WAGE & HOUR AND MISCLASSIFICATION ISSUES

1. WAGE & HOUR AND MISCLASSIFICATION ISSUES AUSTIN HOTEL & LODGING ASSOCIATION Presented by: Marcus D. Brown Winstead PC

2. Department of labor updates • 2015 has seen a renewed emphasis on enforcement and important changes to key policies: • increased audits and prosecutions of federal and state minimum wage and overtime law violations; • intensified scrutiny of the classification of workers as independent contractors; and • proposed overhaul of the Fair Labor Standard Act’s overtime exemption for white collar employees

3. Department of labor updates • Wage and Hour Division: Administrator’s Interpretation of FLSA • addressed the distinction between employees and independent contractors • emphasized the importance of whether an individual’s services are an integral part of a company’s business • downplayed the importance of whether the business controls an individual’s work • “Most workers are employees under the FLSA’s broad definitions.”

4. Misclassification:INDEPENDENT CONTRACTOR vs. EMPLOYEE • Implications of Misclassifications: Why This Matters! • Workers' Compensation • Unemployment • Taxes • Employee benefits • Payment of overtime and minimum wage • Discrimination • Recordkeeping

5. How is contractor status determined? Simply paying on a 1099 is not determinative! • IRS and TWC test = "Right to Control" • USDOL test = "Economic Reality"

6. How is contractor status determined? IRS Test = “Right to Control” • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? • Financial: Are the business aspects of the worker’s job controlled by the payer? (e.g., how worker is paid, whether expenses are reimbursed, who provides tools/supplies) • Type of Relationship: Are there written contracts or employee benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

7. How is contractor status determined? • United States Department of Labor = “Economic Reality Test” • 1) The extent to which the services rendered are an integral part of the principal's business. • 2) The permanency of the relationship. • 3) The amount of the alleged contractor's investment in facilities and equipment. • 4) The nature and degree of control by the principal. • 5) The alleged contractor's opportunities for profit and loss. • 6) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor. • 7) The degree of independent business organization and operation.

8. Tips to Prevent Misclassification • Avoid classifying former employees as independent contractors • Use independent contractors who are incorporated and market their services to the public • Do not be an independent contractor’s first or only customer • Pay by invoice and negotiate rate • No training, reporting obligations, evaluations, handbook • Do not permit independent contractor to make employment decisions for your employees • Have signed agreement (but not determinative as to status) • Confirm status • No benefits • Pay by project (not hourly)

9. Voluntary classification settlement program VCSP offers a discounted cost to resolve the issue • The employment tax liability is first calculated at the reduced rates of Section 3509 (a reduction from the full FICA and income tax withholding rates otherwise applicable) • Under VCSP, the taxpayer pays only 10% of such reduced rate • No interest or penalties apply if the amount owed is paid at the time of entering into the closing agreement • IRS states that it will not share information from this program with the DOL or state agencies

10. Voluntary classification settlement program Eligibility: • Consistently treated the workers as independent contractors. • Over the previous three years, company filed Forms 1099 for each of the workers it wishes to reclassify. • Not currently under employment tax audit by the IRS • Not currently under misclassification audit by DOL or state agency • In compliance with previous DOL or state agency audits VCSP Temporary Eligibility Expansion: • Employers may be eligible even if all required 1099s have not been filed for previous 3 years • Application must be filed before June 30, 2013 • Pay 25% of the employment tax liability • $50 -$100 penalty per unfiled Form 1099, depending on the number of total unfiled forms

11. Voluntary classification settlement program • If approved, the IRS will propose a closing agreement. • Under the closing agreement: • Taxpayer agrees to treat the workers as employees • All workers in the same class as the reclassified workers must be treated the same • The taxpayer pays 10% of the employment tax liability that would have been due had the workers been properly classified for the most recent tax year (no interest or penalties) • Calculated at reduced rates of Section 3509 • Full payment of the amount due must be made at the time of signing the VCSP closing agreement • The IRS will conduct no employment tax audits relating to the reclassified workers for prior years

12. Voluntary classification settlement program • Potential Drawbacks • The normal statute of limitations for payroll taxes is 3 years. Under VCSP, taxpayers will be subject to a special 6-year statute of limitations for their first 3 years under VCSP • This would allow the IRS an additional 3 years to examine ANY wage or employment tax issues for such years • Potential liability for claims for employee benefits • No guarantee of confidentiality – could potentially be used by DOL or state agencies

13. Department of labor updates • DOL Proposed Rule would annually update the minimum salary level for exempt employees • Minimum salary level has not changed since 2006 • Now, the standard salary level would be set to the 40th percentile of earnings for all full-time salaried workers, as annually reported by the Bureau of Labor Statistics • The DOL projects that the 2016 exemption would require a minimum salary of $970 per week ($50,440 per year for a full-year worker)—anyone making less must be paid overtime • Final Rule will likely take effect sometime in 2016

14. EXEMPT vs. NON-EXEMPT: “White Collar” Exemptions • Generally, to be exempt an employee must: • Qualify for one of the exemptions, and • Be paid on salary basis and not less than $455 per week ($23,660 per year for a full-year worker) • Salary basis soon to be raised to $970 per week ($50,440 per year) • Exemptions: • Executive • Administrative • Professional • Computer Professional • Outside Sales

15. HOSPITALITY INDUSTRY: COMMON ISSUES • Tip Credit /Pooling Issues • All tips must be received by the employee EXCEPT: • Does not “prohibit the pooling of tips among employees who customarilyandregularly receive tips.” • DOL gives list of examples, but no real explanation • YES: waiters/waitresses, busboys/girls, service bartenders • NO: chefs or cooks, dishwashers, janitors, laundry room attendants • Montano v. Montrose Restaurant Associates • “The common thread of the cases and the DOL opinion letters is to require a tipped employee to have more than a de minimis interaction with customers who have undesignated tips.” • “A court or factfinder should also consider whether the employee is engaging in customer service functions.”

16. HOSPITALITY INDUSTRY: COMMON ISSUES • Montano v. Montrose Restaurant Associates • Not a perfect test. Examples: • Hotel guests and housekeeping • Restaurant owner or manager • Bouncer: “A night club’s bouncer may have to ‘interact’ (a clear understatement) with customers, and yet it’s virtually unknown for anybody to tip him after picking themselves up off the pavement.” • Tip jar for chefs • Generally ask: at the specific business involved, do the customers, as a habitual and usual practice present money with the intent that the employee in question receive it as a gift or gratuity in recognition of service that the employee performed.

17. Hospitality industry: common issues • Proper Calculation of Premium Rate • Includes Various Forms of Compensation • “Non-Discretionary” Bonuses • Strict and Specific DOL Definition • Incentive Pay • Commissions • Shift Differentials • Retroactive Pay Increases • Additional Compensation Requires Recalculation of Pay Rates

18. Hospitality industry: common issues • Working “Off-the-Clock” • Strictly prohibit off-the-clock work • Require employees to report any instructions to work off-the-clock • Require employees to accurately record work time and sign timecards • Discipline for violation of timekeeping policies • Mandatory process for reviewing exceptions or changes to time entries • Working Remotely • Automatic Meal Period Deductions • Common allegation that employees work through their meal periods • Closely monitor and ensure employees take meal breaks

19. Hospitality industry: common issues • Temporary/Staffed Employees • Who is the employer? • Title VII/EEO Laws • ADA • Workers’ Compensation Coverage • Indemnity Agreements

20. Strategies for limiting exposure • Arbitration Agreements/Collective Action Waivers • Requirements for Effective Arbitration Agreements: • FAA governs • Broad application • Carve outs • Administrative Charges (EEOC/NLRB) • Specific Claims (NLRA, Dodd Frank) • Selection of arbitrator (mutual agreement) • Arbitrator qualifications (member of local bar, retired from local judiciary – see 9 U.S.C. § 5) • Who pays?

21. Strategies for limiting exposure • Requirements for Effective Arbitration Agreements (cont’d): • Venue (close to where employee last worked for company) • Express class/collection action waiver • NLRB section 7 disclaimer • Remedies (individual only) • Regular Compliance Audits • Routine Management Training • Simplify and Streamline Where Possible

22. Emerging issues:ADA Accommodation AND LEAVES OF ABSENCES • Expanded definition of “disability” • Reasonable accommodation = action that must be taken by employer to allow “qualified individual with a disability” to perform essential functions of job without undue hardship • Indefinite leave does not equal “reasonable accommodation” • Defined period of additional leave may be required as reasonable accommodation • Be flexible in application of maximum leave policies • Intermittent leave • Consider obtaining second opinion regarding medical certification • Transfer employee to different position (with same pay, benefits)*** • Require monthly recertification • Require use of accrued vacation or sick time for intermittent FMLA absences • Dock pay of nonexempt employee for FMLA partial day absences after exhaustion of vacation and sick time