Top Legal Pitfalls When Managing Employees

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(Part 2: Employment)

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Top Legal Pitfalls Hiring Managers Make Along the Employment Lifecycle

  Saundra Riley   Senior Associate of the Employment Practices and Litigation Groups   Fenwick & West   https://www.linkedin.com/pub/saundra-riley/b/b33/984

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Pre-employment

1

Employment 2

Termination

3 Screening

Interviewing

Selection process

Background checks

Onboarding

Assessing termination risks

Performance management

Failure to performance manage

Tips and tools

Employee classification: Exempt vs. non-exempt

Worker classification: Contractor vs. employee, and interns

Performance management tips

Recording Available

Today

Tues: Aug 11th @ 11am PT

Giving performance coaching / reviews

Avoiding employment discrimination claims

Including: Myths debunked and take-away action items

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bit.ly/legalpitfallspart3

Why are we talking about this?

q  Area of complex regulation =

pitfall opportunities

q  Proliferation in awareness among

workforce, attention by plaintiffs’ bar

q  Significant financial exposure, other

consequences for misclassification

q  Significant government attention

Tax revenue re: contractors, particularly due to increase in contractors and decrease in revenue

Concern re: taking advantage of workers, depriving of rights and benefits

Increased agency enforcement; legislation to tighten controls

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Employee vs. Contractor

q  Classification for someone engaged to provide services other than as an employee

q  No withholdings, paid on a 1099 basis

q  Not entitled to same benefits and protections as employees, such as:

•  Minimum wage and overtime

•  Meal and rest breaks and sick leave (where mandated)

•  WARN notice

What is “contractor” classification?

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Have you been there?

He signed an agreement that

identifies him as a contractor

She is paid with [stock / an option

grant]

He works for us only a few hours per week

She refused to come on board unless we classified her as a

contractor

He works for multiple entities

My contractor is properly classified

because:

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Have you been there?

This is how we engaged him at my last company

She won’t work for us for more than one year

He came to us from an agency and the agency is responsible for payment and taxes

When we first brought her on as a contractor six months ago, our counsel advised that she was properly classified

My contractor is properly classified

because:

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Employee vs. Contractor

q Agency presumes worker is employee; company must prove contractor

q Depends on facts, not label

q Multiple tests: •  FLSA economic realities test •  Common law control test •  IRS three broad inquiries

q Basic touchstones: •  Control over details of work

(even if not exercised) •  Financial dependence, opportunity for risk/loss •  What does working relationship resemble?

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Employee vs. Contractor

q To test the relationship and fit, easier walk-away

q Challenge:

•  Worker functions largely as employee during period

•  If hired, worker often continues in same or similar function

Trial Period Potential Solutions

q Temporary employment

q Introductory period

q Engage through third party (staffing agency)

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Employee vs. Contractor

ü Audit by NY department of labor of CA non-profit’s contractors •  Fewer than 15 employees total, •  2-3 contractors over 3 year-period in

NY

ü Anecdotally, heard reports from clients of ongoing audits by CA enforcement agency

ü Consistent with rhetoric from federal and state authorities

ü Even inadvertent unemployment claim can trigger audit

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Employee vs. Contractor Examples

①  Contract engineer converted into employee and later terminated – cited discussions about need for funds before officially hiring

②  Contractor who performed similar services alongside company employees – cited similar work of others

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Employee Classification

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Entitled to minimum wage, OT, other protections that vary by state such as meal and rest breaks

vs.

What is “non-exempt” classification?

Exempt from minimum wage and/or overtime obligations Common exemptions:

•  Executive, Administrative, Professional

•  Computer Professionals

•  Also: Sales

What is “exempt” classification?

Non-Exempt

Exempt

Have you been there?

He is paid a salary

She earns more than $40,000 annually

He is a manager

She is an engineer

He is a salesperson

My employee is properly exempt

because:

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Have you been there?

She is an owner/founder of the

company

His responsibilities are really important to the

company

She wants to be treated as an exempt

employee

All of our employees are exempt

My employee is properly exempt

because:

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Exempt vs. Non-Exempt

q  It’s the job, not the title, that matters

q  Presumption is employee is non-exempt; employer must prove exemption

q  Exemptions include “salary basis” test and “duties” test

Tip

Some states have differing requirements; must meet all requirements of applicable laws to be “exempt”

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Exempt vs. Non-Exempt

q  Paid salary, not hourly

q  Federal: No less than $23,660 annually •  Subject to proposed revisions raising

minimum to $50,440 annually

q  Some states have higher salary requirements •  CA requires no less than $37,440 for

executive, administrative and professional exemptions; $85,982 for computer software professionals

q  No improper deductions from weekly pay (for instance, for absences cause by employer) Tip

Some differences in rates for computer professionals and sales personnel.

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Exempt vs. Non-Exempt

Executive Duties

Administrative Duties

Professional Duties

Specific for each exemption Common denominator for most (and frequent pitfall): exercise of discretion and independent judgment

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2

3

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Exempt vs. Non-Exempt

Executive Duties 1

ü Manager of enterprise (or customarily recognized department or subdivision)

ü Customarily directs & regularly directs work of two other employees (not contractors)

ü Authority to hire or fire (or recommendations given particular weight)

ü Customarily and regularly exercise discretion & independent judgment

ü Primarily engaged in exempt duties

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Exempt vs. Non-Exempt

Administrative Duties 1

ü  Office or non-manual work directly related to management policies or general business operations

ü  Customarily and regularly exercises discretion and independent judgment

ü  Regularly and directly assists a proprietor (or executive or administrator) or performs work under only general supervision

ü  Primarily engaged in exempt duties

2

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Exempt vs. Non-Exempt

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3

Professional Duties

ü  Licensed or certified by state or primarily engaged in occupation commonly recognized as learned or artistic profession

•  Learned: Work requiring prolonged course of specialized intellectual instruction and study, or

•  Artistic/Creative: Work that is original and creative in artistic endeavor requiring invention, imagination, or talent

ü  Customarily and regularly exercises discretion and independent judgment

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Exempt vs. Non-Exempt

Note

Although beyond the scope of these materials, please be aware that exempt sales people may still be entitled to minimum hourly wages for each hour worked. Gray

Classification

Exec Admins

Office Managers

Entry-level Engineers IT Helpdesk

Customer Support / Engineers

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Exempt vs. Non-Exempt

INTERNS

With very limited exception (largely in non-profit sector), should be paid

q  Historically, DOL 6 factor test

q  Recent decision in Glatt v. Foxlight articulates a “primary beneficiary” test

Interns

q Hourly, minimum wage with overtime eligibility

q Consult counsel to set up legally compliant internship

q Partner with a local organization that facilitates compliant internships

Potential Solutions

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Exempt vs. Non-Exempt Examples

①  Sales employee fired for missing quota in back-to-back quarters claimed misclassification

②  Administrative assistant asserted class claims for unpaid overtime due to misclassification

③  News replete with examples of

employees suing for misclassification, including recent influx of intern misclassification lawsuits

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Exposure

Unpaid minimum wage and overtime,

plus interest

Possible waiting-time penalties,

depending on state (such as CA), if no longer employed

Other penalties or liquidated damages

Attorneys’ fees, costs and

expenses of lawsuit

Potential for class and representative

claims

Plus – for misclassified contractors: Federal and state taxes, expense reimbursement,

immigration law violations, health and welfare benefits,

equity

Distraction, and potential disruption for business. Adverse publicity. #hiretowin 25

Worker Classification

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q  Understand and take seriously your role in the process

q  Intake is essential; assess proper classification before worker is engaged

q  Manage changes, re-assess classification during life of relationship

①  Contractors: Length, changes to relationship ②  Employees: Company needs, position evolves

Worker Classification

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q  Understand and take seriously your role in the process

q  Intake is essential; assess proper classification before worker is engaged

q  Manage changes, re-assess classification during life of relationship

①  Contractors: Length, changes to relationship ②  Employees: Company needs, position evolves

 Educate managers:

q  Importance of proper classification – at all times

q  Procedures for tracking, reporting important changes or updates in relationship

Periodic audits, targeted or comprehensive, depending on past practices

Common pitfalls

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Absences where we know (or should know) that reason triggers leave rights

Allowing protected leaves to negatively impact performance assessment

“Surprise” negative review following silence, raise, bonus, other recent positive message or reporting concern to management

Common pitfalls that may affect performance assessment & opportunities

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Failing to recognize, consider and/or discuss a request for accommodation, especially where performance concerns then follow

Making assumptions about opportunities an employee would or would not want (for instance, due to familial obligations)

Failing to pursue reports (“formal” or informal) of harassment, discrimination or other inequitable treatment impacting the workplace

Keys to Effective Performance Management

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Regular feedback including through

performance reviews

Timely feedback when there is a performance

decline or concern, or misconduct

Accurate feedback No sugar coating (inflation),

keep it balanced (acknowledge good and bad)

Factual, not just impressions or

conclusions

Consistent treatment

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q  Worker classification: employee v. contractor

q  Employee classification: exempt v. non-exempt

q  Performance management mishaps – tips for:

q  Giving performance coaching/reviews and

q  Avoiding employment discrimination claims

q  Including: Myths debunked and take-away action items

Topic Overview Top Legal Pitfalls When Managing Employees (Part 2 of 3)

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