Category Archives: An Ounce of Prevention

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.

 

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.