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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.