DOL Investigation Shows Need to Classify Employees Properly

A recent settlement between the US Department of Labor and First Republic Bank aptly illustrates the perils of misclassifying large numbers of employees under the overtime laws. 

Following a DOL Investigation, First Republic agreed to pay just over $1 million to nearly 400 of the Bank’s employees in 5 states (approximately 25% of the total number of employees First Republic has in those 5 states) including New York and Connecticut.  The Bank treated these employees as exempt from the overtime pay regulations and did not pay them time and a half their regular hourly rate when they worked over 40 hours in a workweek.  Operating under the assumption that the employees were exempt, the Bank also did not track their work hours, thereby violating the FLSA’s recordkeeping requirements.  The misclassified employees were also paid bonuses which the DOL determined should have been factored into the employees’ regular hourly rates thereby increasing the amount of overtime pay the incorrectly classified employees were found to be owed. 

The root problem in this situation was the bank’s failure to carefully analyze these employees’ job duties in making an informed assessment of their status under the overtime laws.  According to Secretary of Labor Hilda Solis, “It is essential that employers take the time to carefully assess the FLSA classification of their workforce.  As this investigation demonstrates, improper classification results in improper wages and causes workers real economic harm.”  Large and medium-sizes businesses in particular would be wise to heed the Secretary of Labor’s admonition.  

Employee Misclassification Prevention Act introduced in Congress: Are your employees being misclassified as Independent Contractors?

Given the estimated tens of thousands of employers that misclassify their employees as independent contractors, on April 22, 2010, an Ohio senator introduced The Employee Misclassification Prevention Act to provide workers with benefits they are not entitled to as independent contractors. Only those classified as employees are entitled to the protections of wage and hour laws, employment discrimination laws, and unemployment and workers’ compensation insurance. This federal legislation would amend the Fair Labor Standards Act and permit penalties for improperly labeling workers as contractors.

As noted in a statement by Secretary of Labor Hilda Solis, the new bill would provide workers with the “critical workplace protections and employment benefits to which they are legally entitled.” The focus on proper classification is also recognized as a revenue-generating measure for the government. (“It is estimated that Ohio loses at least $160 million a year . . . from worker misclassification.”)

While the bill may provide some clarity in this area, currently different agencies apply different tests to determine whether a person is an employee or an independent contractor. The Department of Labor applies a seven-point test, while the IRS applies a slightly different test. Indeed, we recently wrote about stepped-up IRS enforcement of misclassification of independent contractors.

The point is that someone providing services for your company is not an independent contractor just because you and the individual agree to that status. The bookkeeper that comes in one day a week may well be a part-time employee. It depends on the nature of your relationship, the amount of control you impose, and a myriad of other factors. Given the increased legislation on both the state and federal levels in this area, it would be prudent to ensure that those who provide services for your company are properly classified.