FLSA Pitfalls & Options Synopsis

By Kathleen Pohlid Founder and Managing Member, Pohlid, PLLC | August 05, 2012

Trimming expenses is a critical concern to most businesses in a tough economy, but efforts to cut payroll costs can present legal pitfalls. The use of independent contractors is such an example. Some employers consider using independent contractors as a cost savings measure, but misclassification of workers is illegal under federal law and also under many state laws. Federal and state governments are cracking down on these and other cost saving practices, including improper use of tip credits and fluctuating workweek payment methods. It is important to know and avoid these pitfalls.

Replacing employees with independent contractors may be a significant temptation for establishments seeking to reduce payroll expenses. However, establishments who do so may find themselves in violation of federal and state laws as well as facing legal actions by employees for back wages. Last year, the U.S. Department of Labor and the Internal Revenue Service entered into a memorandum of understanding as part of cooperative attempts to crackdown on employers who improperly designate employees as independent contractors.

The DOL and IRS MOU is a response to what both state and federal governments call an “alarming trend” of misclassification of employees as independent contractors. Accordingly, DOL’s Wage & Hour Division has intensified its investigations and enforcement of Fair Labor Standards Act requirements. The classification of a worker as an “employee” vice as an “independent contractor” poses significant implications to state and federal revenues. Employers are not required to withhold federal or state taxes or to make contributions to Social Security or Medicare for independent contractors. Additionally, employers who utilize independent contractors may avoid paying employee benefits and have a significant advantage over those employers who properly classify their employees.

The use of independent contractors is not per se illegal. However, the misclassification of employees as independent contractors is a violation of the FLSA. The federal government has estimated that up to 30 percent of employers misclassify employees as independent contractors, resulting in a loss of over $2.72 billion in federal revenue. On October 13, 2011, the Employee Misclassification Prevention Act (EMPA), was re-introduced in Congress as H.R. 3178. If enacted, employers will be required to keep wage and hour records for non-employees who are engaged in the employer’s trade or business and for whom the employer must file an IRS 1099. Additionally, employers will be required to notify independent contractors that they are not classified as employees and direct them to DOL sources for more information.

States are also taking measures to address the issue of misclassification. For example, on January 1, 2012, California SB 459 went into effect implementing fines of $5, 000 to $10, 000 to employers who “voluntarily and knowingly” misclassify employees as independent contractors.

The government crackdown on misclassification poses challenges for employers seeking clarity for compliance with the FLSA. There is no bright-line test to satisfy the independent contractor status. Instead, the Supreme Court has held that the underlying economic reality of the employment relationship determines if the worker is an employee or independent contractor. Although no single factor is controlling, the following factors are considered:

Coming up in January 2018...

Mobile Technology: Relentless Innovation

Technology has become a crucial component in attracting and retaining hotel guests, and the need to enhance a guest’s technology experience is driving a relentless pace of innovation. To meet and exceed guest expectations, 54% of hotels will spend more on technology in 2018, and mobile solutions in particular will top the list of capital investments. Many hotels are integrating mobile booking, mobile keys, mobile payments and mobile check-in into their operations. Other hotels are emphasizing the in-room experience, boosting bandwidth and upgrading flat screen TVs to more easily interface with guest mobile devices. And though not yet mainstream, there are many exciting technology developments on the near horizon. The Internet of Things (loT) is taking form in some places, and can be found in guest room control systems, voice activation systems, and in wearable sensors that can be used for access and payment options. Virtual reality headsets are available at some hotels so guests can enjoy virtual trips to exotic locations or if off-property, preview conference facilities and guest rooms. How long will it be before a hotel employs a fleet of robots for room service, or utilizes a hologram as a concierge, or installs gesture-controlled walls that feature interactive digital displays? Some hotels are already using augmented reality for translation services, or interactive wall maps, or even virtual décor. This pace of innovation is challenging property owners and brands to stay on top of the latest technology trends while still addressing current projects. The January Hotel Business Review will explore what some hotels are doing to maximize their opportunities in the mobile technology space.