NLRB Finds Violation for Independent Contractor Misclassification

Contributed by Noah A. Frank, September 22, 2016

The National Labor Relations Board (NLRB) enforces the National Labor Relations Act, the law that allows private sector employees to address the terms and conditions of their employment (e.g., wages, hours, benefits) through collective action. Through a recently released Advice Memorandum, the NLRB expanded its role to include regulating independent contractor relationships.  Pac. 9 Transp., Inc., Advice Mem., No. 21-CA-150875 (NLRB 12/18/2015, released 8/26/2016).

independent-contractorIn Pac 9, multiple unfair labor practice charges were filed, alleging violations of the Act as it related to the company’s relationship with its independent contractor drivers. The NLRB Regional Director sought an opinion from the NLRB General Counsel as to whether the NLRB had jurisdiction and whether a complaint should issue. Recognizing that the NLRB “has never held that an employer’s misclassification of statutory employees as independent contractors in itself violates” the Act’s protection of an employee’s rights, the General Counsel nonetheless recommended that, absent a settlement agreement, the company should be ordered to:

  • cease and desist telling workers that they are independent contractors (rather than employees), and
  • rescind portions of its independent contractor agreements that purport to classify the workers as “independent contractors.”

The General Counsel confirmed that the traditional common law independent contractor test would apply. While no factor is determinative, control was the most important. Other factors include: a distinct occupation or business, direction of work, skill required, providing supplies & equipment, length of the relationship, method of payment, the company’s and worker’s regular businesses, the parties’ belief as to whether they were employee/employer or independent. The General Counsel found it significant that the workers lacked: entrepreneurial opportunity, realistic ability to work for others, ownership or proprietary interest in their work, control over important business decisions, and real investment of capital. Therefore, these factors militated towards an employment relationship.

The Bottom Line:

In a year of NLRB-activism in the non-union workforces (e.g., see our posts on employee handbooks), companies using independent contractors to supplement their workforce must now worry that the NLRB will come after them for a misclassification issue. This is in addition to complying with regulations and tests from the IRS, U.S. and state Departments of Labor, unemployment and worker’s compensation boards, and other agencies regulating the employment relationship. Pac 9 demonstrates that while independent contractor agreements are not the last word in defining the relationship.

Care must be used when engaging individual workers as “independent contractors.” Multiple governmental agencies’ independent contractor tests must be analyzed to confirm that the relationship is both structured and implemented correctly. This includes written contracts, proof of insurance policies, and following good corporate practices. Experienced employment counsel can assist with forming the relationship and ensuring compliance for best practices.

Non-Compete Agreements For Low Wage Employees Barred by Illinois’ “Freedom to Work Act”

Contributed by Michael Wong and Jeff Glass, September 20, 2016

Recently the Illinois Attorney General filed a lawsuit against a well-known restaurant franchise seeking to enjoin it from enforcing non-compete provisions in employment agreements that it had required all employees to sign, including hourly employees such as delivery drivers. The clauses at issue prohibited employees from working at any other similar business within two miles of any of the franchisor or its franchisees’ stores in the United States. Even though the franchisor agreed to voluntarily drop these clauses moving forward, the Illinois legislature took action and the Illinois Freedom to Work Act (the Act) was signed into law.

15198483 - employment contract document form with penEffective January 1, 2017, the Act will prohibit private employers from having “low wage” employees sign an agreement that includes a covenant not-to-compete. Additionally, any covenant not-to-compete entered into between a “low wage” employee and an employer will be considered illegal and void under the Act.

The Act’s prohibition will apply to any employee who earns less than $13.00 per hour or the minimum wage required by applicable federal, state or local minimum wage law.  Employers can use $13.00 as the current high water mark for who is a low wage employee, as currently, the minimum wage under federal law is $7.25, $8.25 in Illinois and $10.25 in Chicago. However, it is important to remember that if the applicable federal, state or local minimum wage is higher than $13.00 than the individual will be considered a low wage employee under the Act.

The Act defines a covenant not-to-compete as any agreement between the employee and employer that restrict the employee from:

  • performing ANY work for another employer for a specified period of time;
  • working in a specified geographic area; OR
  • working for any other employer that is similar to the employee’s work for the employer.

While the Act only applies to agreements entered into after January 1, 2017, it is anticipated that any employer seeking to enforce this type of non-compete restriction against a low wage employee will likely be subject to the same scrutiny and battle as the franchisor who was investigated by the Illinois Attorney General.

It is important to recognize that the Act does not impact employers’ ability to include non-disclosure and confidentiality provisions within agreements with low wage employees to protect confidential and proprietary information. Additionally, the Act does not address agreements to not solicit an employer’s clients/customers or employees. While a non-solicitation clause could arguably fall within the type of non-compete agreement prohibited by the Act, there are strong arguments that depending on the position and circumstances, a well drafted and limited non-solicitation of clients/customers or employees agreement is different and would be enforceable.

As a practical matter, the impact of the Act will probably be minor. Most restrictive covenant litigation does not involve low wage employees. In addition, low wage employees rarely have the level of customer goodwill that is required to support the enforcement of a non-compete agreement. Nevertheless, employers who use restrictive covenants with low wage employees should take note.

Check this blog for future developments on this Act and other issues related to restrictive covenants and unfair competition.

EEOC Offers Guidance on Protected Activity Preceding Retaliation Claims

Contributed by Allison Sues, September 16, 2016

Last month, the EEOC issued its Enforcement Guidance on Retaliation and Related Issues.  Having last issued guidance on retaliation claims in 1998, the agency stated that an updated publication was necessary in light of the significant court rulings on these claims, as well as the increasing frequency of retaliation claims in administrative charges and lawsuits. Retaliation is now the most commonly alleged basis of discrimination.

Of particular interest, the EEOC discusses at length its position on various issues that arise in determining whether an employee has engaged in protected activity:

41191023_s“Participation” Protected Activity: “Participation” protected activity includes making a charge, testifying, assisting, or participating in any investigation or proceeding under anti-discrimination law. As compared with “opposition” protected activity, “participation” protected activity does not require a good faith, reasonable belief that the underlying alleged discrimination or harassment constitutes unlawful conduct.

“Opposition” Protected Activity: “Opposition” protected activity includes any report, complaint, or other communication that an employee makes opposing what he or she reasonably and in good faith perceives to be discrimination or harassment. The EEOC takes a broad view of this type of protected activity, stating that it may encompass complaints that employees make to people outside of human resources and management, including reports made to coworkers, union officials, or even people outside of the company, such as an attorney. The EEOC also notes that employees may engage in protected activity by raising complaints publicly or informing management of the intent to make a complaint (rather than actually making one).

Reasonableness of the Complaint:  Despite the EEOC’s expansive view of protected activity, it does recognize some limitations.  For example, the EEOC clarifies that the manner in which the employee opposes the alleged unlawful conduct must be reasonable.  Determining whether the employee acted reasonably is a “context- and fact-specific inquiry.”  However, the EEOC provides some clarification, noting that complaints including threats of violence and complaints made in an overly disruptive and excessive manner are not reasonable and, therefore, not protected activity. Further, the EEOC notes that engaging in protected activity does not immunize employees from discipline if the protected activity causes them to neglect their job duties.

Protected Activity Regarding Harassment:  The EEOC also offers guidance on protected activity relating specifically to complaints of harassment. An employee can complain of harassment in good faith even if the complained-of conduct is not yet severe or pervasive.  While one isolated inappropriate comment in the workplace may not rise to an actionable harassment claim, the EEOC takes the position that complaining about that one comment can create the basis for an actionable retaliation claim. Also, an employee engages in protected activity by resisting sexual advances of a superior, even if he or she does not separately report the advance.

Compensation:  An employee’s inquiry about others’ compensation rates, even when made to coworkers, may constitute protected activity if the context of the inquiry shows that the employee was trying to gather information in support of a potential discrimination claim.  Therefore, employers with a policy that prohibits employees from discussing their pay should reevaluate in light of the EEOC’s position on compensation inquiries, especially if the company issues discipline for violations of any type of pay secrecy policy.

For further information on the EEOC’s Guidance on Retaliation Claims, click here.

Proposed Rule Offers New Hope for Foreign Entrepreneurs

Contributed by Jacqueline Lentini McCullough, September 14, 2016

A new proposed rule represents a hopeful change for foreign entrepreneurs looking to stay in the U.S. to start and grow their businesses.

Currently the only routes for foreign entrepreneurs to obtain a visa involve huge risk. Those routes, via a Treaty E visa or the EB-5 visa program, require applicants to make significant investments upfront and essentially build their businesses to satisfy the visa criteria, with no guarantee that a visa will be granted.

One of my clients, who sold all-terrain vehicles, imported several of these vehicles and related equipment, not knowing if he would get his visa. Imagine the time, energy and money he had to invest before he could apply and the risk that he endured on the chance his visa would be denied.

Another problem with existing visa routes is that they fail to support less capital-intensive, more modern business models.

Some of my IT consulting clients were able to bootstrap their way into business with just a few computers, internet access and virtual offices. The existing visa criteria required them to commit to year-long office leases and to prematurely invest other funds in the business, again with no assurance that their visas would come through.

And all the upfront investment – in machinery, leases and human resources – was required when the start-ups were in their most vulnerable, cash-flow challenged phases.

visa-stampFocus on U.S. Job Creation

The new proposed rule emphasizes job growth instead of established business investment. It allows the Department of Homeland Security (DHS) to consider visa applications on a case-by-case basis.

Under the new proposed rule, entrepreneurs may qualify for a two-year visa if they:

  • created their start-up during the past three years
  • own at least 15 percent of the business equity
  • can show the potential for rapid growth and job creation
  • have at least $345,000 in qualified investor funding or $100,000 in government grants, and
  • play a key role in the company’s operations and future growth.

The U.S. Citizenship and Immigration Services agency (USCIS) anticipates around 3,000 of these visa applications per year, which could result in 30,000 new jobs.

Gaining that visa would then position the entrepreneurs to apply for an extension granting an additional three years if they can show their company has operated lawfully for two years, that they have gained an additional $500,000 in funding or government grants, that the company had at least $500,000 in revenue with average annualized growth of 20 percent or more, and that they had created at least 10 full-time jobs for U.S. workers.

This new approach not only reduces the risk to the entrepreneur, it also supports newer business models such as services that require little capital investment and allows them to channel investor funding toward salaries for employees. With U.S. job creation as the focus, the approach also helps counteract popular concerns that foreign nationals allowed visas lead to a net job loss for Americans.

Currently in Comment Period

The proposed rule was published to the Federal Register on August 31, 2016. USCIS has allowed for a 45-day comment period ending on October 17, 2016. The Obama administration hopes the rule will be completed before the President leaves office on January 20, 2017.

Officials Not Entitled to Qualified Immunity in First Amendment Retaliation Claim

Contributed by Carlos Arévalo, September 9, 2016

Recently, the United States Court of Appeals for the Second Circuit ruled that police officials in Madison, Connecticut are not immune from liability for a fired police officer’s claim that she was retaliated against for her First Amendment speech. The case of Ricciuti v. Gyzenis, No. 12-432 (2nd Cir. August 24, 2016) involves a police officer who shortly after being hired inquired about the poor condition of police vehicles and was told that the department needed funds to cover overtime. On her own initiative, Rebecca Ricciuti prepared a work schedule that would have reduced the amount of overtime and presented it to a supervisor. In response, Ricciuti was told by the supervisor that “scheduling was none of her business” and that he needed the overtime to “pad [his] pension.”

pay-overtimeRicciuti later raised her concerns with the Chief of Police, Robert Nolan, who asked her to provide her suggestions. Ricciuti, working with Officer Scott Pardales, prepared a proposal that identified the scheduling problems and contained proposed reforms. The proposal generally addressed scheduling, but did not specifically make reference to the supervisors assigning themselves unnecessary overtime. Separately, however, Ricciuti prepared a second document – an overtime matrix – which directly addressed what Ricciuti deemed questionable overtime practices. In the matrix, Ricciuti characterized the department’s overtime practices as “mismanagement.”  In addition, Ricciuti identified unnecessary overtime costs of approximately $100,000.  Ricciuti claimed that she prepared the matrix on her own after researching publicly available documents. Officer Pardales shared the matrix with an elected official. Meanwhile, Ricciuti shared the matrix with a local critic, who had also been researching the overtime issue.

After negative public reaction to the matrix findings, Chief Nolan had a lieutenant conduct an internal investigation of Ricciuti.  Ricciuti was subsequently fired for “insubordination” during the investigation. Ricciuti sued police officials claiming that she was terminated in retaliation for speaking out about the department’s overtime practices. Defendants filed a motion for summary judgment arguing that under the Supreme Court’s 2006 decision in Garcetti v. Ceballos, Ricciuti’s speech “was not protected because she had spoken as an employee addressing private workplace grievances.” In Garcetti, the Supreme Court held that speech was not protected if it was made pursuant to the employee’s official job duties. The court denied the motion and concluded that officials were not entitled to qualified immunity because they should have known that they could not fire an employee for speaking out “as a citizen about a matter of public concern.”

On appeal, the Second District agreed with Ricciuti and rejected defendants’ qualified immunity argument noting that a public employee’s speech as a citizen on a matter of public concern has First Amendment protection.

While overtime practices in the Madison Police Department may be an exception to the rule, it is a certainty that employees will periodically voice concerns about management officials’ direction, policies and decisions. Such concerns may or may not be legitimate. The valuable lesson to be learned from Ricciuti and Garcetti is that public employers have to carefully consider employee speech and avoid a reactionary response to any employee condemnation or criticism of workplace practices and instead focus on whether such speech is the result of the employee’s duties evaluating internal matters or the employee simply voicing concerns as a member of the public.

Blanket Exclusion Policies Continue to Draw EEOC’s Ire

Contributed by Suzanne Newcomb, August 30, 2016

Last week the EEOC filed suit against an Arizona car dealership for rescinding its offer to an applicant who tested positive for a substance banned by the company’s drug policy. The drug screen itself was legal. The ADA specifically allows employers to screen applicants and employees for illegal drug use. It was the employer’s policy of excluding anyone who tested positive for certain substances without first inquiring whether the substance was legally prescribed to treat a disability that prompted the EEOC to file suit. Notably, the EEOC filed suit on behalf of this particular applicant as well as all others who are similarly situated.

Discrimination-2In a press release the EEOC’s Pheonix Regional Attorney explained that drug tests, though legal, “cannot be used to discriminate against qualified people with disabilities.” She cautioned employers to “be mindful that they may need to make exceptions to drug use policies as a reasonable accommodation.”

The EEOC has taken a similar stance against strict application of maximum leave policies. As is noted in the EEOC’s guidance on leave as a reasonable accommodation published earlier this year, reasonable accommodation “can include making modifications to existing leave policies and providing leave when needed for a disability, even where an employer does not offer leave to other employees.” In some situations this can mean extending leave beyond that which is protected by the Family and Medical Leave Act. The EEOC’s May 2016 guidance on leave as a reasonable accommodation can be found here.

The Arizona case involves prescription medication, not illegal drugs. The plain language of the ADA allows employers to act on the basis of current use of illegal drugs. Employers may also inquire about an individual’s ability to safely perform the essential functions of the position. However as prescription drug abuse continues to plague the American workforce, the line between prescription medication and illegal drugs becomes less and less clear.

Bottom line, the ADA requires employers to engage in an interactive process to determine whether reasonable accommodation will allow the individual to perform the job safely. This mandate extends to all phases and facets of the employment relationship. Blanket rules that do not provide for an individualized assessment of whether reasonable accommodation is possible are rarely defensible.

Cash-in-Lieu of Benefits May be Subject to Overtime

Contributed by Kelly Haab-Tallitsch, August 25, 2016

Compensation to employees who opt out of health insurance or other benefits, known as a “cash-in-lieu” program, can be an attractive option for both employers looking to manage skyrocketing health care costs and employees looking for a little extra cash. But a recent ruling by the Ninth Circuit Court of Appeals highlights a significant risk to employers of such programs.

In Flores v. City of San Gabriel, 2016 WL 3090782 (June 2, 2016), the first case of its kind, the court held that under the Fair Labor Standards Act (FLSA) cash payments made to an employee in lieu of benefits must be included in the employee’s regular rate of pay for the purpose of calculating overtime.

Health Insurance and MoneyThe employer in Flores, the City of San Gabriel, sponsored a flexible benefit plan that provided employees with a certain monetary allowance to purchase health insurance and other benefits. Employees who opted out of some or all of the benefits received a cash payment for the amount of their remaining allowance. The employer did not include these cash-in-lieu of benefits payments in the employees’ regular rates of pay when it calculated overtime. A group of employees sued, alleging that the exclusion of the cash-in-lieu payments from overtime calculations was a violation of the Fair Labor Standards Act and they had been underpaid for the overtime hours they worked.

The court in Flores agreed, ruling that the employer’s cash-in-lieu-of benefits payments were “compensation for services” (similar to other types of bonuses) that must be included in the regular rate of pay for overtime purposes. The court also held that the employer’s actions were a willful violation because it did not do enough to determine if it was complying with the law. As a result the employer was liable for double the amount of unpaid overtime compensation for the three year period before the complaint was filed.

Cash-in-lieu of benefits programs were already dealt a blow in late 2015 when Treasury Department guidance indicated that most cash-in-lieu payments will be included in the determination of a health plan’s “affordability” for purposes of the Affordable Care Act’s (ACA) employer mandate.

What Does This Mean for Employers?

The City of San Gabriel has asked the Ninth Circuit to reconsider its decision, but until and unless the decision is actually overturned, employers operating in the Ninth Circuit should review their cash-in-lieu of benefit programs and payroll practices to ensure compliance with the FLSA.

The court’s ruling in Flores is a groundbreaking decision and it’s too early to tell whether courts outside of the Ninth Circuit will rule similarly. Employers outside of the Ninth Circuit who offer (or are considering) cash payments to employees who opt out of health benefits should consult with counsel to assess the impact of legal developments in this area.