr_Sum10_press.pdf

[3] http://www.dol.gov/opa/media/press/whd/whd20091452.htm

[4] https://www.dol.gov/whd/overtime/NPRM2015/OT-NPRM.pdf 

[5] DOL Narrows Independent Contractor Classification

 By Allen Smith  7/16/2015  Permissions SHRM (Society for human Resource Management)

[6] http://www.dol.gov/whd/regs/compliance/whdfs13.pdf

[7] http://www.dol.gov/whd/workers/misclassification/

[8] https://www.littler.com/publication-press/publication/dol-investigation-tactics-and-pending-proposed-rule-come-under-fire

[9] http://www.dol.gov/whd/statistics/

[10] http://www.netpolarity.com/fines-and-ramifications.html

 

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