An Ounce of Prevention: Proper Classification of Employees

This week’s answer to “HOW DO WE NOT GET SUED BY EMPLOYEES?” is to properly classify them under the federal Fair Labor Standards Act (FLSA). I’ve represented clients from sole proprietors to Fortune 500 companies in claims involving misclassification. Like most claims, they could usually have been prevented, and also like most claims, they often hit small businesses harder than large corporations. Most misclassifications stem from employers trying to cut corners  or simplify their workload in payroll, taxes, or paperwork.

Although classification of workers and providers of services can be a complex process, there are basically three types: Independent contractors, employees that are exempt from FLSA laws, and employees that are not.

Independent Contractors work for themselves and hire themselves out to clients. There isn’t a bright line test, but they should make their own decisions about when, where, and how to do the work, be a professional or have some kind of license or certification, provide their own equipment and be free to do work for others. Independent contractors could be tattoo artists, bookkeepers, comedians, or (ahem) workplace mediators. There is a temptation for employers to treat workers as independent contractors because they don’t have to provide them benefits, withhold taxes, keep track of hours and overtime, or pay the 7.65% of their wages for social security and Medicare, but there are many risks of misclassifying a worker as an independent contractor:

Injury: If a worker gets injured on the job, worker’s compensation insurance isn’t there to cover their claim and limit employer liability. This could expose the employer to penalties.

Unemployment: If the worker files for unemployment compensation when the relationship ends, and the employer can’t defend the independent contractor status, there could also be penalties.

Taxes: For non-independent contractor employees, employers are required to pay half of the social security and unemployment tax, and most must also withhold federal and state taxes. If an employee misclassified as an independent contractor doesn’t report the income, the employer could be required to pay the taxes that should have been withheld, plus penalties.

Overtime: A true independent contractor can be paid a fee for services regardless of whether they work over 40 hours a week. If misclassified, a disgruntled worker could claim entitlement to overtime pay.

Additionally, a claim involving any one of these areas could end up with the involvement of all the others, leading to a legal debacle of grand scale. In summary, make VERY SURE your independent contractors really fit the bill. Remember that even if there is a written agreement to independent contractor status, none of the agencies that administer these laws are bound by it.

Employees are classified as either Exempt or Non-Exempt. Non-exempt employees are those paid an hourly wage, and are protected by the FLSA’s minimum wage and overtime pay provisions. Exempt employees are exempt from those laws, and paid a salary to get the job done, no matter how long it takes. The three main categories of exempt employees are executive/managerial workers, administrative workers, and professionals such as doctors, teachers, or engineers. Exempt employees must be paid at least $455 a week and treated as salaried workers, for example, not docked pay if they miss part of a day. There are other exempt employees, like outside sales staff and computer professionals, with slightly different rules.

Risks of misclassifying employees as exempt relate primarily to liability for overtime wages. Often the employer doesn’t require exempt employees to track hours and therefore has no way of refuting someone’s claim to have regularly worked 50 hours a week. If the employee turns out to have been misclassified, the employer is liable for all the unpaid overtime going as far back as three years. Generally, backpay awarded is doubled and the employer has to pay the employee’s attorney fees as well as their own. The cost adds up quickly if there is more than one similarly situated misclassified employee.

For example, Ride Aid recently paid $20.9 to settle a class-action lawsuit from 6,000 employees claiming they were illegally classified as exempt and thus denied overtime pay. Although the employees’ official job title was “co-manager,” they had almost no supervisory functions and spent most of their day doing manual labor.  McDonalds, Burger Kind, and CVS have all been involved in similar class-action claims. On the other hand, I recently mediated a claim between a small, 20-person company and an employee who claimed that when the business switched hands, her managerial duties disappeared, making her misclassified. She claimed to have been working 65-hour weeks, and her total demand for payment was around $50,000.

Although it can be tempting to misclassify workers to save money in the short-term, it leaves employers exposed to multiple liabilities. Don’t do it! Consult a human resources professional to properly classify employees, and protect your business from a world of lawsuits.

 

Transforming Conflict into Productivity

Dan Simon (http://www.twincitiesmediation.com/), a committed transformative mediator, presented a thought provoking program at the Heartland Mediators Association (http://www.heartlandmediators.org/) annual meeting last week. In a day and a half, Dan summarized his 40-hour transformative mediation training using humor and great illustrations. My thoughts ran not only toward utilizing what I learned when I mediate employment disputes but also to how I could translate some of the principles to Human Resources (HR) and other managers.

I hope I can do justice to Dan’s message in this brief summary.  The core concept is that all conflict is a crisis in human interaction.  Midst-of-conflict, people tend to experience a sense of “weakness” (confusion, fear, disorganization, vulnerability, powerlessness, uncertainty, indecisiveness) and “self absorption” (self-protection, defensiveness, suspicion, hostility, closed-mindedness).  Sound familiar?  It’s complicated, because sometimes the weakness is masked by bravado or bullying behavior.  One way to deal with conflict is avoidance, time or distance.  But that isn’t ideal and sometimes people need help overcoming this crisis and restoring constructive interaction.  In the context of the training, that help would be facilitated by a mediator working with the people who are in conflict (and perhaps their lawyers). The goal of the conflict resolution process is to promote a dynamic shift from weakness to “empowerment” (clarity, confidence, personal strength, organization, decisiveness) and from self-absorption to “recognition” (attentiveness, responsiveness, openness to the other and appreciation of their situation).

The transformative mediator uses a non-directive approach based on these premises:

  • A person’s reality is unique to that person and based upon his/her life experiences;
  • People have inherent needs both for advancement of self and connection with others;
  • People are capable of making decisions for themselves – and want to do so;
  • People are capable of looking beyond themselves – and want to do so.

Techniques are discussed below, but as an aside, it strikes me that this approach is much more applicable to a divorce/family dispute or an employment dispute before lawyers are involved.  However, Dan Simon swears based on his 16 years’ experience that it is also a miracle worker in commercial litigated cases.  I supposed that’s because at their core, even battles between companies are really due to a breakdown in relationships.

So how is this useful to HR or a manager?  Let’s take an example using the transformative mediator’s techniques:

Imagine a long-term employee (Terry) with an okay performance record whose performance and attendance start slipping.  As the supervisor verbally addresses those problems, Terry’s attitude gets worse, bordering on insubordination.   So Terry is given a disciplinary warning – if you don’t shape up, we will take action up to and including termination of employment. Terry then goes to the HR rep and complains: my manager is harassing me due to age. The classic response (and good advice from my employment lawyer perspective) would be that the employer does a neutral investigation into the age claim – asking Terry “What makes you feel that way?”, comparing objective work records of younger workers, etc.  Unless there is a finding that the discipline is unwarranted, the investigation is essentially on a parallel track with the performance management process.  Legally, making a complaint doesn’t work as a shield from consequences due to performance deficiencies.

Alternatively, HR could use the investigation to get Terry – alone or with the supervisor – to move toward a position of empowerment and recognition.  A first technique is “reflecting” where the investigator would say back what Terry has expressed, matching substance and emotional tone. “So for you, what’s happening is that . . .” “What you seem to be saying is . . .”  “You’re feeling . . .” Hearing one’s own words come back tends to cause movement in perspective. The discussion could range from performance to attendance to why Terry feels age is playing a role. If the supervisor is present, the same questions can be asked of him, and this has the benefit that Terry and the supervisor hear the other’s position from a neutral person which can promote listening. The second technique is “summarizing”. “So what we’ve talked about is . . .” “There are several things you disagree about, including . . . “ Move from summarizing to “Checking in”.  “So where do you think the discussion should go at this point?”  Finally, “Staying/Backing out” means the investigator/mediator remains silent and lets Terry (or Terry and supervisor) discuss.  (This part is very very hard for someone used to directing discussions!)

The earlier conflict is addressed, the better.  And in the workplace, unaddressed conflict can turn into expensive, time-consuming litigation.  Finding opportunities to resolve conflict at its inception can truly pay off.

Hiring Practices, Inside-Out and Upside-Down

A recent article from the Harvard Business Review asks the question, “What if a Company Maximized Jobs over Profits?” Most companies hire the bare minimum of employees to get the maximum possible profit, but a recent trend of “job entrepreneurs” seeks the opposite–to employ as many people as they can, and earn enough profit to make this possible. They start with a group of people they want to employ, and then design a business model that leverages their particular talents. For example, one “job entrepreneur” sought to employ people along the autism spectrum, and designed a web maintenance and software testing company that allowed his employees’ attention to detail and repetitive focus to be assets to their job performance.

I was struck by this “reverse” way of thinking about hiring. Besides being an impressively self-sustaining business model that takes the place of charity, it’s also a sort of exponential extension of my advice to employers on hiring: you have to look closely at the job you need done and determine exactly what skills an employee needs to be able to do it. Take a step back and look at your business; what does it really take to get the widgets out the door or the shelves stocked or the food served or the machines put together? Maybe there’s an underserved or underemployed group of people who would be perfect for the job, but have been overlooked because you haven’t understood the essentials of your business.

When I lived in Boise, Idaho, I knew a house-painting company who employed only ex-convicts. With good screening, the owner found employees who were willing to work for lower (but still living) wages for a chance to put their lives back together and build stable job histories. With the money saved, he was able to bid jobs at lower prices, get more business, and employ more people. It was profitable, sustainable, socially responsible, and a new perspective on hiring from which many businesses could benefit.

An Ounce of Prevention: Smart Hiring Practices

“HOW DO WE NOT GET SUED BY EMPLOYEES!?” is the perennial question employers ask me. Bigger companies have HR departments, but too often I’ve seen small businesses overlook this crucial aspect of management, and then find themselves in over their heads when things go wrong. When even an unsuccessful lawsuit can cost $50,000-$100,000 to litigate, and employee turnover wastes time and money, having a good HR consultant is something that small businesses can’t afford NOT to have. Like preventative medicine, keeping your business healthy in the beginning can avoid costly trips to the emergency room (i.e. court room) later. One of the easiest, and earliest, ways to avoid being sued by employees is a smart hiring practice.

Most wrongful termination claims come from former employees who never should have been hired in the first place. Additionally, most failure-to-hire claims could have been avoided with an informed interview process. The three stages of smart employee selection are the Pre-Interview, Interaction with the Applicant, and the Final Selection Process.

Pre-Interview

Before you begin the hiring process, make sure you know exactly what you are looking for. What are the essential function of the job, and the required qualifications of potential employees? Make the job description detailed and explicit. This is a good time to review what measures might be taken to accommodate disabilities, and ensure that such measures are ADA-compliant. Develop a consistent interview plan, involving selection criteria and relevant information to elicit. A consistent matrix for scoring applicants can be very useful. Make all screening and reference requirements known.

Interaction with the Applicant

Now that you know on what basis you will hire an employee, make sure that you apply your interview plan to all applicants equally. Even seasoned interviewers can be swayed by charming smiles and small-talk prodigies. The guy you’d like to drink a beer with is not necessarily the best guy for the job. Applying your plan with rigor and consistency will help you see through charisma, and also protect you from unsuccessful applicants claiming that they didn’t get the same chance to talk about their skills as others did.

It’s also very important that everyone involved in the hiring process knows the difference between acceptable and inadvisable questions. Questions about protected status (race, age, gender, disability, national origin) can be anywhere from insensitive to downright illegal in an interview. Even stray thoughtless comments can have disastrous effects. In one of my cases, a young woman interviewing an older woman mentioned that she liked the youthful culture of the office, and how many of the employees would go out to bars together. It wasn’t much, but it was enough for a failure-to-hire claim.

Effective interview questions elicit the applicants qualifications and competencies. Questions like “Tell me about your experience with Excel” or “Give me an example of a time when you helped a difficult customer” give applicants a chance to talk about their experience in a way that reveals their behavioral tendencies and attitudes. Take good notes during each interview and keep track of them; extensive documentation is the best defense against a failure-to-hire claim.

The Final Selection Process

Once you have gathered all your interview data, apply your selection criteria without bias. As with every other part of the interview process, DOCUMENT YOUR REASONING for your final hiring decision.

Who you hire is the most basic step in building your company and its work environment. Smart hiring practices will create better hiring decisions and a reduced risk of legal liability, creating a harmonious and efficient workplace that’s better for everyone. An ounce of good hiring practice is worth a pound of defense lawyers.

An Ounce of Prevention…the Old Adage Still Applies

I first wrote this blog post back in 2009, and lately I’ve been coming back to the concept of prevention in my practice more and more. So much trouble could be avoided not just by knowing about preventative strategies, but by hiring an experienced human resources consultant to enact them effectively. This is particularly important for small businesses without HR departments, for whom the cost of litigation could be disastrous. In the next few blog posts, I’ll be writing more in-depth about areas that need HR support: Hiring and Employee Selection, Proper Classification of Employees and Contractors, Performance Management, Managing Attendance and Time-off, and Termination of Employment. Stay tuned…

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It strikes me that many workplaces have a lot in common with the healthcare system.  If we’d only spend a little bit more money upfront on training supervisors, or conflict resolution (wellness, preventative medicine) we could spend SO MUCH LESS on litigation (surgery, hospitalization) and dramatically reduce loss of productivity due to unhappiness, conflict and miscommunication (pain and suffering).  However, just like medicine, it’s hard to dislodge those dollars you don’t absolutely have to spend, even when you understand that winning an employment discrimination or retaliation lawsuit on summary judgment can cost $50,000 to $100,000.

So what can employers do without spending much money that can have dramatic cost-reduction effects?  A few thoughts;

  1. Do a better job of hiring.  Every time there’s a job opening figure out what the person REALLY needs to do and be able to do and hire someone with those qualifications.  Pay attention to why people didn’t succeed in the job or left, and don’t repeat the same mistakes. Do background screening.  Effect?  Reduced turnover (try quantifying this if you haven’t). More productive employees.
  2. Don’t tolerate or ignore “jerks.”  Every workplace has those people who are bullies or just take up more time than anyone else. They simply aren’t worth it.  Deal with unacceptable behavior directly when it happens and fire them when their value is outweighed by the trouble they cause.  Effect?  Happier more productive coworkers.  Reduced likelihood of litigation by the jerk or those affected by his/her behavior
  3. Develop a conflict resolution program.  This doesn’t have to be elaborate or expensive but find a way to allow employees to air their grievances before they turn into chronic problems.  The earlier in the life of a dispute it’s addressed, the less there is to deal with.  Effect?  Employees aren’t wasting work time harboring grudges, watching what “she” does next.  Avoiding litigation by dealing with little problems before they grow into big ones.  From a lawyer’s perspective, the more opportunity an employee has to complain the less credible he/she is when bringing a hostile environment claim about conduct that “always” happened.
  4. Listen to employees.  The old time suggestion box was a really good idea.  Not only do your workers actually have some really good ideas about how the place could be run more efficiently, they’ll be happier knowing they are valued.  Effect?  Some really good ideas and more productive employees.
  5. Train supervisors on employment laws.  My soapbox for years has been this:  how can we expect people promoted into management positions to comply with laws they don’t even know about?  It’s not just commonsense to understand the obligations under the Americans With Disabilities Act or the Family Medical Leave Act.  Yet the consequences of an illegal – even if well meaning – comment can be enormous.  Effect?  Improved compliance and reduced risk of litigation.

LGBT Rights in Lawrence, and the Rest of Kansas

A few days ago, I came across this article in the Lawrence Journal World: Outside Lawrence, discrimination based on sexual orientation is already legal in Kansas. The title pretty much sums it up. While House Bill 2453, another of Kansas’s nearly annual “religious freedom” bills, sputters in the Statehouse, this article points out that it’s already perfectly legal to discriminate against LGBT people in most of Kansas, except for Lawrence. Sexual orientation isn’t a protected class in the Kansas Act Against Discrimination, and in the absence of an explicit law, gays and lesbians have no legal recourse if they are refused service or fired for their sexual orientation. Lawrence adopted a non-discrimination policy in the early 90’s, the first city in Kansas to do so, and the only city where the policy is both widespread and enforceable.

Despite the dismal picture for LGBT rights in Kansas, it’s heartening to see many of my clients go beyond current state culture and establish non-discrimination policies themselves. One of the fundamental tenets of a healthy workplace is that employees feel safe and respected. Without that, communication breaks down and productivity and creativity become impossible. It seems obvious that protecting diversity is good for everyone, but if Kansas public policy is any indicator, it must not be obvious enough. More and more employers are creating policies that protect LGBT employees because it’s good business practice. Maybe someday the positive results will “trickle up” to the state legislature.

The Boss’s Guide to the Boss from Hell

I recently came across an article from the Wall Street Journal, “How to Spot the Boss from Hell,” about the pitfalls of prospective employees not screening their potential bosses carefully enough. It’s easy to forget, as employers, that a job interview goes both ways; while you’re trying to evaluate an applicant’s qualifications and work ethic, he or she is also evaluating you and your company. How many quality employees might be turned off by an arrogant interviewer or witnessing a belittling encounter between manager and staff? It would be useful for bosses to read this article from the inside out, and think about how they come across to potential employees.

The article discusses a woman who interviewed at a tech start-up. The boss was a friend of a friend, so she ignored the red-flags: lofty promises, self-aggrandizement, and profane language. Soon she found herself with a “Boss from Hell,” one of the leading causes of worker discontent. Although she was an asset to the company, she left after several months.

First, do you know how your managers come across when they interview?  Are they turning away quality employees with their behavior? Many employees get promoted to managerial positions without going through any HR training regarding communication or managing people, and they model themselves after their similarly untrained bosses. Even if they have an agreeable public image, what are they like away from such scrutiny? The article also mentions a woman interviewing for a paralegal job who noticed that although the boss was charming, the secretary never made eye contact with him and seemed cowed. Knowing how your interviewers come across and making sure they trained in people skills is essential if you want to attract good employees.

Second, what is their online presence? Employers run Internet searches on applicants, and applicants run Internet searches on employers. You should know as much as prospective employees do about the managers who work for you and about your own online presence. Is the first link in the Google search your manager’s arrest for public indecency? Is his Twitter account filled with racist jokes? Will an advanced search on LinkedIn turn up former employees who will give good references, or flee in terror from his name?

Third, if the boss is someone whose personality chases people away or has a terrible online presence, do something about it!  Does this manager need some training or coaching on people skills? It may be worth an investment if this is someone who is valuable to your organization. If you’ve tried the training/coaching approach and they still chase off good employees, ask yourself if you really need someone like that in your company. Is she or he THAT valuable?  What do they bring in terms of revenue, customer relationships, reputation, research dollars, being the son of the president… If you can’t figure out their value, then they may need to go.  If they do have value, consider the options: you could restructure so this person becomes more of an individual contributor and have someone else manage people, or up the intensity of the HR training. There are some good offsite intensive programs, for example, that are a bit like weekend summer camp for adults learning not to be jerks.

This article reminded me of how important it is for bosses to put time and attention into how they treat their employees, even before they become employees. You could be missing out on the greatest resource your company has due to poor interview skills. Think about your interview style, get some training, and avoid being a “Boss from Hell.”

Accomodating Creativity

For years I’ve been presenting programs on the challenges and opportunities associated with accommodating mental disabilities in the workplace.  I think the first iteration was in 2004 at the Labor & Employment Advanced Practices Symposium with my friend and colleague Rich Paul at the Paul Plevin firm in San Diego.  One premise was that many contributions to science, music, the arts, industry, fashion have come from individuals diagnosed with mental disabilities.  We encouraged employers to think about making a place for talented people who may have unconventional behaviors or needs in the workplace.

Validation!  Today I picked up the Lawrence Journal World and spotted this headline:  “Creative people’s brains similar to schizophrenics’ brains, study finds” This  Bloomberg News article cited a study in Sweden involving people who took creativity tests.  The researchers found that creative problem-solvers had a lower concentration of proteins that aid in the chemical transmission of information in the thalamus, the part of the brain that determines what data is relevant for reasoning.  That’s a trait commonly found in patients with schizophrenia, a mental illness whose symptoms include hallucinations, jumbled thoughts and paranoia.  As I understand it, there is less information filtered by the thalamus on the way to the cortex where information is processed and analyzed.  With more data in play, the individual might be able to make more creative associations – to see things others don’t.

One of the researchers is quoted as saying “We tend to think of psychiatric diseases s negative, as destructive. But we can see that some traits or components of psychiatric disease may be useful.”

Accommodating mental disabilities in the workplace can require some creativity and a willingness to suspend the rules about the way we’ve always done things.  So often the characteristics of the condition affect how people do their work, the environment, attendance, work hours, behavior, and social skills.  And an employer might be able to defend a decision not to hire – or to discharge – an individual who doesn’t comply with clearly communicated expectations.  But consider whether making accommodations might not open your organization up to some amazing talent.  Sit down with the individual and talk about how the company might be able to work with him or her to get the work done.

Mediation Guided by the Rotary Four-Way Test

First, a reminder of the Rotary Four-Way Test – of the things we think, say or do

1)     Is it the TRUTH?

2)     Is it FAIR to all concerned?

3)     Will it build GOODWILL and BETTER FRIENDSHIPS?

4)     Will it be BENEFICIAL to all concerned?

This is a follow up to my January 12 post on employment/personnel decisions and whether or not these principles are useful in mediation.

As I noted before, the test seems at odds with the self-determination component of mediation. In other words it’s not the job of the mediator to decide if an outcome is fair or beneficial to all, rather the question is whether the parties agree.  That said, going back to these basic principles could aid the mediator, advocates/attorneys and the parties to move toward a lasting resolution to their dispute.  Some thoughts:

Mediator. Mediators can get stuck in a process/technique rut.   However, for the best mediators, dispute resolution is never one size fits all.  This is well illustrated in Jeff Krivis’s book Improvisational Negotiation.   Consistent with the Four-Way Test, mediators should focus on the process, creating an environment that is fair, gives all sides an opportunity to be heard and to receive necessary information without being unduly pressured.    Encourage the parties to consider the global impact, asking whether there are business or personal relationships that will be affected – damaged or enhanced – by continuing with the dispute versus resolution.  This approach is more conducive to creative solutions that litigation cannot provide.

Advocate. What is an attorney advocate’s ethical obligation of candor in a negotiation where there’s also a responsibility and a commitment to get the best deal possible for the client?  Every continuing legal education program involving negotiation or mediation involves some form of this hypothetical:

A party to a lawsuit tells her lawyer to go out and get the case settled so long as it’s under $35,000.  Can her lawyer make a counteroffer to the opposing party for $25,000 saying “that’s all the authority I have” or “that’s our bottom line”.

Lawyers can spend hours of discussion time parsing out whether their ethical obligations of candor are violated under these scenarios.  So put on that ethics hat during the negotiations and ask: Has any information been withheld or communicated that would void the deal if it ever got out?  Remember, also, that a client’s definition of winning may not be the same as the lawyer’s. Recognize – and help the client articulate – interests beyond the monetary outcome, including business and personal relationships.

Party. One benefit of mediation and a negotiated settlement can be the ability to keep information private – but will it come out?  Is it something that makes something material you’ve said untruthful?  When evaluating the deal you’re willing to make, how will it impact not just you, not just the opposing party but people in your family, your organization and your reputation.  There will be a tomorrow and the next day and the next day to live through.  Whether or not you reach an agreement, you’ll be interacting with people, businesses, and the public – is this a decision you’re prepared to live with?

The Four-Way Test (Employers)

I joined Rotary about a year ago and it has far exceeded my expectations.  My chapter (Jayhawk Breakfast in Lawrence) is filled with interesting fun people, we get to start our day looking out over the Alvamar golf course and the programs have always been good, sometimes fascinating.  They’ve certainly helped me get acquainted with the activities and resources of my community.  Thanks to Peter Steimle of Sedona Staffing for inviting me to a meeting.

As a new member I learned the Rotary Four-Way Test – of the things we think say or do

1)     Is it the TRUTH

2)     Is it FAIR to all concerned?

3)     Will it build GOODWILL and BETTER FRIENDSHIPS?

4)     Will it be BENEFICIAL to all concerned?

In general, this test really appealed to me, but I confess I rarely consciously focused on it when making decisions or giving advice in my business.  Then I read an article in the January 2010 Rotarian called “Downsize with Dignity” by Mindy Charski.  Mindy shares some excellent thoughts about applying the Four-Way Test in a layoff situation.  She quotes Rotarian Herbert J. Taylor, author of the Four-Way test in 1932, who credits it with turning around the fortunes of his company paraphrasing, when employers are truthful and fair, and strive to build goodwill and benefit everyone concerned they are almost certain to do the right thing.

At first blush, the test would not strictly apply in a mediation where a key component is self-determination.  In other words it’s not the job of the mediator to decide if an outcome is fair, rather the question is whether the parties agree.  However, the more I think about it, the test could be useful for mediators.  Stay tuned for the applicability of the Four-Way Test in mediation.