Proposed Employer Record Keeping Requirements Related to Worker Classification

Rebecca Woods

SPHR - Vice President, Human Resources

Doherty Employment Group

dohertyemployment.com

Topic: Human Resources

The Department of Labor is on the hunt for worker misclassification. It is time for employers, even those who may have their heads imbedded in the sands of denial, to take note.

On April 26, 2010 the Department of Labor (“DOL”) published it semiannual regulatory agenda which is required by Executive Order to detail all the regulations the DOL expects to have under active consideration for promulgation, proposal or review during the coming one year period. According to the agenda, the DOL plans to propose a rule that would amend the current recordkeeping regulations under the Fair Labor Standards Act (“FLSA”).  Under the proposed rule, any employers seeking to exclude workers from the FLSA’s coverage will be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to provide to Wage and Hour Division (“WHD”) enforcement personnel upon request.  The proposal will also address burdens of proof when employers fail to comply with records and notice requirements.

The Abstract on the Department of Labor website says the following:

The Department of Labor proposed to update the recordkeeping regulations under the Fair Labor Standards Act in order to enhance the transparency and disclosure to workers of how their pay is computed and to modernize other recordkeeping requirements for employers.

According to more specific information about the Department’s intentions, employers who wish to classify any employee as “exempt” from the overtime provisions of the FLSA or who wish to set up a relationship with a worker as an “independent contractor” will need to engage in significant analysis and be able to provide proof that they have classified those relationships accurately. Classifying all or the majority of employees as “exempt” from the overtime provisions of the FLSA or misclassifying workers as “independent contractors” will be much more risky and could come at a greater price in the event they have been misclassified.

It is no secret that misclassification of workers as exempt from overtime pay when they should be subject to the overtime provisions of FLSA, has been the scourge of many employers and the boon of plaintiff’s attorneys for the past seven or eight years. Plaintiff’s attorneys have been able to count on employer naiveté or perhaps simple denial to pursue them over misclassification of workers. Relatively few workers can be classified as exempt from overtime pay, yet time and time again, plaintiff’s attorneys have identified, rallied and represented groups of employees who have been owed overtime compensation due to misclassification. The cost to employers has been astronomical.

An additional hot button issue with the Department of Labor is the frequency of misclassification of workers as “independent contractors” when they should be classified as W-2 employees. The reasons for utilizing independent contractors are many- the employer can benefit from lowered employer taxes, avoid costs for workers compensation insurance and deal with less exposure for employment claims. The independent contractor may benefit by utilizing tax write offs, a delay in tax filing and may have the perception of more freedom in the workplace due to their “independent” status.

It is estimated that millions of workers who should be classified as W-2 employees are misclassified as independent contractors causing less revenue to go into federal and state unemployment coffers, a lower level of federal and state income tax capture and less funding for workers’ compensation funds.

This type of misclassification has been on the radar of both the federal and state governments and a requirement to thoroughly analyze and justify the use of the any worker classification that is outside of the FLSA could dramatically impact revenue capture for state and federal governments.

What has been missing in the past, is an aggressive approach by the Department of Labor to weigh in on the action. The DOL has largely limited its activities to catching an employer’s infraction of law by responding to complaints by disgruntled employees. Should the agency follow through with its proposed rule to force employers to perform a classification analysis, disclose that analysis to the worker and retain the analysis, much could change.

The Department’s new approach to this and other enforcement issues has been dubbed by the Department as “Plan, Prevent, Protect”. Rather than trying to catch employers after they have broken the law, the DOL plans to enforce a new standard by forcing employers to demonstrate not only how they comply with the laws, but what plans they have in place to make certain they will comply in the future.

If the proposed rule is implemented, employers will be required to spend substantial amounts of time re-analyzing worker classifications and drafting new documents to comply, ultimately generating a significant amount of paperwork.  DOL plans to issue a formal Notice of Proposed Rulemaking for this rule in August, at which time employers will have an opportunity to submit comments on the proposed rule.

In the meantime, the “catch me if you can” strategy by employers may shortly become a thing of the past as employers become liable to prove to the government that they are complying with wage and hour laws.

2010-08-11 07:49:14 -0600