Federal Compliance Issues

Some tips for HR executives on actions they can take regarding recent government initiatives affecting employers.

This article accompanies Facing up to Obama.

By Theodore O. Rogers Jr.

Various agencies within the Obama administration appear poised to step up their oversight of employers' compliance with legal and regulatory employment mandates. A few areas in which human resource executives can play a preventive role and help protect their firms are detailed below.

Use of Independent Contractors

There has been much controversy in recent years concerning the use by businesses of workers who act as independent contractors rather than as employees and who, thus, are not subject to wage deductions for taxes, Social Security or Medicare and who usually do not participate in employee benefits.

It is not necessarily the businesses that desire these arrangements. Individuals often seek to be treated as independent contractors, for reasons such as a desire for mobility or independence.

The Obama administration's January 2010 budget included a large increase in funding for the Department of Labor, including $25 million specifically allocated for the hiring of 100 investigators and lawyers to pursue businesses suspected of failing to properly classify workers as employees.

Separately, the IRS has initiated a nationwide employment-tax audit program designed to identify companies that do not properly withhold taxes and pay Social Security and Medicare premiums on the wages of workers. State tax authorities have heightened their attention to this issue as well.

On April 22, a bill was introduced in Congress to make misclassification of employees as independent contractors a federal labor-law violation, and to impose recordkeeping and notice obligations. The bill would subject violators to substantial penalties.

Even before these government initiatives began, many private lawsuits were filed in which plaintiffs who had provided services as independent contractors claimed after-the-fact that they should have been treated as employees and received benefits.

In light of these developments, human resource executives may wish to consider auditing the extent to which their firms make use of workers on an independent-contractor basis. If the firm does use a substantial number of independent contractors, it is advisable to review the basis for those relationships.

There are many completely justifiable uses of independent contractors. Among the facts that should be weighed in deciding whether more serious investigation of contractors' status is warranted are the length of time that contractors have been providing services to the employer; whether the contractors are providing services full-time or service other business as well; and the extent of control that the employer maintains over the manner in which contractors provide their services.

More specifically, the IRS has identified a 20-factor fact-based test for classification of workers as employees or independent contractors, which outlines questions that fall essentially into three broad categories: (a) behavioral control, i.e., whether the company controls or has the right to control how the worker does his or her job; (b) financial control, e.g., whether the company controls the purchase of tools and whether expenses are reimbursed; and (c) the overall relationship of the parties, e.g., whether there is a written contract and how long the relationship has lasted.

Overtime Eligibility

Another worker-classification issue that has subjected many employers to unexpected liability is the classification of employees as exempt or non-exempt for purposes of receiving overtime under the Fair Labor Standards Act.

Under the FLSA, the employer must decide whether a particular employee is exempt from overtime or not. The criteria for that decision are not at all clear cut. In recent years, many lawsuits have been brought on behalf of employees who claim that they were misclassified as exempt from overtime, and who seek unpaid overtime extending back for years. Some of the settlements and awards have been huge.

One of the most difficult situations for employers are those in which it turns out that some workers have been treated as exempt whereas others performing essentially identical work have not been.

The Department of Labor in recent weeks has announced a regulatory enforcement strategy called Plan/Prevent/Protect, which will require companies to take various steps to find and fix violations before federal investigators become involved. Among other things, the regulations would require any company seeking to treat workers as exempt under the FLSA to write up a so-called "classification analysis," justifying the treatment.

In light of the emphasis both by plaintiffs' attorneys and by governmental authorities on pursuing claims on behalf of workers incorrectly categorized as exempt from overtime, human resource executives may be well-served to review their employers' practices in categorizing employees and to obtain legal advice as to the background behind those categories.

In particular, consistent classification of employees performing the same work is vital.

Systemic Discrimination Initiative

The Equal Employment Opportunity Commission has also recently received substantial increases in its budget. Among other things, it has used the increased funding to hire a substantial number of additional investigators and to fund what it terms its "systemic discrimination initiative."

The EEOC has announced, as part of its initiative, that it will review the annual EEO-1 filings by employers to examine whether there appear to be any easily seen disparities between the demographics of the employer's work force and that of other employers that the EEOC considers possible competitors in the same area.

The EEOC may proceed on its own initiative -- even without the filing of charge by an individual -- by the filing of a commissioner's charge, which provides the basis for an investigation.

Human resource executives should consider reviewing their organization's demographic information compiled on the EEO-1 forms and examining any areas in which it might appear that demographic information is out of balance with the demographic make-up of the population of qualified workers in the same area.

Labor Union Issues Applicable to Non-Unionized and Unionized Employers Alike

Recently President Obama made recess appointments to the National Labor Relations Board -- the five-member body overseeing the nation's labor laws -- of two individuals who have worked for, and on behalf of, labor unions.

They join the NLRB chair, Wilma Liebman, who has been a pro-union board member, to form a majority that could well revisit and reverse a variety of prior NLRB rulings. There are several NLRB decisions issued during the Bush administration that affect non-unionized employers and that could be modified or reversed.

For example, unions have pressed for years to have mandatory access to a non-unionized employer's e-mail system for use in encouraging employees to unionize. In 2007, the NLRB ruled that employers can refuse to allow their e-mail systems to be used for union-organizing activities. This precedent may well be reconsidered by the Obama NLRB.

Another NLRB issue of relevance to non-unionized employers concerns whether an employee who is interviewed as part of a potential disciplinary action may insist that a co-worker attend the interview. Presently there is no such requirement, but that may change.

Another issue that may be addressed by the new NLRB is the definition of who is a supervisor. The labor law provides that supervisors are exempt from unionization, which assures the employer of a group of employees available to assist even in the midst of an ongoing campaign or labor disputes. If the definition is narrowed, as may take place, employers' freedom of action may be constrained.

Human resource executives would be well served to keep apprised of developments in the labor-law arena, even if they work for non-union employers and have not had a real need in the past to be concerned about unions.

For Government Contractors -- The OFCCP's Initiative

Similar to the EEOC, the Office of Federal Contract Compliance Programs has responsibility for ensuring federal government contractors' compliance with a variety of regulations governing their practices, including Executive Order 11246, which requires contractors to maintain affirmative-action programs and comply with them. As part of its work, during the Obama administration, the OFCCP has announced increased oversight of contractors' practices.

As with the EEOC, human resource executives working for government contractors may wish to examine closely the statistical data being compiled for purposes of affirmative action plans, and to review those with the professionals who are compiling the plan for the employer.

Theodore O. Rogers Jr. -- a partner at Sullivan & Cromwell in New York -- was named one of Human Resource Executive®'s Most Powerful Employment Attorneys for 2010

See also:

Facing Up to Obama

The 2010 Most Powerful Employment Attorneys

When Social Networking and the Workplace Collide

Avoiding Class-Actions and Winning in Court

Arbitrating Workplace Disputes

Other Trouble Spots

The Selection Process, Take Three


Jun 16, 2010
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