2015 EMPLOYMENT LAW UPDATES;WORKER MISCLASSIFICATION AND OTHER

ISSUES OF CONCERNBy: Sarah R. Johnson and

Daniel N. JanichHolifield & Associates, PLLC Greensfelder, Hemker & Gale11907 Kingston Pike, Suite 201 200 W. Madison, Suite 2700Knoxville, Tennessee 37934 Chicago, IL 60606sjohnson@hapc-law.com dnj@greensfelder.comPhone: (865) 566-0115 Phone: (312) 345-5003Fax: (865) 566-0119 Fax: (312) 419-1930www.holifieldlaw.com www.greensfelder.com

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WHAT WE WILL ADDRESS

EMPLOYER CONSEQUENCES OF WORKER MISCLASSIFICATION

UPDATES TO EMPLOYEE HANDBOOKS

EMPLOYEE BACKGROUND CHECKS

TENNESSEE DISCRIMINATION AND RETALIATION CLAIMS

TENNESSEE EMPLOYEE ONLINE PRIVACY ACT OF 2014

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WORKER MISCLASSIFICATION;WHY IS IT OF CONCERN?

INCREASED USE OF A CONTINGENT WORKFORCE (See: “Shocker: 40% of Workers Now Have ‘Contingent’ Jobs, Says U.S. Government by Elaine Pofeldt, Forbes, May 24, 2015, http://www.forbes.com/sites/elainepofeldt/2015/05/25/shocker-40-of-workers-now-have-contingent-jobs-says-u-s-government/)INCREASE IN WORKER MISCLASSIFICATION LITIGATION (FedEx; Uber)MISCLASSIFICATION IS IN THE CROSS-HAIRS OF THE DOL AND IRSINCREASE IN IRS AND DOL AUDITSCOSTLY CIVIL PENALTIES FOR EMPLOYERS FOUND TO HAVE MISCLASSIFIED WORKERSPOTENTIAL CRIMINAL PENALTIES

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WHO IS A CONTINGENT WORKER?

Contingent worker is any individual working in a capacity other than as a common law employee:Independent contractors: self-employed workers or freelancers

paid directly by service recipient Leased employees: hired and paid by staffing company that

contracts with service recipient to provide workers for a fee; considered common law employees of the leasing organization

Seasonal, temporary and part-time employees: hired for a limited duration as common law employees, independent contractors, or leased employees

Contingent workers are more prevalent in the following industries or professions:

Construction; trucking; “on-demand” workers including technology workers; house cleaners; drivers; in-home health care providers

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WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Right to Control Test

RIGHT TO CONTROL TEST: The employer controls the result and the “manner and means” of the worker’s performance:ERISA: Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318,

112 S. Ct. 1344 (1992)Subjective multi-factor test focusing on the hiring party’s right to control

and the manner and means by which the work is performedIRS: 20 factor test focusing on the following aspects as indicative of the

hiring party’s control: behavioral control (right to direct how and where the worker performs the tasks); financial control (the hiring party has the right to control the business and economic aspects of the worker’s job); type of relationship (how the business and the worker view their mutual relationship – the intent regarding control over the work)

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WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Economic Realities Test

Economic Realities Test applies to the FLSA. The test focuses on six factors (none of which is dispositive) to ascertain a worker’s status:

Is the work performed an integral part of the employer’s business?Does the worker have opportunity for profit and loss?

Does the worker have overhead?Is there a significant personal investment that the worker brings to the job?Does the work require special skills or initiative?What is the length of engagement?How much control does the employer have over the job?

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WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Economic Realities Test (cont.)

DOL Guidance on the Economic Realities Test: Wage and Hour Division: Administrator’s Interpretation 2015-1 ( July 15, 2015) provides guidance on how the economic realities test should be used by courts to determine whether an independent contractor should be classified as an employee. Whether a worker is an employee under the FLSA is to be determined by “the economic realities of the working relationship between the employer and the worker, not by job title or any agreement that the parties may make.” The factors are not to be “applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.” The goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor).

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WHO IS AN EMPLOYEE UNDER FEDERAL LAW: Economic Realities Test

(cont.)

Implications of DOL’s Recent Action:

Worker misclassification is in the DOL’s crosshairs leading to aggressive pursuit of employers of independent contractors through audits;

Increased scrutiny of independent contractor arrangements at the state level through legislation and the “DOL Misclassification Initiative” (cooperation between individual states and the DOL to combat employee misclassification) that in FY 2014 resulted in more than $79 million in back wages for more than 109,000 employees in the janitorial, temporary help, food service, day care, hospitality and garment industries;

Introduction of the Payroll Fraud Protection Act of 2015 that would amend FLSA

DOL also will continue to work with the IRS and 23 states on the misclassification issue through information sharing and coordinated enforcement

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EMPLOYER PENALTIES FOR MISCLASSIFICATION: IRS

Penalties depend on whether the DOL and the IRS determine that the misclassification was unintentional or willful (intentional):

IRS Unintentional Violations: $50 for each Form W-2 that the employer failed to file because of misclassification; since the employer failed to withhold taxes: 1.5% of the wages plus 40% of FICA and 100% of the matching FICA the employer should have paid; interest on these penalties accruing daily from the date they should have been deposited; failure to pay taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability

IRS Intentional Violations (suspicion of fraud or intentional misconduct): 20% of all the wages paid, plus 100% of the FICA taxes, both the employee’s and the employer’s share; criminal penalties for up to $1000 per misclassified worker and 1 year in prison

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EMPLOYER PENALTIES FOR MISCLASSIFICATION: IRS –

Section 530 Safe HarborSection 530 relieves a business taxpayer from paying employment taxes on workers previously treated as independent contractors and for whom the business was not paying employment taxes. The business has no employment tax liability if it can show that: it had a reasonable basis for treating the workers as independent contractors

by meeting the following criteria: judicial precedent, published rulings or technical advice past IRS audit of the business resulting in no tax assessment on similarly situated independent

contractors long-standing industry practice in the industry in which the worker was engaged

It treated all similarly situated individuals as independent contractors; andIt filed all required tax returns including information returns, consistent with the treatment of such workers as independent contractors

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EMPLOYER PENALTIES FOR MISCLASSIFICATION: DOL

FLSA Violations :Back wages under the supervision of the Wage and Hour Division; lawsuit brought by the Secretary of Labor for back pay and an equal amount as liquidated damages; private lawsuit brought by employee for back wages plus an equal amount as liquidated damages plus attorney’s fees and court costs;Secretary of Labor may obtain injunction to restrain any person from violating FLSA;two-year statute of limitations for recovery of back pay and three-year for willful violations;criminal prosecution for willful violations

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RECENT DEVELOPMENTS IN IMPROPER CLASSIFICATION

LITIGATIONFedEX:

In June 2015 FedEx confirmed agreed to create a $228 million fund to settle the decade long California independent contractor case involving about than 2300 FedEx Ground and FedEx Home Delivery pickup and deliver drivers after the ninth circuit ruled in 2014 that FedEx misclassified them as independent contractors. This settlement only covers California drivers, but could impact the resolution of dozens of other FedEx misclassification lawsuits nationwide.

On July 8, 2015 the Kansas Supreme Court ruled that FedEx drivers in Kansas are employees as a matter of law under the Kansas Wage Payment Act

UBER:

On September 1, 2015 Judge Edward M. Chen of the Northern District Court of California issues a 68 page ruling that the Uber drivers could maintain a class action suit on one of their improper classification claims

The “common law rules applicable in determining the employer/employee relationship” referred to in § 50-7-207(b)(2)(B) were stated in Masters v. Arrow Transfer & Storage Co., 639 S.W.2d 654 (Tenn. 1982) as follows:◦ “There are a number of indicia to be considered by a trier of

fact in determining the existence or nonexistence of an independent contractor relationship, such as (1) the right to control the conduct of the work, (2) the right of termination, (3) the method of payment, (4) the freedom to select and hire helpers, (5) the furnishing of tools and equipment, (6) self-scheduling of work hours, and (7) being free to render services to other entities.”

Id., at 656.

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WHO IS AN EMPLOYEE UNDER TN LAW: Common Law Test

A worker is presumed to be an employee unless it is shown that:(A) Such individual has been and will continue to be free from

control and direction in connection with the performance of such service, both under any contract for the performance of service and in fact; and

(B) Such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

See Tenn. Code Ann. § 50-7-207(e); see also Stratton v. United Inter-Mountain Tel., 695 S.W.2d 947, 953 (Tenn. 1985).

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WHO IS AN EMPLOYEE UNDER TN LAW: ABC Test

The Tennessee Supreme Court has stated that a taxpayer must satisfy each of the three parts in the “ABC test” above to establish that a worker is not an employee.

The Beare Co. v. State, 814 S.W.2d 715, 719 (Tenn. 1991).

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WHO IS AN EMPLOYEE UNDER TN LAW: ABC Test

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CONTINGENT WORKERS AND ACA

Both “small” and “large” employers may be motivated to reduce the number of full time employees through the use of contingent workers either hired or reclassified as independent contractors. Small employers may want to keep the number of full time

employees under 50, so that they would not have to provide health insurance.

Large employers that do not want to provide health insurance, may want to reduce the number of full time employees to minimize penalties.

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ACA INCREASES MISCLASSIFICATION RISKS – Proceed With Caution!!!

Unintended consequences of misclassification:

Substantially increased risk of DOL and IRS scrutiny Potential “Domino” effect of scrutiny from other governmental

agencies Potentially very high penalties if independent contractors are

reclassified by the IRS as employees Potential need to modify business practices NOTE: The Final Regulations do not provide Section 530 safe

harbor relief because employers need to ascertain who their employees are based on the common law standard

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STAFFING AGENCIES AND ACA

IRS presumes temporary staffing agencies are the true common law employers of their leased workers and as such ultimately responsible for pay-or-play compliance.

Risks – Possibility that user of staffing agency will be deemed “true” common law employer obligated to offer coverage to employees of staffing agency.

Recommendation: Include indemnification for “pay-or-play” penalties in contract with agency.

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STAFFING AGENCIES AND ACA (cont.)

Final IRS Regulations: Applicable when staffing agency is not the common law employer—

When the agency makes an offer of coverage to the employee

on behalf of the client under the agency plan, the offer is treated as made by the client for pay-or-play purposes only if the fee the client would pay to the agency for an employee enrolled in health coverage is higher than the fee the client would otherwise pay the agency for the same employee if that employee did not enroll in health coverage.

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WHAT EMPLOYERS SHOULD DO TO MINIMIZE MISCLASSIFICATION RISKS

Exercise prudence when classifying workers or reclassifying regular full-time employees as independent contractors.

Correct any possible misclassifications before the IRS or DOL audits uncover such misclassifications

Re-examine independent contractor relationship to ascertain whether they may be vulnerable to DOL’s broad construction of who is an employee.

Review independent contractor contracts and ascertain whether the contingent worker has his or her own business.

Use employee leasing agencies to hire workers, but beware of the risk of having the business and the staffing agency deemed as “joint employers.”

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WHAT EMPLOYERS SHOULD DO TO MINIMIZE MISCLASSIFICATION RISKS

(Cont.)Ensure that contingent workers perform duties distinguishable from those performed by regular common law employees. Review the language of all employee benefits plans to confirm that they provide a clear exclusion of independent contractors and all leased employees from plan eligibility. The exclusion should make it clear that any reclassifications of such workers by any government agency as common law employees shall not result in retroactive eligibility for benefits.Review leased employee arrangements to ensure that they comply with IRS rules governing such arrangements.

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ACA REPORTING REQUIREMENTS FOR EMPLOYERS SUBJECT TO “PAY OR PLAY”

RULES August 7, 2015: IRS issued new draft forms and

instructions for use by health coverage providers and employers required to report coverage under ACA. Annual reporting required annually beginning in 2016 for coverage in 2015.

ACA reporting requirements are addressed in Internal Revenue Code Section 6055 (for health insurers and sponsors of self insured group health plans), and Section 6056 (for employers with 50 or more full time employees, i.e., “applicable large employers” or “ALEs”).

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ACA REPORTING REQUIREMENTS FOR EMPLOYERS SUBJECT TO “PAY OR PLAY”

RULES (Cont.) The forms 1094 and 1095 are very detailed and the IRS

instructions are complex. Reporting with these forms will be a time consuming and complex process for most employers.

The first due date for filing the reporting forms withthe IRS is February 29, 2016 (March 31, 2016 if filing electronically). Reporting entities can obtain an automatic 30- day extension of the filing deadline by submitting a Form 8809 (“Application for Extension of Time To File Information Returns”) to the IRS on or before the due date.

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ACA REPORTING REQUIREMENTS FOR EMPLOYERS SUBJECT TO “PAY OR PLAY”

RULES (Cont.) For furnishing individual statements (due by February 1,

2016), draft instructions provide that the responsible entity may seek an extension of up to 30-days by sending a written request (not the Form 8809) to the IRS’ Information Returns Branch that is postmarked prior to the original due date.

Effective January 31, 2015, a reporting entity may be subject to a $250 per failure (previously $100) penalty, subject a calendar- year maximum of $3,000,000 (previously $1,500,000). If a “good faith” effort is made by the reporting entity to complete the forms correctly, and errors are subsequently found, the IRS will waive the penalties for now if incorrect submissions are subsequently corrected.

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EMPLOYEE HANDBOOK: Important Provisions – Annual Review

Vacation time Sick pay Benefits Severance pay FMLA leave (if applicable) COBRA

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EMPLOYEE HANDBOOK: Important Provisions – Annual Review

Harassment policies Privacy policies Disciplinary procedures

Absences Tardies

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EMPLOYEE HANDBOOK: Same-Sex Marriage

Does your Employee Handbook define spouse or marriage? Update these definitions to be in line with Obergefell v. Hodges – gender neutral definitions

FMLA Leave is now available to eligible employees in all same-sex marriages

COBRA benefits extend to same-sex spouses

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EMPLOYEE HANDBOOK: ADA Issues

Must allow a reasonable accommodation, i.e. leave However, a “No-Restrictions

Policy” (requiring an employee with a disability to stay out of work until 100% healed is a per se violation of the ADA)

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EMPLOYEE HANDBOOK: ADA Issues

A “No-Restrictions Policy” does not allow a case-by-case assessment of an individual’s ability to perform essential functions of the individual’s job, with or without accommodation

EEOC v. Brookdale Senior Living Communities, Inc., Civil Action No. 14-cv-02643-KMT

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EMPLOYEE HANDBOOK: FLSA Issues

Work done on smartphones/tablets after work hours must be at the request of the employer to be eligible to be “on the clock.” This policy must be clearly set out in

the Employee Handbook to avoid any misinterpretation and to appropriately defend any overtime pay claims

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Tennessee Discrimination &Retaliation Claims

Effective July 1, 2014; State law discrimination and retaliation claims under the Tennessee Human Rights Act (“THRA”), Tennessee Public Protection Act (“TPPA”), and the Tennessee Disability Act are subject to compensatory damages caps as follows: 8-14 employees: $25,000 15-100 employees: $50,000 101-200 employees: $100,000 201-500 employees: $200,000 501+ employees: $300,000

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Tennessee Discrimination &Retaliation Claims

State law retaliatory discharge claims have been eliminated

Plaintiffs can prevail on Tennessee state law whistleblower claims (under the TPPA) only if they show that their protected activities were the sole cause of their termination rather than a substantially motivating factor under the common law

Plaintiffs cannot pursue claims in state and federal court at the same time based on the same facts

Managers and supervisors are no longer liable individually under the THRA In line with Title VII under federal law

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Tennessee Employee OnlinePrivacy Act of 2014

Employers cannot request an employee or applicant to disclose a password to a personal internet account

Employers cannot compel an employee or applicant to access a personal internet account in the presence of the employer so that the content can be seen

Employers cannot penalize for failure to provide password or refusal to access account in employer’s presence

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Tennessee Employee OnlinePrivacy Act of 2014

Exceptions. Employers may:Request usernames and passwords to gain access to

devices and accounts that are supplied or paid for by the employer or used for employer

Discipline employees for transferring employer’s proprietary or confidential information to employee’s personal account without employer’s authorization;

Restrict or prohibit an employee’s access to certain websites while using an employer’s network;

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Tennessee Employee OnlinePrivacy Act of 2014

Exceptions. Employers may: Monitor, review, access or block data stored on an electronic

device supplied by or paid for by the employer, or stored on an employer’s network;

Comply with a duty to screen employees or applicants before hiring or to monitor or retain employee communications: (a) that is established under federal law or by a “self-regulatory organization” (e.g., FINRA); (b) for purposes of law enforcement; or (c) for purposes of an investigation into law enforcement conduct;

View, access, or use information about an employee or applicant that is available in the public domain

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Tennessee Employee OnlinePrivacy Act of 2014

Employers may conduct investigations if: (a) there is specific information on the employee’s

personal account regarding the subject of the investigation (so long as the investigation involves potential legal violations or work-related misconduct); or

(b) the employer has specific information about an unauthorized transfer of the employer’s confidential or proprietary information to the personal account.

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Criminal Background Checks

EEOC Guidance. In deciding whether a particular offense should be qualifying, consider the following: the nature and gravity of the criminal offense or

conduct; how much time has passed since the offense or

sentence; and the nature of the job (including where it is

performed, how much supervision and interaction with others the employee will have, etc.)

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Credit Background Checks

Fair Credit Reporting Act. Employers must: Get the applicant’s written consent before

requesting a background check. Give the applicant notice if the employer plans to

screen him or her out based on the contents of the report. In this situation, the employer must also give the applicant a copy of the report.

Notify the applicant once the employer makes a final decision not to consider the applicant based on the report.

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ANY QUESTIONS?

Additional information is available at www.holifieldlaw.com.

If you have questions or concerns about any issues discussed, please contact us.