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					Federal Wage and Hour Law
And Recent Developments in
 Employee Misclassification
      Presented by Barney M. Holtzman
         & Whitney Sedwick Meister
   The Fair Labor Standards
         Act (“FLSA”)
• Establishes a minimum wage for non-exempt
  employees ($7.25/hour)
  – Arizona Minimum Wage: $7.65/hour
• Distinguishes between covered (non-exempt)
  and excluded (exempt) employees
• Requires overtime payments for non-exempt
• Establishes overtime threshold (40 hours)
• Specifies record-keeping requirements
 “White Collar” Exemptions
• The FLSA exempts certain
  employees from minimum wage and
  overtime requirements:
 – Executive
 – Administrative
 – Professional
        Who is Exempt?

• Two tests must be satisfied:
  – Salary test
    • Salary Level
    • Salary Basis - guaranteed minimum salary
      for any work period during which any work
      is performed

  – Duties test
      Salary Level Test
• For most employees, the minimum
  salary level required for exemption is
  $455 per week.
• The $455 per week may be paid in
  equivalent amounts for periods
  longer than one week:
  – Biweekly: $910
  – Semimonthly: 985.83
  – Monthly: $1,971.66
       Salary Basis Test
• Employee must regularly receive a
  predetermined amount of compensation
  each pay period.
• The compensation cannot be reduced
  because of variations in the quality of
  quantity of the work performed.
• The employee must be paid the full salary
  for any week in which the employee
  performs any work.
• The employee does not need to be paid for
  any workweek when no work is performed.
  Deductions from Salary
• Generally, an employer may not “dock”
  an exempt employee’s salary based on
  a perceived lack of productivity on the
  employee’s part (though an employee
  may otherwise be disciplined).
• Improper deductions from exempt
  employees’ salaries expose employers
  to possible loss of those exemptions.
         Permitted Salary
1. Absence from work for one or more full days for
personal reasons
2. Absence from work for one or more full days due to
sickness or disability if deductions made under a bona
fide plan, policy or practice of providing wage
replacement benefits
3. To offset any amounts received as payment for jury
fees, witness fees or military pay
4. Good faith penalties imposed for violating safety
rules of “major significance”
5. Unpaid disciplinary suspension of one or more full
days imposed in good faith for violations of workplace
conduct rules
Effect of Improper Deductions
• Improper deductions from salary can result
  in the loss of the exemption:
      - During the time period in which
      improper deductions were made
      - For employees in the same job class
      - Working for the same managers
      responsible for the improper deductions
• Isolated or inadvertent improper deductions
  will not result in the loss of exempt status if
  the employer reimburses the employee
Payroll Practices That Do Not
Violate the Salary Basis Test
• Taking deductions from exempt employees
  accrued leave accounts
• Requiring exempt employees to keep track of
  and record their hours worked
• Requiring exempt employees to work a
  specified schedule
• Implementing bona fide, across-the-board
  schedule changes
• Paying bonuses
Executive Exemption Duties
• Primary duty of management;
• Customarily and regularly directs the
  work of two or more employees; and
• Authority to hire or fire or having
  suggestions and recommendations as
  to hiring, firing, advancement
  promotion or any other change of
  status to other employees to be given
  particular weight.
 Administrative Exemption
• Performance of office or non-manual
  work directly related to the
  management or general business
  operations of the employer or the
  employer’s customers; and
• Exercise of discretion and independent
  judgment with respect to matters of
    Learned Professional
• The employee’s primary duty must
  be the performance of work
  requiring advanced knowledge
 – In a field of science or learning
 – Customarily acquired by a prolonged
   course of specialized intellectual
   instruction (academic degree is the
   best evidence that an employee meets
   this requirement)
    Advanced Knowledge
• Predominantly intellectual in character
• Includes work requiring the consistent
  exercise of discretion and judgment
• The advanced knowledge is generally used
  to analyze, interpret or make deductions
  from varying facts or circumstances
• Not work involving routine mental, manual,
  mechanical, or physical work
• Cannot be attained at the high school level
           Primary Duty
• The principal, main, major or most
  important duty that the employee
• Factors to consider include, but are not
  limited to:
  – Relative importance & time spent on
    exempt duties;
  – Relative freedom from direct supervision;
  – Whether employee spends more than 50%
    of time performing exempt work.
Discretion and Independent
• The comparison and evaluation of
  possible courses of conduct, and
  acting or making a decision after the
  various possibilities have been
• Must be exercised with respect to
  “matters of significance,” which
  refers to the level of importance or
  consequence of the work performed
  Discretion and Independent
        Judgment (cont’d)
• Factors include, but are not limited to
  whether the employee:
  – Has authority to formulate, interpret, or implement
    management policies or operating practices
  – Carries out major assignments in conducting the
    operations of the business
  – Performs work that affects business operations to
    a substantial degree
  – Has authority to negotiate on behalf of and/or bind
    the employer in matters that have significant
    financial and other business impact
 Discretion and Independent
       Judgment (cont’d)
• Factors include, but are not limited to
  whether the employee:
  – Has authority to deviate from established
    policies and procedures without prior
  – Provides consultation or expert advice to
  – Is involved in planning business objectives
  – Investigates and resolves matters of
    significance on behalf of management
           Exemptions in Flux

• Others exemptions         • Outside sales
  are in flux as a result     exemption
  of either litigation or   • Computer
  action by the federal       professional
  government:                 exemption
                            • Caregiver/live-in
                              domestic exemption
     Outside Sales Exemption
• To qualify for the outside sales exemption,
  employees must satisfy two requirements:
  – Primary Duties:
     • The primary duty must consist of making “sales” or obtaining
       orders or contracts for services or use of facilities for which
       consideration will be paid by a customer or client.
  – Customary and Regular Work Away From Employer’s
    Place of Business:
     • E.G., at a customer’s place of business or at a customer’s
Outside Sales Exemption (con’t)
• Substantial litigation          • By contrast, in
• In pharmaceuticals                Christopher v. SmithKline
  sales industry:                   Beecham Corp., the
   – In re Novartis Wage and        Ninth Circuit ruled that a
     Hour Litigation: Following     similar group of
     a court of appeals ruling      pharmaceutical sales
     that employees were non-       employees were properly
     exempt, Novartis settled
     nationwide class-wide
                                    categorized as exempt
     overtime claims for $99.9    • The United States
     million                        Supreme Court has
                                    accepted review of the
                                    Ninth Circuit’s decision
         Computer Employees
• The computer employee exemption applies to
  computer systems analysts, computer
  programmers, software engineers and/or other
  “similarly skilled” workers in the computer field.

• To qualify for this exemption, employees in the
  computer field must be compensated on either:
   – (a) a salary or fee basis at a rate of not less than
     $455 per week; or
   – (b) an hourly rate of not less than $27.63 per hour
  Computer Employees Exemption
• Exempt computer employees’ primary duties must
   – Application of systems analysis techniques and procedures
     (which includes consulting with users) to determine hardware,
     software or system functional specifications;
   – Design, development, documentation, analysis creation, testing
     or modification of computer systems of programs, including
     prototypes, based on and related to user or system design
   – Design, documentation, testing, creation or modification of
     computer programs related to machine operating systems; or
     any combination of these duties.
 Computer Professional Update Act
• The Department of Labor takes a narrow view of the computer
  employee exemption.

• The “CPU Act” introduced in late 2011 in the Senate would amend
  the FLSA to apply the exemption to “information technology
  occupation[s] (including, but not limited to, work related to
  computers, information systems, components, networks, software,
  hardware, databases, security, internet, intranet, or websites) as an
  analyst, programmer, engineer, designer, developer, administrator,
  or other similarly skilled worker.”

• Also, the CPU Act would amend the primary job duties of exempt
  computer professionals to include activities such as debugging
  systems and enabling continuity of systems and applications.
        Domestic and Caregiver
• Under the FLSA employees who provide
  “companionship services” to the elderly and/or
  “infirm” are exempt from the minimum wage and
  overtime requirements of the law.

• The FLSA further exempts “live in” domestic
  workers from the overtime requirements of the
  Department of Labor Action On
     Domestic and Caregiver
• December 27, 2011, the      • How would the
  DOL published a “notice       exemptions change?
  of proposed
  rulemaking.”                  – Both exemptions would be
                                  limited to companions
• DOL proposes                    and/or live-in domestics
  alteration of regulations       hired directly by the family
  concerning these                they serve.
                                – The exemptions would no
                                  longer be available for
                                  third-party employers.
    Employee vs. Independent
   Contractor: Developing Issues
• Misclassification of employees as
  independent contractors results in
  potential lost wages for employees and
  lost tax revenues for the government.
• In September 2011, the DOL and IRS
  announced a joint effort to identify and to
  eliminate misclassification of employees
  as independent contractors.
      Employee vs. Independent
      Contractor: the FLSA Test
• Requirements of the FLSA apply only to
  employer-employee relationships.
• Courts define “employer” and “employee”
• To determine whether a worker is an
  independent contractor as opposed to an
  employee for purposes of FLSA coverage,
  courts inquire into the “economic realities" of the
  relationship between the parties.
    Employee vs. Independent
 Contractor: the FLSA Test (con’t)
• The FLSA “economic realities” test involves balancing
  several factors:
   – The degree of the alleged employer’s right to control the manner
     in which an individual performs work for the benefit of the
   – The alleged employee’s opportunity for profit or loss depending
     upon managerial skill
   – The alleged employee’s investment in equipment or materials
     required for her work and/or her employment of assistants
   – Whether the services provided require special skills
   – The degree of permanence in the working relationship
   – Whether the service rendered is an integral part of the alleged
     employer’s business
    Employee vs. Independent
 Contractor: the FLSA Test (con’t)
• No single factor is determinative of the
  “economic realities” of the working relationship.

• The company’s actual control or right to control
  the manner in which services are performed
  often is key in judicial determination of whether a
  worker is appropriately treated as an
  independent contractor.
    Employee vs. Independent
 Contractor: the FLSA Test (con’t)
                  “Control” Issues
• Talbert v. American Risk Insurance Co.:
  Insurance adjuster hired on a temporary basis to
  handle claims files after Hurricane Ike was
  properly deemed an independent contractor
  because she “was expected to handle the files
  assigned to her with little or no day-to-day
  supervision . . . [and] ultimately controlled the
  number of hours she worked.”
     Employee vs. Independent
  Contractor: the FLSA Test (con’t)
                        “Control” Issues (con’t)

• Thibault v. BellSouth Telecomm, Inc.: Cable splicer hired on a
  temporary basis to fix cable issues after Hurricane Katrina was
  appropriately treated as an independent contractor.

• The cable splicer was supervised only minimally in performance of
  his duties (e.g., provided with blueprints and left to repair cables on
  his own).

• Notably, the company actually set the cable splicer’s hours and
  required him to work alongside the company’s actual employees.
    Employee vs. Independent
 Contractor: the FLSA Test (con’t)
                   “Control” Issues (con’t)

• Schultz v. Capital International Security, Inc.: Security
  agents were improperly treated as independent
  contractors rather than employees.
• Agents were given explicit direction from company as to
  performance of multiple job duties, including:
   – Performing rounds
   – Performing regular checks in locations on property where
     contractors were present
   – Manner of opening doors for the Saudi prince whom they
      • Court concluded that these factors and others demonstrated “nearly
        complete control” over how agents did their jobs.
   Employee vs. Independent
Contractor: Misclassification Risks
        Under the FLSA
• Exempt employees:                  • Non-exempt
  – If employees                       employees:
    mischaracterized as                – 2-3 years of back-pay
    independent contractors            – 2-3 years of unpaid
    have been performing                 overtime
    exempt work and otherwise
    meet requirements of an            – “Liquidated damages” in an
    applicable exemption (e.g.,          amount equal to unpaid
    salary basis, salary level),         wages and overtime
    there may be relatively little     – Attorneys’ fees
    liability under the FLSA.          – Possibly treble damages
                                         under Arizona’s wage
                                         payment statutes
      Employee vs. Independent
       Contractor: the IRS Test
• As with the FLSA, “control issues” are key to the
  IRS’ determination as to whether a worker (or
  group of workers) is appropriately deemed an
  independent contractor.
• The IRS analysis involves three areas of inquiry:
  – Behavioral control
  – Financial control
  – The type of relationship between the parties
  Employee vs. Independent
Contractor: the IRS Test (con’t)
                          Behavioral Control
• Who has the right to control what a worker does and how he or she
  does it?

• Multiple factual issues are involved in this analysis, including:

    • Specific training or instruction provided by the company to the worker
    • The manner in which the worker receives assignments
    • Who determines the methods by which work is performed
    • The worker’s daily routine and/or schedule (if any)
    • Where the worker performs services (e.g., at the company’s facilities or at
      some other location)
    • Whether the worker is required, personally, to provide services to the
    • Who hires assistants or substitutes for the worker, if needed
    • Which party pays the assistants and whether the worker is reimbursed if he
      or she pays the assistant
  Employee vs. Independent
Contractor: the IRS Test (con’t)
                           Financial Control
• Which party has control over the business aspects of the worker’s

• Multiple factual issues are involved in this analysis, including:

    • The supplies, equipment and materials that are provided by both parties and
      utilized by the worker in performance of his or her job
    • Whether the worker leases equipment, facilities or space in which to perform
      his or her work
    • The expenses incurred by the worker in the performance of services for the
      company and whether those expenses are reimbursed by the company or
      some other party
    • The type of pay the worker receives
    • Whether the company carries workers’ compensation insurance for the
    • Any economic losses the worker may suffer beyond loss of salary (e.g., lost
      or damaged equipment) in performance of his or her work
  Employee vs. Independent
Contractor: the IRS Test (con’t)
                          Relationship Type
• Does the relationship between the company and the worker
  “look” like a traditional employer-employee relationship?

• The IRS has indicated that the following factual issues, among
  others, are key to this analysis:

    • Whether there are written contracts between the parties
    • Whether the relationship gives rise to “employee type benefits”
    • The duration of the relationship
    • Whether the work performed by the worker is “a key aspect” of the
      company’s business
    • Whether the parties’ relationship can be terminated by either party
      without incurring liability
 Employee vs. Independent
Contractor: Risks Under the
  Internal Revenue Code
• Employment Taxes:
  •   Social security contributions
  •   Workers’ compensation contributions
  •   Federal Unemployment taxes
  •   Federal Insurance Contributions Act taxes
  •   Interest
  •   Penalties
       • Over time, these liabilities can grow to significant numbers
       • President Obama’s 2010 budget assumed that the federal
         crackdown on misclassification would yield $7 billion over
         ten years!
Voluntary Classification Settlement
        Program (“VCSP”)
 • The VCSP is a program that provides employers
   who have misclassified employees as
   independent contractors a limited shelter from
   back tax liability.
 • Eligibility requirements:
    • Employer must have consistently treated workers as non-
    • Employer must have filed all required Forms 1099 for the
      workers for the previous three years
    • Employer must not be under an IRS audit of any kind
    • Employer must have no dispute with the IRS regarding
      whether the workers are properly classified
    • Employer must not be under a current DOL or state
      agency audit concerning worker misclassification
Benefits and Risks of Participation
           in the VCSP
                   Benefits                                   Risks
 •   Participating employers will pay       •   Participating employers must
     10% of the employment tax                  agree to extend by three years the
     liability (calculated at reduced           limitations period for assessment
     rates) for the compensation paid           of employment taxes for the first,
     for the reclassified worker(s)             second and third calendar years
     during the immediately preceding           beginning after the date when the
     tax year.                                  employer agrees under a VCSP
 •   Participating employers will not be        “closing agreement” to reclassify
     liable for any interest or penalties       the relevant workers as
     and will not be audited for                employees.
     employment tax purposes for prior      •   The VCCP settles only potential
     years—at least insofar as the              employment tax exposure.
     reclassified workers are               •   The VCSP does not address any
     concerned.                                 possible liabilities employers may
 •   The IRS will not share                     face under the FLSA as a result of
     information learned as a result of         misclassification.
     participation in the VCSP with the
Risk Management Practices
                   Internal Audit
• Identify positions/contracts to review
• Evaluate each of those positions/contracts
  critically and ask:
  • Whether the worker performs exempt job duties;
  • Whether the worker otherwise meets exemption
    requirements; and
  • Whether the company or the worker “controls” or
    has the right to control the manner in which the
    worker delivers goods or services to the company.
Risk Management Practices
              Internal Audit (con’t)
• Develop a strategy for appropriately analyzing
  job duties of workers at issue:
  • Job descriptions
     • Useful only to the extent that they actually reflect what
       workers do on a day-to-day basis.
  • Interviews
     • Interviewing managers and incumbents may provide a
       clear picture of job duties.
     • However, interviews may not be privileged!
     • Targeted interviews with relevant managers are best.
Risk Management Practices
             Internal Audit (con’t)
 • Questionnaires
    • Questionnaires likely are not as useful: responses may
      not be sufficient, and follow up is difficult.
    • Questionnaires are “discoverable” in litigation.
 • “Shadowing”
    • Depending upon scope of prospective liability, a
      shadowing “expert” may be retained.
    • Such experts are, however, expensive and may overlook
      crucial facts or information.
What’s New in Employment Law?

Fennemore Craig Labor & Employment Seminar

              February 2012

               John Balitis
•   Americans with Disabilities Act
•   Medical Marijuana Act
•   Social Media Updates
•   Minimum Wage Increase
•   EEOC Statistics for 2011
•   NLRB Posting Rule
•   Title VII Updates
•   Non-Competition Agreements
•   Family and Medical Leave Act
  Americans with Disabilities Act
• High school diploma requirement may violate the
      • December 2, 2011 EEOC informal discussion letter

• Defining Disability
   – Severe obesity
      • EEOC v. Resources for Human Development, No. 10-3322, 2011
        U.S. Dist. LEXIS 140678 (E.D. La. Dec. 6, 2011)
   – Migraines
      • Allen v. Southcrest Hospital, No. 11-5016, 2011 U.S. App. LEXIS
        25488 (10th Cir. Dec. 21, 2011)
       Medical Marijuana Act
• Overview of the Medical Marijuana law

• Judge Bolton’s January 4, 2012 decision

• Current obligations on employers

• How can a well-written drug policy help?
               Social Media
• August 2011 Advice from NLRB General
  Counsel’s Office
  – Why does the NLRB care about employers
    who terminate and/or discipline employees for
    conduct on social media?
        Who owns social media
• PhoneDog lawsuit
   – Employer suing former employee over ownership of a
     Twitter account
   – Account was started in association with PhoneDog
     but now the former employee is using it as his own
• Similar Facebook and LinkedIn cases
• Lessons from social media litigation for employers?
   – Policies should clearly and unambiguously address
     ownership of social media accounts
   – Act promptly upon termination of the employee to
     remove their access to social media accounts
   – Consider entering into agreements with social media
     Minimum Wage Increase

•Effective January 1, 2012

•$7.65 an hour in Arizona

•Bonus fun fact: Payroll Card Account
    EEOC Statistics for 2011
• Highest number of charges for the EEOC in
  its 46-year history: 99,947
• Highest amount of monetary relief for victims
  of workplace discrimination: $364.6 million
• EEOC filed 261 lawsuits
• Mediation program: $170 million in monetary
  benefits for complainants
• National systemic enforcement program
         NLRB Posting Rule
• What is required under the posting rule?
• Prior postponements of the rule
• New Date: April 30, 2012
  – This latest postponement, which was
    announced on December 23, 2011, is “at the
    request of the federal court in Washington,
    D.C. hearing a legal challenge regarding the
                Title VII Updates
• Religion
   – A & F refuses to accommodate religious attire
   – Conservative Christian employee states claim for failure to
     accommodate religious beliefs under Title VII
       • Weathers v. FedEx Corporate Services, Inc., No. 09 C 5493 (N.D.
         Ill. November 1, 2011)

• Transgender protection
   – Current protections under Title VII
   – 11th Circuit case: found in favor of a transgender employee
     claiming sex discrimination when her employer fired her after
     she announced plans to undergo a gender transition
   – Guidance from Office of U.S. Personnel Management
   Non-Compete Agreements
• Are your companies’ non-competition and
  non-solicitation contracts up to date?

• Recent Arizona case law regarding choice
  of law provisions
  – Pathway Med. Techs., Inc., v. Nelson, No.
    CV11-0857, 2011 U.S. Dist. LEXIS 113075
    (D. Ariz. Sept. 30, 2011)
 Family and Medical Leave Act
• When does FMLA protection begin?
  – Pereda v. Brookdale Senior Living
    Communities, Inc., No. No. 10-14723, 2012
    U.S. App. LEXIS 492 (11th Cir. Jan. 10, 2012)
    (holding that the FMLA “protects a pre-
    eligibility request for post-eligibility leave.”)


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