How an HR Audit Can Benefit and Protect Your Organization

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An audit of your organization’s Human Resources functions can be one of the best ways to manage risk and obtain valuable business information.

What is an HR Audit?

There are many different types of audits. Some audits consist of simply reviewing employee files to make sure they contain up-to-date I-9s and other essential documents. Other audits are more comprehensive and involve a thorough review of employment and pay policies for compliance with the myriad of federal, state and local laws.

Audits can also be focused on certain aspects of the HR function, such as wage and hour compliance (a particularly important area given recent governmental actions around employee classification and overtime under the Fair Labor Standards Act discussed here and here), benefits (which is a constant “hot topic” thanks the Affordable Care Act) or administration of the Family and Medical Leave Act and/or Americans with Disabilities Act.

Why Conduct an HR Audit?

Some of the benefits of properly conducted HR audits include:

  • Ensuring regulatory and legal compliance and reducing human resources risk. Having employees is risky business.  Laws are changing seemingly every day and increased governmental oversight and litigation risk requires organizations to review their employment policies and practices to make sure they are up to date.
  • Identifying inaccurate or out-of-date job descriptions and classifications. Organizations change and job duties change, making job descriptions inaccurate or out-of-date.  Do your job descriptions include all of the “essential functions,” qualifications and requirements of the job? If you have worker’s classified as independent contractors, is that classification appropriate and withstand the increased scrutiny.  Are your employees properly classified as exempt/non-exempt?  Will those classifications need to be changed when the new overtime regulations take effect?
  • Measuring the effectiveness of HR policies and programs and HR personnel.  How effective are your HR policies?  Are you offering employees programs and benefits they want?  Are your HR policies being disseminated? Are they effective?  Are there unwritten policies that are exposing your organization to risk?
  • Identifying misunderstandings between employees and management about corporate policies. Do your managers and employees know what the corporate policies are?  Are managers implementing those policies fairly, uniformly and consistently?
  • Identifying training needs and opportunities.  Have all required employees undergone anti-discrimination/anti-harassment training?  Are there recurring issues that require additional training? If changes to the Fair Labor Standards Act will result in reclassification of employees, would those employees (and supervisors) benefit from training on time recording and time management?
  • Streamlining HR functions and improving efficiencies. Are there ways your HR team could be more effective? Could outsourcing some HR functions allow them to be more of a strategic partner to the management team?

HR audits provide organizations with valuable information. But, they require an effective plan for how to conduct the audit and how to address and prioritize any issues revealed in the audit.

Want to Know More?

For more information about how an HR audit can benefit and protect your organization, consider attending the PA SHRM Annual State Conference on September 24th and 25th.  During the conference, Julie Kinkopf, Esquire and Renee Mundy, Esquire, SPHR will conduct a workshop discussing how and why to conduct an HR audit.  You can also contact Julie Kinkopf at 610-660-7786 or Julie@KinkopfLawFirm.com.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create and attorney-client relationship.

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DOL Issues New Guidance on Employee/Independent Contractor Classification

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This week the Department of Labor (DOL) issued an Administrator’s Interpretation of the Fair Labor Standards Act’s (FLSA or Act) definition of employment and worker classification–i.e. whether workers are employees entitled to the protections of the FLSA (including overtime pay) or independent contractors not covered by the Act. The DOL did not create a new test for employment classification, instead restating the same six factors of the “economic realities” test from its May 2014 Fact Sheet.  However, the Administrator’s Interpretation re-examines each of the six factors and provides specific examples of how the DOL believes the factors should be applied.

Why should you care?  It is estimated that nearly one-third of businesses misclassify their workers, subjecting themselves to possible governmental audits and litigation. The new guidance reinforces DOL’s intention to go after employers it believes are misclassifying workers. It also increases awareness of independent contractor/employee classification issues, much to the delight of plaintiff’s attorneys.  Of course, worker classification suits and FLSA litigation in general is already on the rise (up nearly 32% from 2009 to 2014).  Just last month Federal Express settled a worker misclassification class action for $228 million.  Uber is also facing a class action lawsuit after the California Department of Labor found it misclassified a driver as an independent contractor.

FLSA Test For Employee vs. Independent Contractor

The FLSA is the federal law that governs overtime and minimum wage requirements for employees.  Independent contractors are not covered by the FLSA. The FLSA’s rather circular definition of an “employee” is “any individual employed by an employer.”  The Act’s definition of “employ” is incredibly broad and includes anyone the employer “suffer[s] or permit[s] to work.”  This is not the same test used by the IRS to determine whether payroll taxes need to be withheld, or by state agencies to determine eligibility for unemployment or workers compensation benefits.  A discussion of the IRS’ 20 factor test can be found in a previous blog post here. While many of the same factors are found in each of these tests, the DOL’s new Administrator’s Interpretation of how the FLSA applies clearly focuses on a bigger picture, the nature of the worker’s business as a whole and not just the job the worker is performing for the alleged employer.  According to the DOL, whether the worker is an employee under the FLSA depends on how dependent the worker is on the employer:

The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for himself or herself.  If the worker is economically dependent on the employer, the worker is an employee.  If the worker is in business for himself or herself (i.e. economically independent from the employer), then the worker is an independent contractor.

There is no mechanical formula for determining whether someone should be classified as an employee or an independent contractor.  The facts must be reviewed on a case-by-case basis depending on the specific facts of the relationship between the worker and the company. To help with this analysis, six factors, called the “economic reality” test have been applied for years. The DOL’s new guidance includes the same six economic reality factors has its 2014 Fact Sheet.  While these six factors are not new, there are some changes in how the DOL is interpreting them.

  1. Is the Work an “Integral Part” of the Employer’s Business?  The more closely related the work being performed is to your business, the more likely the person doing that work is an employee.  For example, if you own a construction company that frames houses, carpenters are integral to that business and should be classified as employees, but a software developer who creates software to track bids or schedule appointments is not integral and may be an independent contractor (depending on other factors).
  2. Does the Worker’s “Managerial Skill” Affect the Worker’s Opportunity for Profit or Loss? The focus here is not on whether the worker can work more hours to make more money.  Instead it is whether the worker can exercise managerial skills, i.e. purchasing equipment and materials, advertise, manage time tables.  In addition, the focus is not limited to the current job, but also looks to whether the worker’s managerial skill will affect their opportunity for profit or loss in the future.  If the only way the worker can make more money is to work more hours, then they are more likely to be an employee.  However, if the worker can decide how much to charge for a job, whether to hire helpers, whether to advertise, etc., they are using their managerial skills to affect their opportunity to profit or suffer a loss in their business and are more likely to be an independent contractor.
  3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment? This factor looks not only at the amount of the investment, but what the worker is investing in.  Investments that support the worker’s business beyond any particular job (i.e. improve the worker’s business capacity, or reduce their cost structure) are more likely to support an independent contractor classification. Simply investing in the tools necessary to do the job is not sufficient to indicate independent contractor status.
  4. Does the Work Performed Require Special Skill and Initiative?  The “skills” the DOL is focusing on in applying this factor are not the technical skills necessary to do the work, but “business skills, judgment and initiative.” Specialized technical skills will not support an independent contractor classification if those skills are not exercised in an independent manner.  For example, a carpenter may be highly-skilled technically, but if that carpenter is simply told “what work to perform where,” they are not demonstrating the skill and initiative of an independent contractor.  However, if the carpenter provides specialized service to several different construction companies, marketing his services, and determining which orders to fill, he is demonstrating the skill and initiative of an independent contractor.
  5. Is the Relationship Between the Worker and the Employer Permanent or Indefinite?  The longer and more continuous the engagement, the more likely an employee-employer relationship exists. Independent contractors, by contrast typically work on a project basis (when the project is over, the engagement is over) and do not necessarily work repeatedly for an employer. The key to this factor is whether the lack of permanence or indefinite nature of the work is due to the worker’s own business initiative.  For example, a worker who intermittently works with multiple businesses, marketing her services, negotiating rates and decides which work to accept and which to turn down is more likely to be an independent contractor.
  6. What is the Nature and Degree of the Employer’s Control?  To be an independent contractor, the worker must control meaningful aspects of the work performed “such that it is possible to view the worker as a person conducting his or her own business.”  The DOL warned that the reasons why the alleged employer exercises control–i.e. because quality control measures or regulation of schedules are “the nature of the business”–is not the question.  According to the DOL, if the nature of the business requires a company to exert too much control over workers, “then that company must hire employees, not independent contractors.”

No one factor is determinative.  The specific facts related to your business, the worker’s business and the relationship you have with them need to be examined carefully.

The Bottom Line

Worker classification is one of the most difficult and far-reaching employment law compliance issues.  Getting it wrong could mean you or your company may have to pay unpaid wages, taxes, penalties and depending on the circumstances could face criminal penalties.  The best way to protect yourself and your company is to have an employment attorney to objectively assess each of the relevant factors and determine the appropriate classification.

If the worker can properly be classified as an independent contractor, it is essential that you ask the right questions and get the necessary documents from the contractor to protect the company’s classification.  You also need a written Independent Contractor Agreement, specifically drafted for the engagement.  The agreement should be drafted by an employment attorney who can include provisions addressing the applicable factors and help protect the independent contractor classification.

If you have contractors who may need to be reclassified as employees, it is important to have legal advice to assist you in making that transition is such a way as to minimize the risks to you and your company.

Given the significant risks businesses face for misclassifying workers, businesses are encouraged to carefully review their relationship with their workers, including any written agreements, policies and procedures used to govern the relationship. Moreover, before businesses enter into an independent contractor relationship, they are encouraged to seek the advice of a tax professional and/or employment attorney. Businesses should also keep detailed notes of how the determination was made and all facts that apply to each factor.

Questions?

If you have any questions or would like more information about this or any other employment matter, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.  You can also find previous articles written on the proposed overtime changes here, here and here.  Additional articles regarding employment matters can be found here.  We know this is a confusing area of the law and are here to help protect you and your company from liability.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create and attorney-client relationship.

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Changing Overtime Rules: What You Need to Know and Do to Prepare

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This week the U.S. Department of Labor (DOL) announced changes to federal overtime pay regulations expected to make an additional 5 million workers nationwide–including an estimated 200,000 in Pennsylvania and 130,000 in New Jersey–eligible for overtime in 2016. The proposed regulations would change who is eligible for overtime under the Fair Labor Standards Act (FLSA) now and in the future.  Since the FLSA is one of the most far-reaching employment laws, covering millions of employers and well over a hundred million workers, and since wage and hour claims (including class actions) are the fastest growing type of federal employment litigation, employers must take notice of the proposed changes and how they could impact their business.

Background

The FLSA is the federal law that governs overtime and minimum wage requirements. The law requires non-exempt employees be paid 1 1/2 times their regular rate of pay for all hours worked over forty in a work week.  While all employees are presumed to be eligible for overtime, the FLSA includes specific exemptions to the overtime requirements. The most popular exemptions to overtime under the FLSA are the so-called “white collar” exemptions–administrative, executive and professional. There is a three-part test to qualify for one of the white collar exemptions:  (1) employees must be paid on a salary basis, meaning they are paid a predetermined amount not subject to reduction because of variations in the number of hours worked; (2) employees must be paid a minimum salary of $455 per week ($23,660 per year); and (3) their primary job duties must satisfy certain “duties tests” set forth in DOL regulations. These “job duties” tests vary depending on the exemption sought.

The FLSA also exempts certain “highly compensated” employees from overtime.  To qualify for the “highly compensated” exemption under the current regulations, employees must be paid at least $100,000 per year (not including insurance cost or other fringe benefits), must perform office or non-manual work and must meet at least one of the exempt duties of an exempt executive, administrative or professional employee.

The salary requirements in the FLSA have been changed only seven times since the FLSA was enacted in 1938.  They were last adjusted in 2004. Since the salary and compensation minimums have not kept up with inflation, the percentage of employees eligible for overtime has dramatically decreased over the years.  According to the DOL, only 8% of full-time salaried workers currently fall below the salary threshold for the white collar exemptions.  The DOL wants to set the standard for the white collar exemptions at the 40th percentile of weekly earnings for full-time salaried workers and the highly compensated employee exemption to the 90th percentile of weekly earnings for full-time salaries workers.

The Changes

Three key changes to federal overtime law are proposed.  First, the weekly minimum salary to qualify for one of the so-called “white collar” exemptions (administrative, executive and professional) would more than double from $455/week to $921/week in 2015 and $970 in 2016.  This means first line supervisors and other employees currently covered by the executive, administrative or other white collar exemptions making less than $921 per week ($47,892 per year) would suddenly be eligible for overtime–regardless of their job duties. Clearly this proposed change will have the greatest impact on the service industry, but its impact will be broader than that.  Many companies have supervisors, managers or administrative staff (such as human resources personnel, financial managers, etc.) who make more than $455 per week, but less than $921. Under the proposed regulations, these employees would now be entitled to overtime for all hours worked over forty and would be required to track all hours worked.

The second proposed change would increase the yearly salary required to be exempt for overtime as a highly compensated employees.  That annual salary “threshold” would increase from $100,000 to $122,148. Employees making less than $122,148 in 2016 would be changed from exempt to non-exempt, thereby being forced to track all hours worked and becoming eligible for hours worked over forty in a work week.

The DOL estimates that these changes will affect 4.6 million workers in the first year.  The changes will also require employers to revise compensation structures and work schedules.  Additionally, the changes will also require employers (and employees) to start tracking the hours worked for employees previously paid salary.

Finally, the regulations would create a mechanism to automatically update the salary and compensation level without requiring action by future administrations–basically an auto-pilot for increasing the levels in the future.  This change seeks to keep the level of employees covered by the white collar exemptions to the 40th percentile of weekly earnings for full-time salaried workers and those covered by the “highly compensated” exemption to the 90th percentile.  Thus, the minimum weekly salary in 2016 for the white collar exemption would automatically increase to $970 per week ($50,440 per year) and would continue to increase in the future.

Clearly, these changes will be far-reaching and will require employers to re-evaluate employee classifications and pay practices.

Steps Employers Should Take Now

First, it is important to note that these are proposed regulations and nothing has changed in the FLSA regulations as of yet.  There will be a public comment period until September 4, 2015 and following that, final regulations will be enacted.  Because the changes proposed are to federal regulations (not statutes), and because the FLSA itself does not define the the administrative, executive and professional exemptions, Congressional approval is not required before the changes to the regulatory definitions are enacted.  Thus, employers should begin preparing now.  Suggested actions include:

  • Review your pay practices and employee classifications.  Do you have written job descriptions and are they up to date?  Do they accurately reflect the actual duties being performed by the employees?  Will employees exempt under the current regulations still be exempt under the new regulations? Could the employee qualify for another overtime exemption that does not include a minimum salary requirement, or could the employee’s duties be changed to make them qualify for such an exemption? Consider having your job descriptions reviewed by a qualified employment law attorney who can provide a third party analysis based on existing law and the proposed changes.
  • Prepare to convert employees currently making less than $921 per week (or $122,148 per year for highly compensated employees) to overtime-eligible, non-exempt employees.  In order to minimize the additional expense related to this conversion and keep total compensation close to the current salary, employers will want to evaluate the number of hours these employees work, whether those hours fluctuate, and how those hours can be tracked.  Review budgets to determine if adjustments need to be made to take the increased labor costs into account.
  • Review work schedules and work flow needs.  Will converting currently exempt employees to non-exempt, overtime eligible employees require hiring of additional personnel?
  • Review your processes for tracking hours worked.  The changes in the law will mean that employees who were formerly salaried, but are changed to hourly, non-exempt will be required to track all hours worked. This may be difficult to implement and require additional training and the implementation of better time tracking systems.
  • Review your employee handbook and/or personnel policies.  It may be advisable to revise policies regarding approval of overtime, after-hours work, email and/or “Bring Your Own Device,” given the increased number of hourly, non-exempt employees covered by those policies. In addition, supervisors may need additional training about work time, after hours or off-site work and time tracking.  Remember, the FLSA requires non-exempt employees be paid for all hours worked, whether approved or not.
  • Prepare employees who may be converted from exempt employees paid a salary to non-exempt, hourly employees.  Many employees take pride in being salaried and may resent and resist having to track their hours. The FLSA requires that employers pay employees for all hours worked.  Resistance to proper time recording practices could result in employee management issues as well as overtime liability.
  • Employers must remember that these changes are to the federal laws and that states have their own wage and hour laws. State laws may provide impose greater restrictions on employers or may contain different tests for exemptions from overtime, or the calculation of overtime. Thus, employers must be mindful to comply with state laws in addition to the FLSA.
  • Employers should hire qualified counsel to assist with a general wage-and-hour audit or to review particular job positions and ensure that hidden compliance issues do not catch them by surprise.

Companies should also be prepared for an increased focus on their pay practices, worker classification and employment policies now and in the future.  News coverage of the overtime rule changes may prompt employees (and independent contractors) to question their employment classification.  There is an army of plaintiff’s side law firms ready to assist these workers with potential claims.  Even without the increased scrutiny and press, wage and hour lawsuits (including class actions) are the fastest growing type of employment litigation.  There is little doubt that will continue at an even faster rate.  Moreover, the DOL will be monitoring employers for non-compliance and has doubled the number of investigators since 2008, making it ready to conduct audits to monitor compliance with its regulations.  

Questions?

If you have any questions or would like more information about the changing overtime laws, state overtime laws–or any other employment matter, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.  You can also find previous articles written on the proposed overtime changes here and here.  Additional articles regarding employment matters can be found here.  We know this is a confusing area of the law and are here to help protect you and your company from liability.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create and attorney-client relationship.

Image courtesy of 1shots at FreeDigitalPhotos.net

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Paid Sick Leave Comes to Philadelphia

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February 12th was a pretty busy day in Philadelphia. In all the hoopla over the announcement that the Democratic National Convention will be coming to Philly in 2016, you may have missed another announcement that will have a far larger impact on Philadelphia employers–Philadelphia has become the latest city to require employers to provide paid sick leave to their employees. In doing so, Philadelphia joins 16 other cities, including New York, Washington DC, Portland and Seattle, and three states–California, Connecticut and Massachusetts, in requiring paid sick leave. Other states, including New Jersey, are considering enacting similar laws and President Obama has called on Congress to enact paid sick leave at the federal level.

The Promoting Healthy Families and Workplaces Ordinance (the Ordinance) will become effective on May 13, 2015. It applies to businesses that employ 10 or more full time, part time or temporary employees (and some chain establishments with less than 10 employees). It requires those businesses and employers to provide paid sick leave for all employees who work in the City of Philadelphia for at least 40 hours in a calendar year. Employers are required to provide covered employees one hour of paid sick leave for every 40 hours worked, up to a maximum of 40 hours per year. The Ordinance excludes independent contractors, seasonal employees, adjunct professors, employees hired for a term of less than six months, employees covered by a collective bargaining agreement and other limited exceptions. It is estimated that the Ordinance will cover over 200,000 workers.

Covered employees will start accruing sick time on May 13, 2015. Those who are recently hired can use the accrued sick time 90 days after their initial hire date. Once accrued, the sick time can be used by an employee for their own care or care of a family member for (1) diagnosis, care or treatment for an existing medical condition; (2) preventative care; or (3) issues (both medical and legal) related to the employee being a victim of domestic violence, sexual assault or stalking. It is important to note that the definition of “family member” under the Ordinance is much broader than the definition under the federal Family and Medical Leave Act (FMLA) and includes children, parents, step parents, parents of employee’s spouse, grandparents, grandchildren, siblings, spouses of siblings, persons to whom the employee is married under state law, and “Life Partners” (as defined in other sections of the Philadelphia Code). Employees must provide “reasonable advance notification” if the need to use sick leave is “foreseeable.” If an employee is out for more than two consecutive days, the employer may require reasonable documentation that the sick leave has been for a reason covered by the Ordinance.

Employers must also allow employees to “carry over” accrued but unused sick time, unless the employer provides at least 40 hours of sick time at the beginning of the following calendar year. In other words, the Ordinance requires only 40 hours per year and an employer is not forced to allow an employee to carry over unused hours in excess of the forty hour requirement. The Ordinance does not impose additional paid sick time requirements if the employer already provides employees with paid sick leave or other paid leave policies, such as paid time off (PTO) that meet or exceed the accrual requirements of the Ordinance and that permit employees to utilize leave for the same purposes permitted under the Ordinance. Employers are not required to pay out unused sick leave to employees at the time of termination.

The Ordinance also requires employers to distribute individual written notices to all eligible employees, or to display a poster regarding the rights guaranteed by the Ordinance in a conspicuous and accessible location in the workplace. Those employers with employees who do not speak English as their first language may also be required to provide the notice in any other language that is the first language spoken by at least 5% of the workforce. In addition, employers are required to maintain records documenting hours worked and sick time taken, and to retain those records for two years. As with most employment laws, the Ordinance prohibits retaliating against employees who exercise their rights under the Ordinance.

How Should Employers Prepare?

Employers are encouraged to carefully review their existing paid time-off policies to make sure that they comply with the Ordinance. Since “family members” are defined more broadly than in existing leave laws, such as the FMLA, and since the Ordinance includes coverage for domestic violence, sexual assault and stalking, it is likely that existing paid time off policies will need to be modified. Employers should also review their record-keeping practices to make sure that the information collected and maintained is sufficient to meet the requirements of the Ordinance. In addition, employers must train their human resources personnel, supervisors and managers on the Ordinance’s requirements and definitions. Finally, once the poster is released by the City, employers must either post it in a conspicuous place or provide covered employees with written notice of their rights under the Ordinance.

Need help complying with this or the other multitude of local, state and federal employment laws? Contact us. We are here to help!

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and has been counseling businesses of all sizes on employment and general business matters for over 15 years. Ms. Kinkopf is former General Counsel of a medical imaging company and has extensive experience representing businesses in state and federal court cases involving employment matters, contracts and commercial disputes. She also helps businesses develop sound employment practices designed to avoid litigation and government audits. Ms. Kinkopf represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters. More information may be found at www.kinkopflawfirm.com.

Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create and attorney-client relationship.

Image courtesy of David Castillo Dominici at FreeDigitalPhotos.net.

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Yet Another Notice Companies Must Provide to Workers With Their W-2s or 1099s

Do you have employees or independent contractors who live in Philadelphia?  If so, the City of Philadelphia is requiring you to include an additional notice with their W-2, 1099 or “comparable form.”  It is all part of the City’s “Income Inequality Initiative,” which seeks to increase the number of residents that take advantage of the federal government’s Earned Income Tax Credit (EITC).  The Notice, which can be found here, explains who may be entitled to EITC and where residents can obtain free help preparing their tax returns.

Importantly, the requirement applies to companies NOT located in Philadelphia as well as those located in the City.  It also applies regardless of whether the workers are employees or “non-payroll workers” (i.e. contractors). The Notice must be sent at the same time as the worker’s W-2 or 1099.  If the Notice is not sent with the W-2 or 1099, companies must send it no later than February 7, 2015.  Failure to do so may expose companies to penalties under the City’s revenue code.

More information about the “Income Inequality Initiative” and notice requirements may be found here.  For help complying with this and other laws relating to employees and contractors, contact us–we are here to help!

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and has been counseling businesses of all sizes on employment and general business matters for over 15 years. Ms. Kinkopf is former General Counsel of a medical imaging company and has extensive experience representing businesses in state and federal court cases involving employment matters, contracts and commercial disputes. She also helps businesses develop sound employment practices designed to avoid litigation and government audits. Ms. Kinkopf represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com.

Disclaimer:  The contents of this post are for informational purposes only, are not legal advise and do not create and attorney-client relationship. 

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Is Your Business On Thin Ice When It Comes To Worker Classification?

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It is estimated that more than 30% of business misclassify employees as independent contractors.  Are you one of them?  Misclassification often results from simply not understanding or not properly applying the tests for independent contractors.  There are also businesses who believe that simply calling someone an “independent contractor” and having them sign an agreement stating they are an independent contractor is sufficient.  Of course there are also businesses who know the worker should be classified as an employee, but call them “independent contractors” or “1099s” to avoid withholding payroll taxes, providing workers compensation insurance, providing benefits, paying minimum wage or overtime and other legally required employment benefits. Whatever the reason, misclassifying workers can be risky business.

THE RISKS:

Misclassifying employees as independent contractors costs state and federal governments billions of dollars in unpaid taxes every year.  Needless to say, the government wants that money.  The federal government has also made it clear that it sees the misclassification of workers as exploitation.  Thus, the Department of Labor (DOL) has launched the “Misclassification Initiative” to crack down on business that, in the words of the DOL”den[y] access to critical benefits and protections” to workers.  Through the Misclassification Initiative, numerous state and federal agencies, including the IRS and the DOL are sharing information and resources to reduce the tax gap and improve compliance with federal labor laws.  This has resulted in increased scrutiny of worker classification.

In addition, your business could be one unemployment or worker’s compensation claim away from an audit. Even though independent contractors are not entitled to unemployment benefits or worker’s compensation benefits, many apply for those benefits after being hurt on the job or having their contract terminated.  Once that claim is filed, it will trigger an investigation into whether the worker was properly classified as an independent contractor.

So why should you care about worker classification?  If an employee is misclassified as an independent contractor, the business, its officers and decision makers face significant penalties, including unpaid payroll taxes, unemployment taxes, workers compensation penalties (both civil and criminal), interest and penalties.  For example, the IRS will be looking for back taxes of as much as 41.5% of the worker’s wages per year, for up to the prior three years, as well as penalties for not filing W-2’s and for failing to withhold payroll taxes and interest. In addition, the DOL and state counterparts will be looking for back wages, overtime, and the value of benefits the worker should have received. In addition, failing to provide worker’s compensation insurance can be a criminal offense, subjecting owners to possible fines and jail time.  Moreover, should a misclassified worker be injured on the job, the employer will be responsible for those injuries and may not have the benefit of the damage caps usually available under the state’s worker’s compensation law.  As if that is not scary enough, the penalties are not limited to the business–officers and employee’s with authority over financial affairs can be held personally liable! With the stakes so high, it is important to make sure that workers are properly classified and that the business has agreements and records to support the classification.

DETERMINING WHETHER A WORKER IS AN EMPLOYEE OR INDEPENDENT CONTRACTOR

There is no bright-line test for whether a worker is an employee or independent contractor and simply calling someone an independent contractor does not make it so.  Instead, the classification is determined on a case-by-case basis, considering all relevant facts.  In the end, whether someone is an independent contractor or an employee often comes down to one word:

Control

The more control a company asserts over the worker, the more likely that worker will be considered an employee. Conversely, the  more control the contractor has over the work and more opportunity the contractor has to realize a profit or loss based on their work, the more likely the worker will be considered an independent contractor.

Control can be highly subjective. Your view of the facts may be very different from the IRS’s analysis. In the end, it is the IRS’s analysis that matters.  Therefore, it is essential to obtain an objective assessment of the relationship between the company and the worker.  A tax professional or employment attorney can help make that determination.  If the independent contractor classification is appropriate, an employment attorney can also draft an Independent Contractor Agreement to help protect the classification by including terms consistent with the factors used to make the determination.

There are numerous tests for determine whether someone is an independent contractor or an employee.  For purposes of this post, we will focus on the IRS test.  The IRS has 20 factors it uses to determine the proper classification.  No single factor is determinative.  Instead all factors must be considered.  As described here and here, the IRS factors fall into three main categories of control:

  • Behavioral Control–Who directs or controls how the worker does the work?
    • Is the worker given extensive instructions or training? The more instructions and training given to worker, the more likely they are an employee.
    • Who decides when, where or how the work will be done? If the company tells the worker when, how and where to do the work, they are more likely an employee.
    • What tools are used and who supplies the tools?  If the company supplies the tools necessary to do the work, the worker is more likely an employee.
    • Does the worker have to perform the services personally? If the services must be performed by the worker, and cannot be performed by an agent or substitute of the worker, it is more likely an employment relationship.
  • Financial Control–Who controls the business/financial aspects of the relationship, such as the ability to make a profit or experience a loss?
    • Does the contractor make a significant investment (i.e. purchasing tools, materials, supplies) to do the work?  If the worker has a significant investment in the work, such as buying materials, supplies or have their own office space, the more likely they are an independent contractor.
    • Does the company reimburse the worker for expenses or does the worker pay the expenses himself?  If the company reimburses the worker for expenses associated with the work, they are more likely to be an employee.
    • Opportunity for profit or loss–Is the worker just being paid for his time or for results?  If the worker can realize a profit or suffer a loss, it suggests that they are in business for themselves and favors an independent contractor designation.  If instead, the worker simply gets paid for his time, it points to an employment relationship.
  • Relationship of the Parties–How do the business and the worker perceive the relationship?
    • What does the contract between the parties say about the relationship? While simply putting a sentence in the agreement identifying the worker as an independent contractor will not turn an employee into a contractor, including language about the factors (such as a requirement that the contractor provide his own tools), shows that the parties view it has an independent contractor relationship.  Of course, “actions speak louder than words” and the parties must act in a way that is consistent with the contract language.
    • Is the work being performed integral to business?  When the success or continuation of a business depends on the performance of certain services, the workers performing those services are more likely to be employees.
    • Is the worker permitted to work for other businesses or must he work full time for the company? Allowing a worker to work with other companies and market his services to the general public favors an independent contractor designation.
    • Does the company provide benefits, such as insurance, paid leave, etc that are usually associated with an employer-employee relationship?

THE BOTTOM LINE

Whether a worker is going to be considered an independent contractor or an employee will depend on the level of control the company seeks to have over that worker.  If the company seeks to control how, when and where the work is done, pays the worker for their time (as opposed to paying for results) and requires the worker to devote his full time and effort to work for the company, that person will likely be an employee.  However, if the worker has independence in deciding how, when and where the work is done, makes significant investment of their own money to perform the work and has the ability to profit by his efficiency or to incur a loss if he is inefficient, that person is more likely to be an independent contractor.

The best way to protect yourself and your company is to have a tax professional or employment attorney to objectively assess each of the relevant factors and determine the appropriate classification. If the worker can properly be classified as an independent contractor, it is essential to have a written Independent Contractor Agreement.  The agreement should be drafted by an employment attorney who can include provisions addressing the applicable factors and help protect the independent contractor classification.

Given the significant risks businesses face for misclassifying workers, businesses are encouraged to carefully review their relationship with their workers, including any written agreements, policies and procedures used to govern the relationship. Moreover, before businesses enter into an independent contractor relationship, they are encouraged to seek the advise of a tax professional and/or employment attorney. Businesses should also detailed notes of how the determination was made and all facts that apply to each factor.

If you have more questions about worker classification, consider attending a free presentation of Employment Law Essentials for Small Business and Entrepreneurs being presented by Julie Kinkopf, Esquire in Radnor on August 4, 2014 at 9:00 (more information and sign up here).

“Control” image courtesy of Stuart Miles / Freedigitalphotos.net

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

Disclaimer:  The contents of this post are for informational purposes only, are not legal advise and do not create and attorney-client relationship. 

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Philadelphia Pregnancy Accommodation Poster Released

Philadelphia Pregnancy PosterAs noted in a previous post here, in January Philadelphia amended the Fair Practices Ordinance to require employers to make reasonable workplace accommodations for pregnant workers unless doing so would impose undue hardship on the operations of the business.

The law also requires employers to post a notice before April 20, 2014.  The Philadelphia Commission on Human Relations has released the required poster.  It can be found here.

Employers are again encouraged to review their employee handbooks and reasonable accommodation policies in light of the new law.  If you have any questions or would like more information on these or other employment issues, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

 

 

 

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President Obama Seeks Significant Changes to Overtime Regulations

workerwithclock

As expected, today President Obama directed the Department of Labor to review and revise the regulations that govern the Fair Labor Standards Act (FLSA).  The President said he directed the review “to give more Americans the chance to earn the overtime pay that they deserve.”

The Fair Labor Standards Act was originally passed in 1938 and requires employers to pay most employees overtime pay at a rate of time and a half for all time worked in excess of forty hours per week.  However, Section 13(a)(1) of the FLSA provides an exemption from overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees (so-called “white-collar” positions).  To qualify for the “white-collar” exemption, employees must be paid at least $455 per week on a salary basis and their job duties must meet specific tests. In general, their duties must include managing a part of the enterprise and supervising other employees or exercising independent judgment on significant matters or require advanced knowledge.

The President’s remarks clearly take aim at the $455 per week threshold.  According to the White House, “only 12 percent of [current] salaried workers fall below the threshold that would guarantee them overtime and minimum wage protections (compared with 18 percent in 2004 and 65 percent in 1975).”  The President also noted that the threshold has been only been changed twice in the last 40 years–once in 1975 and once in 2004. According to Bloomberg News, the 1975 threshold of $155 is the equivalent to $970 in today’s dollars whereas the $455 amount set in 2004 is the equivalent to $553 in today’s dollars.

In addition to increasing the salary threshold for the “white-collar” exceptions, it is expected that the Department of Labor will seek to narrow the duties that qualify employees as exempt.  The jobs duties tests went through major revisions under President George W. Bush in 2004.  However, the regulations are often criticized by employee groups as being overly broad and allowing employers to give employees minimal executive or administrative tasks to avoid paying the employees overtime.  It is expected that the Obama administration will push for rules similar to those in place in California which require employees to spend a certain percentage of their time on “exempt duties” before they qualify for the “white-collar” exemption.

What does this mean for employers?

No doubt the changes to FLSA regulations could affect millions of workers and employers.  The FLSA protects 135 million workers in more than 7.3 million workplaces nationwide.  However, none of the changes sought by President Obama will happen overnight.  In fact, it is expected that any changes to the FLSA regulations will take years to complete and become effective.  However, one likely effect of the President’s remarks and directive–and the extensive press coverage of them–will be increased litigation over whether employees are properly classified as exempt under the current regulations.

FLSA claims are already the biggest litigation threat to employers.  In fact, in 2013 the amount of FLSA claims filed increased by 10% over 2012 according to Federal Judicial Caseload Statistics and have increased by roughly 400% since 2000.  Another concern for employers is that many Employee Practices Liability (EPLI) policies specifically exclude overtime claims.  Thus, employers must be especially vigilant about overtime classifications.

Employers are encouraged to review their overtime classifications and job descriptions to make sure that they comply with the current state and federal overtime laws.  If you have any questions or would like more information on these or other employment issues, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.

Image courtesy of Renjith Krishnan /FreeDigitalPhotos.net

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

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Employers Now Required to Provide Reasonable Accommodations to Pregnant Workers

On January 20, 2014, Mayor Michael Nutter signed an amendment to Philadelphia’s Fair Practices Ordinance banning discrimination based upon pregnancy, childbirth, or a related medical condition and imposing a new requirement that employers must make reasonable workplace accommodations unless doing so would impose undue hardship on the operation of the employers’ business.

Prior to this amendment, reasonable accommodations were only required if the pregnant worker was “disabled.”  Under the new law, the worker need not show that they are “disabled,” only that they are “affected by pregnancy.”  The ordinance identifies several possible accommodations, including restroom breaks, periodic rest for those jobs that require standing for long periods of time, special assistance with manual labor, leave for a period of disability arising from childbirth, reassignment to a vacant position and job restructuring.

The reasonable accommodation must be made provided (1) it is  requested; and (2) the accommodation will not cause an undue hardship on the employer.  In determining “undue hardship,” four factors are considered:

  • The nature and cost of the accommodations
  • The overall financial resources of the facility where the accommodation is requested, including the number of persons employed at such facility or facilities, the effect on expenses and resources, or the impact otherwise of such accommodations upon the operations of the employer
  • The overall financial resources of the employer, specifically the number of employees and the number, type, and location of its facilities
  • The type of operations, including the structure of the workforce

The ordinance provides the same remedies as those for other unlawful employment practices, including injunctive or other equitable relief, compensatory damages, punitive damages, and reasonable attorneys’ fees.

The law specifies that “it shall be an affirmative defense that the person aggrieved by the alleged discriminatory practice could not, with reasonable accommodations, satisfy the requisites of the job.”  Which may provide some relief to employers in those cases where the employee, even with the accommodation, cannot perform their job duties.  However, job restructuring and reassignment are among the accommodations employers must provide (unless those accommodations impose an undue hardship).

Philadelphia is not alone in enacting heightened protection for pregnancy workers.  Similar laws have been enacted in Maryland, New Jersey, California and New York City.  In February 2014, Representatives Mark Cohen of Philadelphia and Mark Painter of Montgomery County introduces the Pennsylvania House Bill 1892, the Pennsylvania Pregnant Workers Fairness Act, which is modeled after the Philadelphia ordinance.  Although Senator Bob Casey, introduced similar legislation at the federal level, that legislation stalled in committee last year.

Employers are required to post a notice conspicuously in an area accessible to employees, by April 20, 2014.  The poster is to be in a form and manner to be determined by the Philadelphia Commission on Human Relations.  As of today, the PCHR has not issued the poster.

Employers are encouraged to review their employee handbooks and reasonable accommodation policies in light of the new law.  If you have any questions or would like more information on these or other employment issues, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

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Affordable Care Mandate Delayed Again

Yesterday the Treasury Department issued final regulations for the Affordable Care Act.  The press release can be found here and a fact sheet explaining the regulations here.

Here is the bottom line:

  • Employers with 50-99 employees have until January 1, 2016 to offer coverage.
  • Employers with over 100 employees must offer coverage to 70% of their full time workforce in 2015 and 95% of their full time workforce in 2016.
  • The regulations clarify how full time employment will be determined for certain employees.   For example, an adjunct faculty member is deemed to have worked 2 1/4 hours for every hour spent in the classroom.  Also, seasonal workers who work less than six months a year will generally not be considered full time.

For more information, contact Julie Kinkopf, Esquire at julie@kinkopflawfirm.com or 215-704-0029.

Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has been representing employers for over 15 years.  Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits.  She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters.  More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/

This blogpost should not be considered legal advise and is informational only.

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