Stripping independent contractor protections

Today's New York Daily News reports on the filing of a class action lawsuit against a chain of gentlemen's clubs. The lawsuit challenges the club's practice of skimming 10 cents off every dollar the dancers earn from a lap dance, paying less than minimum wage, and cheating employees out of overtime. The article quotes one of the club's dancers, "We're independent contractors. If a girl doesn't like it, she can go somewhere else." Another girl added, "I had no idea it was happening, I thought they were taking out taxes and stuff like that." (Insert your own joke here). The first girl is correct. If the dancers are independent contractors, then the club most likely has no liability, and certainly has no liability for any minimum wage and overtime violations. The wage and hour laws only apply to employees; they do not reach independent contractors.

If Senator Barack Obama has his way, though, the scope of who qualifies as an independent contractor will narrow. The Senator introduced the Independent Contractor Proper Classification Act of 2007. Currently, Section 530 of the Internal Revenue Code has a safe harbor for employers who have classified workers as independent contractors. That safe harbor requires the IRS to excuse misclassifications and allow an employer to continue reporting employees as 1099 independent contractors if the employer (1) has been treating similarly situated workers as independent contractors, (2) has been consistently reporting the workers as independent contractors to the IRS and has been issuing 1099s to the workers, and (3) has a reasonable basis to classify employees as contractors. An employer has a reasonable basis if it relied on a long-standing practice of a significant segment of the industry or relied on a revenue ruling or court decision. The bill seeks to amend Section 530 by requiring employers to reclassify workers that had been misclassified as independent contractors, and by prohibiting employers from relying upon industry practice as a justification for misclassifying employees.

Independent contractor classifications have not necessarily been on the Department of Labor's radar up to now. The enforcement provisions of the Act, would place employee classifications squarely in the DOL's cross hairs. The Act directs the IRS to develop a process for workers to request an evaluation of their classification, requires the IRS to inform the DOL of discovered misclassification practices, and requires the DOL to conduct investigations in industries with high misclassification rates. The Act would also require each employer to notify any independent contractors of their federal tax obligations, that labor and employment law protections that do not apply to them, and their right to seek a classification determination from the IRS. Finally, the Act safeguards against employer retaliation and provides for the payment of attorney's fees to employees who successfully challenge their classification.

As with most other Democratic legislative initiatives coming out of the current Congress, it is unlikely the President would sign this bill into law even if Congress were to pass it. Nevertheless, the Independent Contractor Proper Classification Act is another good reminder that companies should not classify a worker as an independent contractor without first considering all of the risks, consulting with employment counsel, and putting in place a written agreement outlining the terms of the relationship.

Federal Judge indefinitely blocks Social Security "No Match" Rules

A California federal judge yesterday placed an indefinite hold on the Bush Administration's proposed rules for the handling Social Security "no match" letters. The rules would have required employers, upon receipt of a no match letter from the SSA to either verify the offending employee's immigration/ citizenship status or terminate the employee. Today's New York Times does a nice job summarizing the judge's order and the fall out from it:

The judge, Charles R. Breyer of the Northern District of California, said the government had failed to follow proper procedures for issuing a new rule that would have forced employers to fire workers if their Social Security numbers could not be verified within three months. Judge Breyer chastised the Department of Homeland Security for making a policy change with "massive ramifications" for employers, without giving any legal explanation or conducting a required survey of the costs and impact for small businesses.... If allowed to take effect, the judge found, the rule could lead to the firing of many thousands of legally authorized workers, resulting in "irreparable harm to innocent workers and employers." ...

Some conservative lawmakers who argue for vigorous enforcement of the immigration laws as a priority said they were outraged by the judge’s ruling. "What part of 'illegal' does Judge Breyer not understand?" asked Representative Brian P. Bilbray, Republican of California and chairman of the House Immigration Reform Caucus. "Using a Social Security number that does not belong to you is a felony. Judge Breyer is compromising the rule of law principles that he took an oath to uphold." ...

Judge Breyer found that the Social Security database that the rule would draw upon was laden with errors not related to a worker’s immigration status, which could result in no-match letters being sent to legally authorized workers. "There is a strong likelihood that employers may simply fire employees who are unable to resolve the discrepancy within 90 days," even if they are legal, he wrote.

This decision indefinitely blocks the new rules until the court conducts a trial sometime next year and reaches a final decision. It is unlikely, however, that Judge Breyer will change his mind. Most likely, the Bush Administration will continue to push this issue through trial and into the appellate courts. A Democratic Administration in 2009, however, would almost certainly bring an end to this cause.

NLRB issues quartet of lead cases

While this blog focuses primarily on employment law issues, the National Labor Relations Board has had a busy October thus far, issuing four significant decisions that merit some discussion.

In Toering Electric Co., the NLRB ruled that an applicant for employment must be genuinely interested in seeking to establish an employment relationship with the employer in order to qualify as an "employee" under the meaning of the National Labor Relations Act, and thus be protected against hiring discrimination based on union affiliation or activity. The Board explained, "One cannot be denied what one does not genuinely seek.... Submitting applications with no intention of seeking work but rather to generate meritless unfair labor practice charges is not protected activity. Indeed, such conduct manifests a fundamental conflict of interests ... between the employer's interest in doing business and the applicant's interest in disrupting or eliminating this business."

In BK & E Construction Company, the NLRB held that the filing and maintenance of a reasonably based lawsuit does not violate the National Labor Relations Act, regardless of whether the lawsuit is ongoing or completed and regardless of the the motive for bringing the suit. While recognizing that the filing of a lawsuit against a labor union or an employee could be a powerful instrument of coercion or retaliation, the Constitutional right to petition courts is too important to be called an unfair labor practice. According to the NLRB, the prospect of liability for an unfair labor practice would reasonably tend to chill a litigant from exercising that fundamental First Amendment right to petition the courts. Thus, as long as the lawsuit is not objectively baseless, or if no reasonable litigant could realistically expect to succeed, the filing of the lawsuit does not constitute an unfair labor practice.

In Jones Plastic & Engineering, the NLRB held that at-will employment status does not detract from an employer’s otherwise valid showing that it has permanently replaced striking employees. In other words, the mere fact that a replacement worker is hired "at-will" and told that their employment was for "no definite period" and could be terminated for "any reason" and "at any time, with or without cause" did not detract from the showing of permanent replacement status. The dispositive issue remains whether there was a mutual understanding with the replacement employees that they would not be displaced by returning strikers at the end of the strike, and not whether the replacements are at-will employees.

Finally, in Dana Corp., the Board modified its recognition-bar doctrine, and held that an employer’s voluntary recognition of a labor organization does not bar a decertification or rival union petition that is filed within 45 days of the employer's recognition notice. The Board will process the petition if, like other petitions, it is supported by 30% of the bargaining unit.

Toering Electric is probably the most significant of these four policy-making decisions, as it deals a serious blow to the popular union organizing tactic known as "salting". Salting is when a union sends members undercover (known as "salts") to seek employment from a nonunion employer with the intent of obtaining employment and then organizing the employer's employees. Now, if the employer discharges or refuses to hire the salt because of his union affiliation or activity, the employer's conduct can be lawful if the employer can present evidence that puts at issue the genuineness of the applicant's interest in going to work for that employer.

Butt I was doing it on my free time

Findlaw is reporting on the termination of a Virginia high school art teacher who is suing his former employer over his termination after officials learned he moonlighted by creating paintings using his bare buttocks. School officials terminated Stephen Murmer after they saw a YouTube video in which he wore a swim thong and a Groucho Marx mask to demonstrate how he applies paint to his rear and presses it onto a canvas. The lawsuit, filed by the ACLU, claims that Murmer's termination violates his First Amendment right to free expression. According to the lawsuit, Murmer was terminated for art he created on his free time and under a pen name, all of which he kept private from his students. A copy of the Findlaw article is available here. If you are curious, Findlaw links to Murmer's website and the YouTube video.

Employees of private (i.e., non-governmental) employers have much less protection than their public counterparts. Given the explosion of websites such as YouTube and MySpace, not to mention personal blogs, into our collective consciousness, employees should be on notice that what they post is more or less fair game to their employers. If a YouTube video undermines an employer's confidence in an employee, the employer should be within its rights to terminate the employee for that reason, provided the reason is non-discriminatory.

How narrow is the scope of the public policy tort in Ohio?

Just as it seemed that Ohio courts were narrowing the scope of the wrongful discharge public policy tort, they toss a curve ball. Hycomp, Inc., a manufacturer of airplane engine parts, terminated David Zajc, one of its quality control managers, after he refused to ship a part he deemed either noncompliant with contract specifications or had quality issues. Zajc claimed that his termination jeopardized the clearly defined public policy found in the Uniform Commercial Code, the Ohio Products Liability Act, and federal aviation regulations. The trial court disagreed and dismissed Zajc's claim on Hycomp's motion for summary judgment. The Cuyahoga County Court of Appeals, however, reversed that dismissal. It agreed with Zajc that the UCC (which permits a buyer to reject nonconforming products), the Products Liability Act (which imposes strict liability where the risks exceed the benefits of a product design), and federal aviation laws and regulations (which authorize the FAA to regulate the production of aircrafts and provide for a inspection system for subcontracted parts). According to the Court, it is irrelevant that those laws do not expressly prohibit Zajc's termination, but that it is enough that the termination places those public policies in jeopardy, notwithstanding that Zajc never complained, but merely refused to carry out his bosses directive to ship the at-issue parts.

The dissent argues that Zajc's claim is nothing more than a back door whistleblower claim, that there is no evidence that Zajc complained about any safety concerns, and that even if he did, he failed to comply with the mandatory prerequisites of the Whistleblower Act. In the words of the dissenting Judge Gallagher:

Absent facts demonstrating a clear safety concern, I do not find any clear public policy expressed in the above statutes that would be jeopardized by the termination of an employee who disagrees with his employer about whether a part is nonconforming or defective and then disobeys instructions to ship the goods.... In this case, Zajc is asking us to find a clear public policy that an employer cannot discharge an employee who disagrees about the quality of parts and refuses to ship the parts without any showing that public safety is being endangered. I do not believe that Zajc has shown that the narrow public policy exception to the employment at-will doctrine should be extended to the limited facts of this case.

Those who are regular readers of this blog will not be surprised that I think the dissent has the better of the argument. The tougher question is how to interpret the implications of this decision. For the past several years, we've seen a tightening of the public policies that will support a wrongful discharge claim. The Zajc case, though, seems to open up a can of worms by permitting employees to shoehorn a termination into a tangentially implicated statute. For employers, the bottom line is to make employment decisions based on legitimate, non-discriminatory, non-retaliatory business reasons. Companies should never fail to take a legitimate employment action out of a fear of being sued. Cases like Zajc, however, certainly inject a little more uncertainty into the process for companies and for the lawyers advise them.

A copy of Zajc v. Hycomp, Inc. is available for download here.

Wal-Mart ordered to pay $140.5 million on overtime claim

Last week, I commented on the risks companies face from a lack of control over wage and hour practices (here, and here). This week, a federal judge in Pennsylvania reinforced my point for me by ordering Wal-Mart to pay an additional $62 million in statutory liquidated damages to 124,506 current and former Pennsylvania employees who last year a Philadelphia jury found were not properly compensated for off-the-clock work and missed rest breaks. That jury had previously awarded $78.5 million in compensatory damages to 186,000 current and former Wal-Mart employees. That jury verdict was based on the finding that Wal-Mart failed to pay its employees for time they worked off the clock or for their missed rest breaks. Motions are still pending on whether the plaintiffs are entitled to interest on their award, and whether they are entitled to recover attorneys' fees, which are estimated at a staggering $48 million.

This verdict is a good time to remind everyone that it is a good idea to have a policy in your handbook that requires all overtime to be authorized and forbids any hourly employee from working through a break without prior approval. It is unclear whether Wal-Mart had such a formal policy, if it was merely its practice to do so. Whatever Wal-Mart was doing, however, it was negatively affecting hundreds of thousands of its employees. Regardless, if it is your expectation that your employees take their breaks, you should spell out that expectation in the employee handbook. That way, if an employee is serially violating the policy by working through lunch without permission, you have a defense to refusing to pay that employee if you so choose.

Jury rules against Isiah Thomas

The jury in the Isiah Thomas sexual harassment trial has returned a verdict of $11.6 million dollars against Madison Square Garden and its chairman, James Dolan. The jury spared Isiah Thomas any personal liability, although it is certainly hard to calculate the damage this trial has done to his reputation. The verdict breaks down as follows: MSG owes $6 million for condoning a hostile work environment and $2.6 million for retaliation. Dolan owes $3 million. ESPN.com quotes U.S. District Judge Gerard E. Lynch calling the verdict "eminently reasonable." It is therefore doubtful he will do anything to reverse the verdict or lessen the amount. MSG, meanwhile, is quoted as saying: "We believe that the jury's decision was incorrect. We look forward to presenting our arguments to an appeals court, and believe they will agree that no sexual harassment took place and MSG acted properly."