I strongly advise employers to conduct regular and comprehensive wage and hour audits to ensure that their pay practices comply with all aspects of wage and hour laws.
News in the area of wage and hour law continues to be discouraging for employers, and each year, wage and hour class-based litigation and government enforcement actions continue to increase. Fair Labor Standards Act (“FLSA”) claims filed in federal court are now at record highs. Smaller employers increasingly are targeted, as plaintiffs’ law firms have improved their efficiency in identifying and litigating potential wage and hour claims. Smaller employers have limited time and resources, and may not be able to conduct a soup-to-nuts wage and hour compliance audit.
For these smaller employers, there are five specific areas of wage and hour compliance they should know and review for 2014. Part 1 of this post addresses independent contractor misclassification and unpaid internships, while Part 2 addresses compensation of non-exempt employees and classification of exempt employees. Read Part 2 here.
Part 1: Independent Contractor Misclassification and Unpaid Internships
1. Independent Contractor Misclassification
The misclassification of individuals as independent contractors, instead of employees, is a potential liability for employers. Independent contractor misclassification is fertile ground for class-based litigation. Coverage under the FLSA is afforded only to “employees” of covered employers, not true independent contractors.
When determining FLSA coverage, courts look to the “economic reality” of the situation and the following factors:
- the degree of control by the alleged employer over the work performed
- the alleged employee’s opportunity for profit or loss depending upon his/her managerial skills
- the alleged employee’s investment in equipment/materials
- whether the service rendered requires a special skill
- the degree of permanence of the working relationship
- whether the service rendered is an integral part of the alleged employer’s business
The FLSA applies a very narrow definition of independent contractor. Close calls often result in findings that individuals are employees, not independent contractors, creating significant liability. Because of this liability, employers who use independent contractors, especially on a regular, non-sporadic basis, should review these relationships to ensure they meet the FLSA’s “narrow” definition of independent contractor. If not, employers should look to transition these relationships to traditional employment relationships.
2. Unpaid Internships
2013 was the year that FLSA liability for unpaid internships gained national attention. Numerous employers, including a few high-profile media enterprises, faced class-based litigation filed by former unpaid interns, seeking wages under the FLSA and state law.
In the past, unpaid internships were common, especially among college students seeking “real world” work experience. With the downturn in the economy, many students and young people have sought such internships to enhance their resumes in the absence of actual paying jobs. Few employers understand the very limited circumstances under which unpaid internships are permissible under the FLSA.
For-profit entities may lawfully have unpaid interns only if they can meet each of the following six factors:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment
- The internship experience is for the benefit of the intern
- The intern does not displace regular employees, but works under close supervision of existing staff
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded
- The intern is not necessarily entitled to a job at the conclusion of the internship
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship
Simply put, very few unpaid internship relationships can meet this stringent test, resulting in potential minimum wage and overtime liability. Employers, especially those in the for-profit private sector, who host unpaid interns should determine whether those interns can meet this test. If not, employers should treat their interns as employees and pay them at least the minimum wage rate.
Contact my office at 610-627-1010 if you’d like to schedule a consultation to discuss any of these issues in more depth.