Wages and Hours

by Steven Adelman

 
 

Twice in the last year, the U.S. Department of Labor has issued important pronouncements about the way work is characterized and compensated. Together, these changes may have a significant effect on the way event operations professionals are hired, insured, and paid for their work. This article begins with the recently heightened scrutiny of employers' characterization of their workers as “independent contractors,” which naturally leads into a discussion of the employee overtime rules scheduled to take effect on December 1, 2016. 

DISTINGUISHING EMPLOYEES FROM INDEPENDENT CONTRACTORS, AND THE PERILS OF MISCLASSIFICATION

On July 15, 2015, DOL issued new guidance regarding who qualifies as an “employee” under the Fair Labor Standards Act (FLSA).  To be clear, the government was not making any new law, or redefining any terms of art.  Instead, it was (1) clarifying the meaning of existing legal terms, and (2) declaring that it intended, for the first time, to take those legal distinctions seriously in enforcing U.S. employment law.

Without putting too fine a point on it, DOL aims to eliminate the misclassification of workers as independent contractors. Employers who hire independent contractors do not pay those workers' unemployment insurance, workers' compensation insurance, Social Security and Medicare taxes, or minimum wages and overtime premiums, as they are required to do for employees.  During a panel discussion on this subject during LDI in October, retired IATSE counsel Jim Varga succinctly described employer misclassification as wage theft.  Another co-panelist, Paul Kush of ProSight Specialty Insurance, noted that the insurer of an employer that mischaracterized employees could rescind its coverage in a way that denies either workers’ compensation or general liability coverage for an employee’s workplace injury.  So the stakes are high, particularly in light of the impending overtime rule changes discussed further below.

 

The distinction between an employee versus an independent contractor is based on substance, not mere names. DOL is not impressed with the title of the document by which an employer calls its hired workers independent contractors, or if whether 1099s are distributed at the end of the year.

Instead, when a company raises a worker’s independent contractor status as a defense, as in a workers’ compensation claim, the key is whether the company has retained the right to control the manner and means of the work. Regardless of who writes the worker’s checks, if the right to control the manner and means is left with the company for whom the service is performed, then an employer/employee relationship exists.

THE ECONOMIC REALITIES TEST

There are criteria to figure this out. In order to determine by whom a worker is “employed” for FLSA purposes, 29 U.S.C. §203(g) relies on what is called the Economic Realities test, basically sifting through the facts of someone’s work situation to figure out which party actually controls the work.  The following issues are often considered under the Economic Realities test:

1. Have the parties expressly agreed to an independent contractor relationship?

2. Who sets the hours and days worked?

3. Who selects and/or provides working tools and materials?

4. For traveling employees, who selects the routes?

5. Who selects the length of employment?

6. Who selects the method of payment? Hourly? Commission? By the job?

7. Is the work performed differently by independent contractors than employees?

Although I am not giving legal advice here, I will offer some ideas to consider.

Procedurally, companies that hope to establish independent contractor relationships that will withstand a misclassification charge should have a written agreement that lists the respective rights and obligations of the parties, paying particular attention to the issues generally considered in the Economic Realities test.  Substantively, company supervisors should acknowledge the independent contractor relationship on the job site and not direct the work of hired labor the same way as company employees.  Finally, companies that engage independent contractors should require the labor provider to present evidence of workers' compensation coverage before beginning work.

The Department of Labor will err on the side that a hired worker is an “employee,” at least for their purposes, so you should plan accordingly.

THE NEW OVERTIME RULE

This planning should include making provisions for the overtime payment rules set to take effect on December 1, 2016.  The new rule updates the salary and compensation levels for “executive, administrative, and professional” workers who currently are ineligible to receive overtime pay for extended work (usually referred to as “exempt employees.” Here are the two key provisions:

1.   The maximum compensation of employees exempt from overtime (>40 hours/ week) rises

     a)  From $455/week, or $23,660/year salary,

     b)  To $913/week, or $47,476/year (the 40th percentile of earnings of FT salaried workers in the lowest-wage Census Region -- the South); and

2.   Automatic adjustments every three years to maintain these percentiles. “Invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.”

These salary levels apply to all employees, regardless of one’s job title or whether one is paid a salary or an hourly wage.  Relevant to the readers of this article, employees within the scope of the new salary rule include those whose work “requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.”  Do you see yourself in that definition?

   

As with enforcement of the distinction between employees versus independent contractors, news of these minimum wage and overtime rules has been available for more than a year.  The Department of Labor published a “Notice of Proposed Rulemaking” in the Federal Register back on July 6, 2015. 

Even if you didn’t notice that, more than 270,000 people did and provided their comments.  The “Final Rule,” which includes the provisions described above, was published on May 18, 2016 to provide time before the scheduled December 1 implementation date.

Every event and venue professional has dealt with people who, despite all the signs and warnings, still act surprised when you insist on enforcing a rule -- this is no exception. On September 28, the U.S. House of Representatives passed HR 6094, the “Regulatory Relief for Small Businesses, Schools and Nonprofits Act,” sponsored by Rep. Tim Walberg, R-Mich.  It would delay the implementation date to June 1, 2017, and entirely remove the automatic three-year adjustment to minimum compensation levels.  I doubt this bill will become law.  In the unlikely event that the Senate passes a similar bill during its post-election “lame duck” session, the President, who proposed a wage increase back in 2014, is sure to veto it.  So, as above, plan accordingly.   

Sports and entertainment lawyer Steven A. Adelman is the head of Adelman Law Group, PLLC in Scottsdale, AZ and Vice President of the Event Safety Alliance. He can be reached at sadelman@adelmanlawgroup.com.

Jacob Worek