Right To Know... Transparency in Classification

Transparency seems to be the watchword of 2011. And it's not just corporate transparency - thanks to Florida's Sunshine Law, we've had more transparency about the "Tot Mom Trial" than most of us would care to see. But there's more transparency on the horizon, and it has implications for wage and hour compliance.

In its Spring 2011 Regulatory Agenda, the Department of Labor announced its plans to update the record-keeping regulations under the Fair Labor Standards Act in order to enhance the transparency and disclosure to workers of their status as the employer's employee or some other status, such as an independent contractor, and if an employee, how their pay is computed. 

According to the Department of Labor, this update - in the form of The Right To Know Under the Fair Labor Standards Act - is necessary because "essential information about an employee's earnings and employment status should be made available to the worker, and that this greater transparency will provide employees with essential information about their earnings."

We won't know the exact details of The Right To Know until the Advanced Notice of Proposed Rulemaking is issued later this fall, but what we do know indicates that there's likely to be a lot of classification analysis required. Based on available information, the employer would be required to analyze each exempt job classification, as well as each independent contractor position. The employer would have to document and retain the information used in the classification analysis, along with the justification for finding that workers are properly classified as exempt or independent contractors.

Here's where the transparency aspect comes in... Employers would have to provide the classification records and information to employees, so that the employees can assess the classification analysis and see if they agree. 

Given that this classification transparency is coming, now is the time to start looking at your classification process. The "hotspot" seems to be misclassification of independent contractors. There are a variety of tests used by courts and regulatory agencies to determine whether an individual is an independent contractor or really an employee. The tests vary across courts and agencies, but there are nine common elements. Here are those elements - in flowchart and in list form - to help you get started on your independent contractor classification review:

1. Right to control. An employer has the right to control the performance of an employee's job duties. A company does not control an independent contractor's method or manner of performance of services.
2. Right to discharge. An employee may be terminated with little notice, without cause, or for failure to follow specified rules or methods. There is no right to discharge if an independent contractor produces an end result that doesn't measure up to contract specifications.
3. Termination. An employee has the right to terminate the working relationship with the purported employer at will and without incurring liability for non-completion. Independent contractors agree to complete a specific job and are liable for failure to complete the job.
4. Compensation. Employees are paid by the hour, week or month and the employer sets and monitors the work hours. Employers reimburse business expenses. Independent contractors are paid on a job basis and pay their own overhead expenses.
5. Availability to the public. Employees make services available only to their employer. Independent contractors make services available to the general public.
6. Realization of profit or loss. Employees typically have no opportunity to share profits or losses of the business. Independent contractors are in a position to realize a profit or suffer a loss.
7. Substantial investment. The furnishing of all necessary facilities, tools, clothing and instruments by the employer indicate employee status. A substantial investment by a person in facilities or tools used in performing services indicates an independent contractor status.
8. Company responsibility. Employers are responsible for the negligence, personal behavior, and work actions of employees who are in contact with customers and the general public while the employee is working, but not the actions of independent contractors, unless the contract specifically says so.
9. Services fundamental to the business. An employee's services are necessary to the fundamental business purpose for which the organization exists. An independent contractor's services typically are not, as they have the right to substitute services of others for their own.

If you have questions about proper classification, consult with legal counsel - it's always a good idea to get expert legal advice on any questions you may have about classification or other wage and hour issues.

 Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. For more than a decade, she's been working with businesses and government agencies providing expert analysis. Stephanie has published several articles on examining compensation systems with respect to internal equity, and has appeared on NPR to discuss the gender wage gap. She is the host of The Proactive Employer Podcast, and is the founder of Thomas Econometrics. Follow her on Twitter at ProactiveStats.

Comments

[E. James (Jim) Brennan]

Thanks for all the detail on independent contractor determinations, Stephanie. Let me address your "classification" and "transparency" points.

Please note that the proposal as it currently stands would demand a POSITION classification rather than a job classification. It seems that each worker would receive an analysis of their particular position showing how it was "classified" regarding employment status or FLSA status. Makes sense, because many jobs exist where some incumbents are found to be exempt but other incumbents with the same job in the same enterprise are non-exempt. Exemption is not title-specific but is determined on a case by case basis contingent on the actual individual worker situation.

"Transparency" only requires disclosure, sharing and documentation. Agreement by the worker (either contractor or employee) doesn't seem to be necessary. You just have to share their position classification with them and retain it for reference by the examination agent. Of course, if they are upset by the analysis, you may greet that investigator sooner.

This whole "wage theft" bandwagon is quite scary, because most employers have never prepared such necessary documentation to support ALL exemption or contractor status decisions. (That would seem to include your CEO and all NEOs, as well. I'd hate to see a CEO declared non-exempt due to failure to properly communicate and document the exemption.)

What is even worse is that individual States can create their own separate rules, too. Lots of companies are bound to get caught, despite sincere compliance efforts. This could mean job security for compensation professionals next year, however.