Are They Really Independent Contractors?

(The following information was derived from BLR HR Updates May 21 and 22, 2008)

These days, organizations frequently try to increase their workforce flexibility and decrease their benefit costs by hiring independent contractors to do required work.

All well and good … unless a court later determines that while you’re calling such workers independent, you’re really treating them as employees. In that case, and as names as famous as Microsoft have learned the hard way, penalties can be severe.

Often the issue revolves around how much control employers exercise over these workers’ job activities. The more control, the more likely the worker is actually an employee.

This point was highlighted recently in a case described by attorney Michael Curtis on the website, Mondaq.com. The case helps in understanding the reasoning that must be used in determining how “independent” workers are. (Curtis is with the California law firm of Thelen Reid Brown Raysman and Steiner LLP).

The facts were these:
Threatened with unionization of his drivers, a cab company owner contended that they were independent contractors and, thus, not a collective bargaining entity, because:
–They paid a fixed rental fee for the cabs.
–They didn’t have to account for fees or tips.
–They had no set work hours or minimum work requirements.
–They received no benefits and no tax or social security was withheld from pay.
–Lease agreements openly stated that the drivers were independent contractors.

Independent contractors, right? Not so fast. The court held that while all the above was true, the drivers also suffered a “lack of entrepreneurial freedom” (i.e. the chance to make money on their own).

The evidence:
–Drivers could only use cabs to respond to the cab company’s dispatches.
–They were prohibited from distributing private business cards and could not accept calls for service on their cell phones.
–They had to comply with company policy on how they drove and dressed, and they were subject to company discipline.
–They had to carry ads in their cabs that generated revenue for the company, but not for the drivers.
–Drivers were required to take more training than was legally mandated.

Taken together, those facts indicated that the company had a significant amount of control. This led the court to conclude that the cabbies did not have entrepreneurial freedom. And that, said the court, meant they were employees.

What the DOL Says
The U.S. Department of Labor (DOL) states that, under the Fair Labor Standards Act (FLSA), the employer-employee relationship is tested by “economic reality” rather than “technical concepts.” So just words in a leasing agreement, or a “little bit of independence” isn’t enough to classify someone as an independent contractor.

Furthermore, the U.S. Supreme Court has, on a number of occasions, indicated that there is no single test for determining whether an individual is an independent contractor under the FLSA. It’s instead the total activity or situation that defines. Besides the control and entrepreneurial freedom issues mentioned above, courts consider:

– The extent to which the services rendered are part of the principal’s business
– The permanency of the relationship
– The amount of the alleged contractor’s investment in facilities and equipment
– The amount of initiative, judgment, or foresight required
– The degree of independent business organization and operation

Bottom line on all of this: Before you seek the advantages of calling your workers independent contractors, consider their total situation carefully. And remember, it’s not what you call them that may count in the end.

The U.S. Department of Labor (DOL) points out the following particular problem areas for employers when it comes to determining whether a worker is an employee and, thus, is eligible for protections under the Fair Labor Standards Act (FLSA), or is an independent contractor, and therefore not covered under the FLSA. (And note that when DOL identifies problem areas, that usually means they’re keeping a keen eye on anyone in these situations.)

1. Construction. DOL notes that in the construction industry, many builders hire “so-called independent contractors,” who in reality should be considered employees because they do not meet the government’s tests for independence.

2. Franchises. Franchise arrangements can pose problems in the independent contractor arena as well. Depending on the level of control the franchisor has over the franchisee, workers may be considered to be employed.

3. Volunteers. A person employed by a for-profit organization cannot “volunteer” to perform the same services he or she performs as an employee. (Of course, DOL says, individuals may volunteer their services to religious, public service, and nonprofit organizations without contemplation of pay, and not be considered employees of such organizations.)

4. Trainees. Trainees, interns, or students may also be employees, depending on the circumstances of their activities for the employer. Are they doing the same work that regular employees do, as opposed to tasks that help them learn? They might then be considered employees.

5. Homeworkers. People who perform work in their own homes are often improperly considered to be independent contractors. FLSA covers such home workers as employees, and they are entitled to all benefits of the law.

HR Discussion:
One category not listed above that should be considered is sales. Many employers errantly believe that sales people can be classified as independent contractors. In most cases it comes down to an issue of control. If an employer demands total loyalty, and by that we mean prohibiting the sales person from selling other products it’s a good bet that sales person isn’t a qualified independent contractor.

Please contact the A Plus Benefits Human Resource Department if you have any concerns that you might have employees that are misclassified. A Department of Labor audit that occurs because of misclassification is time consuming and potentially very expensive.

It is our desire to assist our clients with being in full compliance with Department of Labor regulations. It is our goal to help you get back to business.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.

None of us are perfect. No matter how hard we try, weird things creep into the workplace.

Below, Scarlett Pruitt, brings to light 10 Signs of a Dysfunctional Workplace. I’ve added some comments because it’s great having the last word.

Can you see anything below that resembles your workplace?

1. Nothing can get done without the boss’s approval. Empower your organization by delegating, says Pruitt. There’s not much CEO work going on if the boss has to sign off on every little thing. And there’s a corollary …

1a. To get things done, you have to hide them from the boss. Now you know you’ve got a situation that is going to end badly.

The “Boss” sets the course and keeps the boat going in the right direction. If the boss can’t trust those whom he has hired to make daily decisions and when work is being done “in the dark” it won’t be long before employees will begin to abandon the ship. In short, the boss must allow people to do what they were hired to do. Bosses who micro-manage are not being efficient.

2. Who is the boss? The structure may be clear on paper, but no one knows who really makes the decisions. Everybody benefits from clarifying decision-making responsibilities.

An “empowered” employee must be allowed to use the power/responsibility that has been delegated to the individual. When a person is empowered by the boss and then not allowed to use the authority given, the message that is sent is…I don’t trust you, I’m afraid you’ll make a mistake. And the biggest mistake…the boss not trusting the employee.

3. Do-nothing meetings. If a meeting has no agenda or just rehashes previous discussions, axe it. And again, a corollary:

3a. IMing during meetings. Meetings are for brainstorming and discussing, not “snarky IM conversations,” says Pruitt. “Pull the plug” on cell phones.

I once worked for a company that became famous for the muffins that were served at meetings. I didn’t have to worry about breakfast or lunch because I knew that I was going to be in at least 2 meetings during the day where muffins would be the most important thing at the meeting. Some very successful companies have meetings standing up (get ‘er done). Use an agenda, if there is nothing on the agenda, cancel the meeting.

4. Cubicle co-workers IM instead of talking. Some topics require face-to-face discussion. Arrange some meetings (but don’t forget rule number 3.)

Please do some interactive things between departments. Allow employees the opportunity of building some interdepartmental relationships. And remember, if your department managers do not have good working relationships with other department managers you have an obstacle that is preventing your business from being great. The Boss must provide opportunities for department managers to build relationships. And Boss…never talk poorly about a department manager to another department manager, keep your complaints about department managers within your executive group.

5. There’s more than one “secret couple” around. They usually don’t stay secret for long, and tension and drama (and lawsuits) result if there is perceived favoritism. Write a policy and enforce it.

Those with authority can never date subordinates. You might know of some isolated examples of manager-subordinate relationships working out. However, the chance of this kind of relationship going bad is huge. Don’t allow it. As said above, make a rule against this kind of thing and enforce it.

6. IT rules are so tight that you’re not told your own password. Tech security is important, but there are limits. Find a reasonable middle ground.

How many hoops do your employees have to jump through to do their job? If your IT Department requires employees to dig tunnels, climb walls and break down metal doors to just start working, way too much time is being wasted. If nothing can get done without the IT Department being involved, you’ve given too much authority to IT and in fact IT is running the business. That’s not going to work long term.

7. There’s a “wall of shame” where employee mess-ups are posted and highlighted for the entire world to see. “Rewards should be public, but chastisement should be private,” Pruitt says.

Okay, do you want to instill fear into every employee? Just punish an employee in public and you’ll have every one afraid that they are next. If you have a manager who believes it’s effective to punish in public you are on the course to a law suit. A good manager does not make himself look big by making his staff look small. If someone in your organization is doing this, demand a change or find a new person who will not manage with fear.

8. The boss screams at staffers, for example, when there’s skim milk instead of half-and-half for the coffee. Authority should never be used to bully or intimidate. Counsel or call in the consultants.

Management rule #1 - Never yell unless the building is on fire.

9. Everyone has 10 weeks of accumulated vacation because no one can take a day off. “People are not machines,” says Pruitt. “Encourage them to take vacations, or they are likely to walk out one day and not come back.”

You know what all work and no play does to “Jack.” Of course there are times when you need all hands on deck. A special project, an emergency, etc. Time away from work is important. Want to impress an employee with how much you appreciate the person? Give the person an extra day off now and then. Send a group to the movie, close the shop for the afternoon and take everyone to the movie. The hero will be the person that showed appreciation to the staff, not the high priced actor on the screen.

10. What matters is not what you get done, but how many hours you are seen “working.” Don’t be impressed by the person who arrives early and leaves late just for show. Reward productivity, not hours, says Pruitt.

In order to know who is getting it done you have to go out and see it for yourself. The best thing a manager can do is to get out from behind the desk and go do the work with the staff. Give your employees an opportunity to show you what they can do, the result of spending time with staff is that they will show you a better way to get it done, ignore them and they will eventually go show the competition a better way to get it done.

Randall Barker is the VP of Human Resources at A Plus Benefits, Inc.

The following is an article that recently appeared in the BNA Bulletin to Management with some imbedded comments from A Plus Benefits.

As E-Verify, No-Match Rules, I-9s Evolve, Employers Need to Stay on Top of Issues

While awaiting government action on various immigration issues, employers must continue to staff their workplaces, avoid the dramatically increased fines for hiring illegal immigrants, and stay on the right side of the Immigration Reform and Control Act’s anti-discrimination provision.While awaiting government action on various immigration issues, employers must continue to staff their workplaces, avoid the dramatically increased fines for hiring illegal immigrants, and stay on the right side of the Immigration Reform and Control Act’s anti-discrimination provision.Experts told BNA that while it is not an easy situation, especially given a dearth of skilled workers in some sectors, there are ways to cope, including:

• being scrupulous about I-9 forms; (A Plus has announced a new initiative for I-9s)
• if the company is using E-Verify, employing it correctly; and (A Plus has announced that it can now act as a third party agent for its clients, a no cost benefit)
• ensuring that staff are trained in race and national-origin anti-discrimination policies. (Every A Plus HR Advisor can provide this training)

Eleanor Pelta, a partner in Morgan Lewis’s Labor and Employment Practice in Washington, D.C., told BNA that when it comes to hiring foreign-born workers, “employers are still between a rock and a hard place.”

“I don’t think there’s any employer immune to an [Immigration and Customs Enforcement] action, and the fines have just been adjusted upward for inflation,” she warned.

Changes to I-9s, E-Verify
The I-9 process is essentially the same as it has been—companies are required to complete these work authorization forms for employees and check their documentation the first day on the job. But the forms now feature an even more prominent “Anti-Discrimination Notice”, and the Department of Homeland Security’s Citizenship and Immigration Services is expected shortly to issue a proposed final rule reducing the number of documents employers can accept.

Increasing the stakes, under a joint rule from DHS and the Department of Justice, a 25 percent increase in fines took effect March 27 for knowingly employing a person not authorized to work in the United States.

Meanwhile, DHS is working hard to turbo-charge the Social Security Administration’s annual “no-match” letters. The letters have previously been used for informational purposes only—informing employers when 10 percent or more of their workforces show data discrepancies. However, under a proposal issued last year, DHS expanded what is considered “constructive knowledge” that an employee has provided a false Social Security number and stated that employer failure to respond to no-match letters can be evidence used in civil and criminal actions brought by the agency.

In the midst of legal challenges from a coalition of labor unions, business groups, and immigrant rights groups that blocked implementation of the rule, DHS issued a related supplemental proposed rule March 21.

In addition, while DHS’s E-Verify employment verification system is currently voluntary on a national basis, agency Secretary Michael Chertoff has promised a proposed rule soon making it mandatory for some 200,000 federal government contractors, and several states are already requiring some or all employers to use it.

“It seems to be the trend,” said Brent T. Huddleston, attorney with the Law Offices of Richard A. Gump Jr. in Dallas. “We expect it to continue, and in many cases we recommend [using E-Verify now],” he said.

Review, Training Recommended
Pelta warned that an employer “can be fined even if you have an entire population of legal workers if you’re not doing the I-9s correctly—it’s called ‘paper work violations.’ ” Keeping accurate and timely I-9s has never been more important, she said.

“You want to really have a system that you can trust,” she advised, including a written protocol accessible to all human resources staff, and see to it that everyone receives training. She suggests a complete review at least once a year to identify recurring mistakes and target areas for further training.

“We’re seeing this come up in a lot of interesting places,” Pelta said of immigration-related concerns.

For example, she said, “we’re finding that companies targeting acquisitions are asking us to come in and take a look at immigration compliance—they don’t want to acquire possible violations or find out that 50 percent of the employees are not authorized to work.”

Huddleston recommends that if possible, one employee at a company—often an HR person—should serve as the I-9 manager.

Having one person in charge leads to fewer mistakes and inconsistencies because that person tends to take ownership of the process and, as the in-house specialist, can become better versed in the requirements of the system, he said. Huddleston added that companies should avoid the temptation to have whoever is available on a new hire’s first day take care of it.

He also suggests periodic outside audits of the company’s system, so that problems can be caught before they become liability issues. One of the biggest mistakes he sees is companies’ resistance to this idea, Huddleston said.
(Beginning July 2008 A Plus HR Advisors will begin conducting I-9 audits and training to confirm that each and every client is submitting correct and complete form I-9s)

“Very rarely” would a company not benefit from such a review, he said, adding that companies of all sizes and reputations generally have room for improvement in their I-9 systems.

E-Verify Safe Harbor of Sorts
Meanwhile, using E-Verify can help an employer show that it is attempting to obey the law. Still, the system has been widely criticized, is not foolproof, and could eliminate some legitimate employees, many argue.

The problem with E-Verify, said Pelta, is that “it’s tapping into some very old data bases with high error rates.” According to the Social Security Administration, 7.8 million of its records have errors in them, with 12.7 percent of the mistakes pertaining to U.S. citizens.

“I’m not sure what employers can do about that,” she said. “I think you’re kind of stuck with that unless there is another way to verify a person’s work authorization.”

A potential landmine for employers using E-Verify, Pelta said, is taking adverse employment actions in response to tentative nonconfirmation notices (TNC) and failing to inform employees of their rights under E-Verify. She said such mistakes are avoidable.

It is a matter of getting used to the system and “ being very, very careful,” Pelta said.

According to Interim Findings of the Web-Based Basic Pilot Evaluation, prepared for DHS in December 2006 by Westat of Rockville, Md., foreign-born employees who were ultimately verified for work were 30 times more likely to have gotten a TNC during the process than U.S.-born employees eventually authorized.

Because of the possibility this presents for discrimination against immigrants, there is a precise procedure for using E-Verify, according to DHS. The system is not to be used as a prescreening device and in fact, cannot be consulted until a new hire’s first day.

Secondly, employers are required to inform employees getting a TNC of their right to take steps to correct the record.

Huddleston noted that an employer using E-Verify can be held liable if it knew that an employee was using a false identification—even if the employee checked out OK on E-Verify. “E-Verify doesn’t always protect against ID theft and fake documents,” he said.

Katherine Lotspeich, acting director of the USCIS Verification Division, told BNA that one of the original intents of an electronic verification system was to prevent discrimination against job candidates on the basis of ethnicity.

She said 92 percent of employees are certified nearly instantly using E-Verify and that the error rate has been overstated. “Everyone assumes the other 8 percent are eligible to work, but less than 1 percent of the tentative nonconfirmations are contested,” she said.

HR Discussion:
Our HR Department at A Plus Benefits is expending a lot of effort to stay on top of the developments concerning authorized and unauthorized workers and the various initiatives that are developing in different government departments.

We believe participation in the E-Verify is a wise step for each and every client to ensure that only those authorized to work in the US are hired.

While there are critics of the E-Verify system, there are adequate steps in place for individuals who believe they have been improperly flagged as unauthorized. As the article points out, less than 1% of those who are flagged as unauthorized claim that they are in fact authorized to work in the U.S.

If you have questions about the E-Verify program or any other concerns related to the hiring of authorized individuals, please contact us.

We appreciate your business, we hope our efforts allow you to get back to business.

Randall Barker is the VP of Human Resources for A Plus Benenfits, Inc.

As a business owner, manager, supervisor, you wonder why your expectations for work attendance seem to be communicated to your employees in an ancient language that no one understands. Why is it so hard for everyone to understand that you really do expect an employee to show up and work the posted schedule?

On close examination, the final answer just might be that it is indeed your fault, your communication to employees concerning attendance might be flawed. Is there a difference between what you say and what you actually make happen?

Here’s a short list of some factors that contribute to attendance problems:

1- No one is in charge of attendance – who’s keeping score?

2- Generational issues, older employees who know how important attendance is and younger employees who believe they can come and go as they please.

3- Internet knowledge – more and more employees are informed about FMLA and are learning how to use “the system.”

4- Use it or lose sick leave plans.

5- Supervisors who believe if they enforce attendance policies they might lose their “best” employee.

6- No plan to fix the problem.

My Grand Pa would say to me….if a person keeps a cow-pie in his hat eventually he will get used to it. In my youth I didn’t have any idea about what Grand Pa was trying to tell me, but I know now. If there’s a problem and I don’t do anything to fix it, by and by I’ll just get used to the problem, the problem will become status-quo.

Grand Pa might have given a few ideas about fixing the attendance problem (for sure there was no attendance problem on his farm!)

1- Make sure everyone understands what is expected. No questions. We hired you to come to work everyday…we expect you to be here everyday.

2- Who does the employee contact when she is going to be late or absent. There must be a clear line of authority. Telling a co-worker to tell the supervisor is never appropriate.

3- Some things must be set in stone, like:
a. Requests for vacation or personal time off (we highly suggest doing away with vacation and making all leave fall under PTO) must be submitted in advance.
b. If you miss work and fail to follow the established rules for notification you will receive a warning, a verbal warning the first time and then a written warning…no exceptions.
c. If you miss 3 or more days of work due to illness you can’t come back to work without a doctor’s note…no exceptions.
d. More than 2 or 3 or 4 days (the company must decide) absence within a quarter are considered attendance abuse and can lead to discharge.
e. Use Decision Making Leave before discharging a person for poor attendance. This forces the employee to commit to changing his ways or being subject to discharge.

4- Post the rules for attendance where everyone will see; by the time clock, in the break room, etc. Don’t accept as an excuse…I didn’t know.

5- Use the 90 day introductory period to assess a person’s willingness to abide by the attendance rules. If a person has an attendance issues in the initial 90 days of employment do not employ that person past 90 days. Attendance issues will not get better (or any other policy violation the employee having issues with).

6- Be consistent.

7- Keep attendance records. (document, document, document)

Allowing some (my best guy) to violate the attendance rules while enforcing the rules with others will ultimately lead to a morale problem.

Set clear expectations and professionally enforce your attendance policy. In the long run your organization will run better, be more productive, and morale will be better.

What’s under your hat? Hopefully not an “attendance cow-pie.”

Please contact the HR Department at A Plus Benefits if you have further questions or concerns.

We appreciate your business!

Randall Barker is the VP of Human Resources at A Plus Benefits, Inc.

7th Circuit: Overbroad Non-compete Was Unenforceable
By Chris Arbery and Angela Mahdi

The 7th U.S. Circuit Court of Appeals upheld a district court’s ruling that a former employee of Cintas Corp. did not violate the terms of his non-compete agreement because the agreement itself was overbroad and, therefore, unenforceable. The appeals court further held that the district court properly refused to correct the problems in the agreement and properly awarded the defendant attorneys’ fees for prevailing in the matter.

The 7th U.S. Circuit Court of Appeals upheld a district court’s ruling that a former employee of Cintas Corp. did not violate the terms of his non-compete agreement because the agreement itself was overbroad and, therefore, unenforceable. The appeals court further held that the district court properly refused to correct the problems in the agreement and properly awarded the defendant attorneys’ fees for prevailing in the matter.

When Daniel Perry began working for Cintas in 1993 as a sales representative, he signed an employment agreement containing various restrictive covenants: non-competition, non-solicitation of employees and nondisclosure of confidential information. Although Perry was promoted to national account manager for Illinois and Indiana in 2000, he resigned in 2003.

Perry then started working for a large competitor of Cintas’ as vice president of sales for the western region. Perry provided his new employer a copy of Cintas’ employment agreement. Thereafter, Perry accompanied a fellow employee to a sales meeting with a Cintas customer, but Perry remained in the car during the meeting. He also conducted a telephone interview with an applicant, but ended the interview after learning that the applicant formerly worked for Cintas. Perry’s new employer did not hire the applicant. Perry also brought with him two computer disks containing forms he obtained from Cintas.

Cintas filed a breach of contract suit in Illinois federal court, alleging that Perry violated his employment agreement. Cintas also requested injunctive relief. Applying Ohio law, the district court denied injunctive relief and granted Perry’s motion for summary judgment. The district court found that the non-compete provision was overly broad and declined to use its authority to modify the provision and make the agreement enforceable. The district court further held that there was insufficient evidence to create a triable issue on the alleged violations. Lastly, the court ordered Cintas to pay Perry’s attorneys’ fees and costs.

On appeal, the 7th Circuit found that the only evidence that Perry violated the employment agreement was the fact that he went to work for a competitor. The appeals court held that Cintas’ contention that the district court should modify the non-compete provision to render it reasonable was “an implicit concession that the provision was overbroad and unenforceable as written.” Further, the court held that the power to modify an agreement is “discretionary, not mandatory” and that the district court did not abuse its discretion in declining to exercise its discretionary power.

The 7th Circuit further held that, even if the non-compete provision was reasonable, there was no evidence that a breach occurred. Indeed, the court held that remaining in the car while another employee conducts a sales meeting “does not amount to solicitation” of a Cintas customer. In addition, Perry’s decision not to hire a former Cintas employee “does not amount to solicitation of a Cintas employee.” The court also held that the information on the computer disks was “dated” and that Cintas had “not demonstrated how the information on the disks might provide an advantage to competitors within the meaning of the nondisclosure provision in the agreement.”

Finally, the 7th Circuit upheld the award of attorneys’ fees in Perry’s favor, even though his new employer had paid them. The court remarked that the agreement, while perhaps ambiguous, did not expressly require the employee to directly incur the fees in order to receive an award and that the ambiguity should be construed against Cintas as the drafter of the agreement.
Cintas Corp v. Perry, 7th Cir., No. 06-1958 & 06-2844 and 07-1216 & 07-1365 (Feb. 20, 2008).

Professional Pointer: Many courts are loathe to enforce non-competition agreements. This case demonstrates the importance of ensuring that such an agreement is narrowly tailored and enforceable under applicable law as written. Although a court may have the power to “blue pencil” or modify an unenforceable agreement to make it enforceable, it may choose not to do so.

HR Discussion – A Plus Benefits, Inc.
Most courts will not enforce a non-compete that prevents a former employee from working in the industry that has supported the former employee and his family. To expect that a former employee cannot continue to work in the industry would essentially require that the individual re-train in another industry. This would most certainly lead to a marked decrease in the person’s income for several years.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.