We wrote previously about the announcement of a cooperative alliance between the U.S. Labor Department and the U.S. Internal Revenue Service aimed at ending what the Secretary of Labor called "the business practice of misclassifying employees [as independent contractors] in order to avoid providing employment protections."

If that news was not enough to get everyone's attention, the terms of the "Memorandum of Understanding" between these agencies (link to copy below; copy courtesy of CCH) should cause all employers to take notice.  DOL and IRS have agreed to implement their agreement "through enhanced information sharing and other collaboration" led by a "joint IRS-DOL team".

Some Of The Details

Among other things, DOL will "refer to the IRS .  .  . Wage and Hour Division investigation information and other data that DOL believes may raise Internal Revenue employment tax compliance issues related to misclassification."  DOL will also share "Wage and Hour Division training materials and opportunities with the IRS .  .  .."

For its part, IRS "will evaluate and classify employment tax referrals provided by the DOL and .  .  . [will] conduct examinations to determine compliance with employment tax laws."  And in at least some instances IRS is prepared to "share the employment tax referrals provided by the DOL with state and municipal taxing agencies .  .  .."

The two agencies have also committed to "coordinate national outreach activities."  This will include such steps as "joint national press releases" and "joint messages to national stakeholder organizations."  The Memorandum does not identify any of these "stakeholder organizations", but one may hazard an educated guess as to what the identities of at least some of them might be.

The administration's "transparency" mantra has been suspended where the Memorandum is concerned.  For example, the document asserts "a need for the government to provide information to other law enforcement bodies without making a public disclosure."  DOL and IRS say that they intend to preserve their "legal privileges or other legal protections against disclosure" to outsiders, and they contend that information exchanges between them will not be a "public disclosure" under the federal Freedom of Information Act.

Points To Consider

The many take-aways include these:

◊   Once again, every company or other organization relying even in part upon a contingent of independent contractors should immediately evaluate whether there is any vulnerability to a successful claim that those workers are instead employees.

◊   Every such company or other organization being investigated by DOL should assume that information provided about independent contractors will be given to IRS and, potentially at least, to analogous state or local agencies and officials.

◊   Employers must of course abide by their legal obligations in DOL and IRS investigations and audits.  But, within those parameters, management should be careful in deciding (i) what documents and other information to provide, and (ii) how, under what circumstances, and with what caveats to disclose them.  DOL and IRS say that they intend to protect certain confidential or private information and trade secrets that are covered by federal laws and regulations.  However, an employer cannot be sure whether DOL or IRS will agree with the employer (or even with one another) that each document or item of information is protected against disclosure to some other person or entity, or that a court will agree with DOL's or IRS's views in some later third-party legal action to compel disclosure.  And the best of intentions cannot preclude an erroneous, mistaken, or inadvertent release of information to the public.

◊   While the Memorandum's principal focus appears to be worker misclassification, it does not say that the collaboration is restricted to this topic.  For instance, the "joint outreach" is said also to encompass "other issues of mutual interest."

DOL IRS Memodandum of Understanding.pdf (216.50 kb)

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The U.S. Labor Department announced today that it has entered into a cooperative alliance with the U.S. Internal Revenue Service and others aimed at ending "the business practice of misclassifying employees [as independent contractors] in order to avoid providing employment protections."  As the IRS's involvement might suggest, this collaboration has as much to do with enhancing the inflow of tax revenues and other sums to various governments as it does with "employee protections".

The arrangements' other signatories include:

◊   Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington,

◊   State labor officials in Hawaii, Illinois, and Montana, and

◊   New York's Attorney General.

The Labor Department says that these arrangements will permit it to "share information and coordinate law enforcement with" the participants.

None of this should be a surprise, arising as it does from a federal "Misclassification Initiative" that began to gather steam last year.  Nevertheless, every company or other organization with an operational model based even in part upon a contingent of independent contractors should anticipate renewed enforcement energy, activity, and assertiveness.  Management should immediately evaluate whether there might be any vulnerability to a successful claim that those workers are instead employees, including for purposes of federal and state wage-hour laws.

And where the federal Fair Labor Standards Act is concerned, remember that its definition of "employee" has been characterized as being the broadest among all federal employment laws.  In considering a worker's FLSA status, think through the answers to questions like these:

◊   Are the individual's services an integral part of the organization's activities?
 
◊   Does the individual have any significant investment in facilities or equipment?

◊   Does the individual have an opportunity for profit and loss in a business sense?

◊   Does the individual exercise a businessperson's initiative, judgment, or foresight?

◊   Is the relationship is permanent or indefinite, rather than for a determinable time?

◊   Does the individual have meaningful and predominant control over the work's details?

◊   How much control does the organization retain over the work's details?

Fisher & Phillips' 2010 article published in the Bureau of National Affairs' Daily Labor Report (linked below) provides additional perspective on the independent-contractor question.

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Independent Contractor Article 05 20 10.pdf (62.50 kb)

News that some of the nation's preeminent homebuilders have received information demands from the U.S. Labor Department under the federal Fair Labor Standards Act has drawn a variety of unhappy reactions.  But whatever one thinks about the wisdom, appropriateness, timing, or manner of DOL's move, the fact is that the administration has had the construction industry in its FLSA sights for some time now.

As we reported in May 2010, even then DOL had identified construction as being among what it calls "fissured" industries.  Officials use this term to refer to business arrangements that in DOL's view cloud the realities of the employment relationship so as to dilute the responsibility for FLSA compliance.

It is therefore likely that one important purpose of DOL's homebuilder initiative is to develop a baseline of industry- and company-specific structural information that is relevant to FLSA compliance.  For instance, investigators will no doubt be looking into whether ostensibly-separate corporations, partnerships, sole-proprietorships, and the like serving as different components in or layers of construction projects are truly independent businesses, or whether they are instead so integrated with one another as to be a single, overall enterprise.

DOL will also be delving into the extent to which even truly distinct and separate entities nevertheless collaborate about or exercise control over the workers on construction projects.  It will be doing this to judge whether each such entity is a "joint employer" of some or all of those workers so as to share individual and collective responsibility for complying with the FLSA where those workers are concerned.  This can be the case if, for example, a worker's efforts simultaneously benefit those entities under circumstances in which:

◊   There is an arrangement between or among the entities to share or interchange the worker's services;

◊   One entity is acting directly or indirectly in the interests of one or more others in relation to the worker; or

◊   The entities "are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with" one or more others.

See 29 C.F.R. Part 791.  Courts tend to evaluate the joint-employment question under factors that mostly boil down to variations on these themes.

Obviously, DOL will also be investigating whether the targeted employers have been following the FLSA's minimum-wage, overtime, recordkeeping, and child-labor requirements and restrictions.  This will include evaluations of whether these employers have erroneously treated some employees as being exempt or have misclassified employees as being "independent contractors".

Construction contractors subject to federal prevailing-wage and fringe-benefits requirements should also assume that investigators will be alert for any non-compliance with the Davis-Bacon Act or the Contract Work Hours And Safety Standards Act.

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The U.S. Labor Department's most-recent regulatory agenda now targets April 2011 for the release of a proposed rule that DOL says is intended to, among other things, "update [federal Fair Labor Standards Act] recordkeeping requirements to foster more openness and transparency in demonstrating employers' compliance with applicable requirements to their workers, to better ensure compliance by regulated entities, and to assist in enforcement."  Elsewhere, DOL has stated that this forthcoming "Right To Know Under The Fair Labor Standards Act" would address "notification of workers' status as employees or some other status such as independent contractors, and whether that worker is entitled to the protections of the FLSA."  The proposal would "also explore requiring employers to provide a wage statement each pay period to their employees," apparently so as to convey to employees "how their pay is computed."

These current notifications include even fewer specifics than their predecessors, about which we reported in May.  At that time, DOL expressed an intention to require employers to notify workers of their FLSA rights in some unidentified way and to provide unspecified "information" about hours worked and wage computations.
 
DOL also said earlier that employers would be required to prepare some sort of "classification analysis" for a worker whom the employer will "exclude . . . from the FLSA's coverage," to disclose this analysis to the worker, and to provide the analysis to a DOL investigator upon "request."  Judging from the latest notices, this is still on the table.  It is less than transparent whether such an analysis would be restricted to situations in which a worker is categorized as being or not being an employee for FLSA purposes.  For example, there is concern that it will also extend to an employer's decisions about which employees it will treat as being exempt from the FLSA's pay requirements.  At a May "Stakeholder Forum" in Washington, D.C., DOL officials declined to address this question.

We continue to recommend that employers remain on the alert for this proposed rule.  When it is published, employers should evaluate each provision in detail, should carefully consider all potential ramifications, and should be prepared to submit suggestions, comments, and any objections.  In light of the recent "Bridge to Justice" initiative, there is every reason to anticipate that information compiled under the requirements of any final regulation will wind up in the hands of claimants and their lawyers.

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The U.S. Labor Department has now provided additional, disquieting insight into its "Plan, Prevent, Protect" program that we first reported on in our April 30 post.  Part of DOL's Spring Regulatory Agenda 2010 announces an intention to issue a Notice of Proposed Rulemaking ("NPRM") proposing significant amendments to the FLSA recordkeeping regulations.

There are as yet no details.  But DOL says that its new rules will, among other things, seek to require employers:

•    To notify workers of their FLSA rights (apparently, the longstanding requirement to display DOL's prescribed poster somehow does not accomplish this);

•   To provide currently-unspecified "information" about hours worked and wage computation; and

•    To perform and document some kind of "classification analysis" for a worker whom the employer will "exclude . . . from the FLSA's coverage", to disclose this analysis to the worker, and to provide the analysis to a DOL investigator upon "request".

DOL's amendments will also undertake to "address burdens of proof when employers fail to comply with record and notice requirements."  It will be interesting to see whether and to what extent DOL will presume to instruct the courts as to what proof burdens they must apply and how and when to apply them.

These proposals are likely to raise a host of substantial and troubling questions.    For instance, must a "classification analysis" be done for each worker, rather than simply for a group of similarly-classified ones?  What level of detail will be necessary?  Must the analysis directly or indirectly reflect the advice of in-house or outside counsel so as to implicate the attorney/client privilege?  Must it contain confidential business information where this might be linked to a decision to treat an employee as being exempt from the FLSA's minimum-wage, overtime, and timekeeping requirements?  What assurance will DOL give (indeed, what assurance can it give) that a written analysis turned over in response to an investigator's demand will not be disclosed outside of DOL?

We recommend that employers remain on the alert for this NPRM.  Once the document is published, each proposed amendment and its potential ramifications should be closely scrutinized and carefully considered.  We strongly suspect that there will be provisions as to which comments, and perhaps even strenuous objections, will be advisable before any revisions are adopted.

Keep in mind also that, as we have noted earlier, pending legislation would attach potentially burdensome penalties to an employer's being found not to have complied with whatever any final recordkeeping amendments turn out to be.

If your organization's operational model includes an "independent contractor" contingent, it is more important than ever to ensure that this status can be successfully defended.  Enforcement officials are gearing up to challenge the classification across a variety of fronts.

Efforts continue at the federal and state levels to pass new laws affecting whether and when independent-contractor status will be valid.  But a leading indicator of things to come appears in the U.S. Labor Department's FY 2011 budget report.

In the Labor Department's view, misclassifying individuals as independent contractors "denie[s] access to critical benefits and protections to which they may be entitled as regular employees" and "generates substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds."  The Labor Department seeks "a joint Labor-Treasury initiative to strengthen and coordinate Federal and State efforts to enforce statutory prohibitions, [and to] identify, and deter misclassification of employees as independent contractors."

The Labor Department plans targeted investigations and stepped-up litigation.  It also envisions competitive grants made to states for similar initiatives which are designed to "reward the States that are most successful at detecting and prosecuting employers that fail to pay their fair share of taxes due to misclassification."  The Labor Department also favors legislation that would compel employers to prove that independent contractors are classified correctly and would impose federal Fair Labor Standards Act penalties for misclassifying workers.

The FLSA definition of "employee" has been characterized as the broadest of all federal employment laws.  What a worker is called, whether he or she would be considered an employee under other laws (like tax laws), and whether the individual has signed an independent-contractor agreement do not in themselves determine whether the person is truly an independent contractor for FLSA purposes.  Relevant questions include these:

•  Are the individual's services an integral part of the organization's activities?

•  Does the individual have any significant investment in facilities or equipment?

•  Does the individual have an opportunity for profit and loss other than just working hard?

•  Does the individual exercise a businessperson's initiative, judgment, or foresight?

•  Is the relationship is permanent or indefinite, rather than for a determinable time?

•  Does the individual have meaningful and predominant control over the work's details? 

If the answers leave you feeling uncertain about the status of your independent contractors, it's time to take a hard look at things.

UPDATE 05/24/10:  Fisher & Phillips recently published an article on this topic in the Bureau of National Affairs Daily Labor Report.  Click below to read the article.

Misclassification Article 05 20 10.pdf (62.50 kb)