21st Annual IL Statewide APA

ConferenceAugust 22, 2014

Cooking Up Trouble:Independent Contractor vs.

Employee Misclassification and Other Common Wage & Hour Mistakes

William R. PokornyPartnerFranczek Radelet, P.C.

21st Annual IL Statewide APA Conference – August 21-22, 2014

Key Wage & Hour Laws

Fair Labor Standards Act

• Minimum wage

• 1.5 x “Regular Rate” for all hours over 40

• Recordkeeping

• Child labor

Illinois Minimum Wage Law

•Similar to FLSA•Some differences

• Higher minimum wage• Exemptions

•Follow whichever is best for the employee

Wage Payment and Collection Act•Requires payment of wages / final compensation

•Easy claims procedure for employees

•Strict limits on payroll deductions

Mistakes Can Be Costly

• 10 employees

• $800/week

• For 35 hrs

• 45 hrs/week

• 13 weeks/yr

$800 / 35hrs = $22.86/hrO.T. prem. = $22.85 / 2 = $11.43/hr45 hrs x $22.85/hr = $1,028.575 hrs x $11.43/hr = $57.14Total due = $1085.71Total paid = $800Difference = $285.71x 13 weeks = $3,714.29x 10 employees = $37,142.86x 3 years = $111,428.57x 2 (liquidated damages) = $222,857+ Attorney fees, state penalties

Common Problems

Deductions

Oscar Overpaid

• Payroll error: $100 / paycheck, approx. $2,600

• Asked Oscar – he does not want to repay

• Oscar’s supervisor wants to deduct the money from his next paycheck – would barely cover

Oscar Overpaid

• Document overpayment – get acknowledgement from employee

• Agree on repayment schedule if possible

• Use disputed deduction process if needed

• Consider employee relations issues – worth the headache / ill will?

Fired Fred• Custodian• Terminated: Damaged equipment, suspected theft• Final pay:

• 2 weeks unused vacation• 1 week pay through termination date

• Next pay day – this Friday• Supervisor:

• Can we deduct value of damaged property from final pay?

• Can we withhold final pay pending theft investigation?

Deductions from Final Pay• With consent of employee

• At time of deduction• “Cash Advance” agreements – signed at time of advance

• Can’t deduct for:• Lost/damaged property• Business losses• Other debts owed by employee, absent cash advance

agreement• Disputed deduction process

Misclassification

Not Necessarily Exempt

• Salaried employee• “Manager”• Supervisor / foreperson• Confidential employee• Non-union employee• Office staff• IT personnel

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Key Exemptions

• “White Collar”• Industry-specific

• Outside sales• Commissioned retail sales• Auto / parts sales• Agricultural

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“White Collar” Exemptions

•Salary Amount - $455 / week minimum•Salary Basis•Duties

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Salary Basis

• Fixed amount• For any week in which work is performed• No variance for

• Hours• Quantity of work• Quality of work

• Deductions strictly limited

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Effects of improper deductions

• Exemption lost for the period deduction made

• Affects not only employee to whom deduction made but also . . .• All employees in the same job class working for the same manager

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Executive• Primary duty: managing enterprise or customarily

recognized department or subdivision• Customarily and regularly directs at least 2 FTEs or

equivalent• Authority to hire / fire, or recommendations as to hiring,

firing, advancement, promotion, or change of status carry “particular weight”

• IL: Max. 20% of time on activities not “directly and closely related” to the above. (40% for retail / service; not applicable to sole-charge of separate branch or owner of at least 20% share.)

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Assistant Managers

• Reports to Store Manager• Spends significant time on on-exempt activities• Makes schedules, some supervisory responsibility• No independent hiring / firing authority

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Administrative

• Primary duty of office work

• Directly related to the management or general business operations of the employer or the employer’s customers

• Regularly exercises discretion and independent judgment• e.g. HR Director, Sales Manager

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Office Manager

• Primary duties: • Generally in charge of office operations• Prepares and analyzes payroll, monthly and quarterly reports and

financial statements• Scheduling

• Other Duties:• Typing• Filing• Bookkeeping

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“Learned” Professional

• Advanced knowledge in a field of science or learning

• Customarily acquired through prolonged course of specialized intellectual instruction

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“Creative” Professional

• Primary duty is original or creative work in recognized field of artistic endeavor

• Result depends primarily on the invention, imagination, or talent of employee

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Professionals - IL

• Consistent exercise of discretion and judgment• Predominantly intellectual and varied in character,

and such that the output cannot be standardized in relation to a given period of time

• No more than 20% of time on work not “essential and necessary” to the above.

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Independent Contractors

• Control• Profit/Loss• Investment• Special skills• Permanence• Integral to the business of the principle

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Practical Considerations

Independent Contractor• Self-directed; controls details of how the work is performed• Works for multiple employers• Paid on a project basis• Does not receive training from Company• Does not receive benefits• Uses own equipment

Employee• Works for one employer• Employer provides work direction and tools• Paid a guaranteed regular wage• Employment related out-of-pocket expenses are paid by employer• Training from employer• Receives benefits

Illinois Employee Classification Act• Applies to “contractors” – basically any employer in

the construction industry• Extremely stringent definitions of independent

contractor• Severe penalties for misclassification

• up to $2,000 per worker per day.

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Prevention:

• Analyze job duties• Update job descriptions• Review payroll practices• Track hours for exempt workers?• Change policies / classifications?

Limiting Misclassification Damages

• 10 employees

• $800/week

• For all hours

• 45 hrs/week

• 13 weeks/yr

$800 / 45hrs = $17.78/hrO.T. prem. = $17.78 / 2 = $8.89/hr45 hrs x $17.78/hr = $8005 hrs x $8.89/hr = $44.44Total due = $844.44Total paid = $800Difference = $44.44x 13 weeks = $577.78x 10 employees = $5777.78x 3 years = $17,333.33x 2 (liquidated damages) = $34,666.67+ Attorney fees, state penalties

Calculating Overtime

General Overtime Calculation

1. Total all non-excluded compensation

2. Divide by total hours worked to determine the “regular rate”

3. Divide the “regular rate” by 2 to determine the overtime premium rate

4. Calculate overtime hours by subtracting 40 from the total hours worked

5. Multiply the total overtime hours by the overtime premium rate

General Overtime Calculation1. Total non-excluded compensation:

$20 x 46 hours = $920

2. Regular Rate = $20 / hour

3. OT premium = $10 / hour

4. Total OT hours = 46 – 40 = 6 hours

5. 6 hours x $10 / hour = $60

Total pay = $920 + $60 = $980

46 total hours $20/hour

OT for Salaried Employees1. Regular rate - $1,000 / 37.5

hours = $26.66

2. 2.5 hours additional straight-time pay: $26.66 x 2.5 = $66.67

3. 6 hours OT pay:

4. $26.66/hr x 1.5 x 6 hours = $239.94

Total pay = $1,306.61

($1,000 + $66.67 + $239.94)

46 total hours Salary = $1,000 /

week Salary covers 37.5

hour week

Multiple Jobs, Different Rates

•Must pay OT for all hours over 40

•Means All Hours – even if in different jobs

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Multiple Jobs, Different Rates

Unless the employee is exempt or the work is occasional or sporadic:• Track and total all hours worked in all jobs• Pay OT if total hours are over 40• Calculate OT using either:

• Weighted average• Negotiated rate for work being performed during

OT hours

Multiple Jobs, Different Rates

• Bob makes a current hourly rate of $20 per hour and works as a secretary for 37.5 hours per week

• He also works as assistant coach for the volleyball team

• One Saturday, he works at a volleyball tournament for 8 hours, for which he is paid a stipend of $100

• The total straight time compensation for the week is ($20 x 37.5 + $100), or $850

• Bob is entitled to 5.5 hours of OT pay

Weighted Average Method

• $850 / 45.5 total hours worked = $18.68/hour

• $18.68/hour is Bob’s weighted average pay

• For each OT hour, Bob is owed ½ of the weighted average rate

• Thus, Bob’s additional OT is calculated as follows:• $18.68 x ½ x 5.5 OT hours = $51.37

Negotiated Rate Method

• Depends on what the employee is doing when the OT work is performed

• If the workweek starts Saturday and ends Friday:

• $20 x ½ x 5.5 OT hours = $55

Negotiated Rate Method

• Depends on what the employee is doing when the OT work is performed

• If the workweek starts Sunday and ends Saturday:

• $100 stipend / 8 hours = $12.50/hour• $12.50/hour x ½ x 5.5 hours = $34.38

Brian Bartender• Works total of 40 hours as a bartender at

$7/hr., plus tips• 10 hours as banquet staff at $10/hr, plus

share of service charge ($50)• How do you calculate overtime for this

week?

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Brian Bartender• Straight Time:

• $7 hours x 40 = $280• 10 hours x $10 = $100• Total: $380

• Overtime:• ($7.00 ÷ 2) x 10 hours = $35

• Total Pay:• Straight Time: $380• Service charge: $50• OT: $35• Total: $465

• $8.25/hr x 40 ($7/hr rate plus $1.25 tip credit) = $330• $10/hr x 10 = $100• $50 service charge• Total of $480

• Regular hour rate ($480/50 = $(9.60)

• OT ($9.60 x 1/2 = $XX)

• $430 + $43 = $473

• Tip credit ($1.25 x 40 hours = $50)

• Total payment to Brian is $423 ($473 - $50)

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WRONG

Brian Bartender• Determine total non-overtime compensation

• $8.25/hr x 40 ($7/hr rate plus $1.25 tip credit) = $330• $10/hr x 10 = $100• $50 service charge• Total: $480

• Regular rate - $480 ÷ 50 = $9.60

• OT ($9.60 ÷ 2 = $4.80)

• Total pay:

• $7/hr x 40 hrs = $280

• $10/hr x 10 hrs = $100

• $4.80/hr x 10 OT hrs = $48

• $50 service charge

• Total: $478

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Calculating Overtime

• Use weighted average rate (absent agreement)

• Include all compensation in regular rate• Bonuses• Service charges• Tips (only amount used to satisfy minimum wage)• Incentive pay

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Tracking Work Hours

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Dedicated Dwight• Bookkeeper• Hourly• Responsible for monthly

TPS Reports• Solid performer, highly dedicated• Has been taking TPS reports home, completing them after-

hours• Has not recorded this time• Not looking for pay

Helga Housekeeper• Helga works as a hotel room attendant

• Lately, she has been working through her breaks

• Does not tell anyone she is not taking breaks

• Automatic deduction of 30 minutes each shift for meal break

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Addressing Off the Clock Work

• Investigate immediately• Determine scope of the problem• Ensure practice stops

• Counseling / discipline for employee• Counseling / discipline for management

• Determine hours• Verify through available sources (security logs, email, etc.)• Obtain employee’s written estimate

• Written acknowledgement of payment • Ounce of prevention …

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Travel / Commuting Time

• Hourly employee• 6:00 a.m. – logs in, checks & responds to email• 7:00 a.m. – ½-hour commute home to work

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Travel / Commuting Time

• Ordinary home to work travel – No• Travel as part of principal work activities – Yes• Special circumstances:

• Emergency / call back• Overnight travel• Special one-day trips

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Travel / Commuting Time

• Technician• Company vehicle• Picks up work crew on way to work

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Training

Counts as work time unless all of the following apply:• Outside working hours• Voluntary• Not directly related to employee’s job• No productive work performed

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Training

•Customer service employees• Spanish-language training• Outside of work hours• Voluntary

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Pre/Post-Shift Activities

• Is the activity required by the nature of the job duties?

• Is it “de minimus”?

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Pre/Post-Shift Activities

• Call center operator• Boots computer, launches applications, logs in.• 3-5 minutes• While waiting, uses restroom, gets coffee, etc.

Correcting Mistakes

Hi, I’m from the Department of Labor …

Responding to an Onsite Visit• Train reception staff to call management• Get key information

• What agency?• Scope of investigation?• What information requested?• Response deadline?

• Get business card / credentials• Avoid answering substantive questions• Be polite!• Call the lawyers!

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Required Records - Exempt• Full name and employee number/identification number

• Home address and zip code

• Date of birth, if under age 19

• Gender and occupation

• Time and day the workweek begins

• Total wages paid each pay period

• Date of payment and pay period covered by payment

• Describe the basis for the wages paid, for example, the amount of salary, commissions, and fringe benefits which are paid during the period

Required Records – Non-Exempt• Regular hourly rate of pay if overtime is due, and the

basis for the regular rate, including any exclusions

• Hours worked each workday, and total hours worked each workweek

• Total daily or weekly straight time wages

• Total premium pay for overtime hours

• Total additions and deductions from wages each pay period, and an explanation for each addition and deduction

Other Key Records

• Job descriptions• “Unofficial” time records• Policies and employee communications• State requirements vary

Retention Period

• Federal laws require 2-3 years• State law varies• Best practice depends on state statute of

limitations – in IL at least 10 years

Action Items

• Don’t wait for a lawsuit or DOL audit• Review exemptions• Review policies and audit implementation• Train supervisors• Verify recordkeeping compliance• Provide hotline / complaint mechanism• (Carefully) correct mistakes• Get legal advice

Thank You for Attending!

21st Annual IL Statewide APA Conference – August 21-22, 2014