Drexel Entrepreneurial Law ClinicSteve Rosard, Director

Garrett GraffJason KuntzJoel Ruffini

Lauren Strebel

Interns, Consultants, and Employees: The Costs of

Misclassification

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Panelists• Caroline Austin, Duane Morris

• Mike Wietrzychowski, Schnader

• Reena Parambath, Earle Mack School of Law

Agenda• Definition of employees• The costs associated with employees• Two exemptions

o Internso Independent Contractors (AKA Consultants)

• Penalties of misclassification• Discussion

Fair Labor Standards Act

• FLSA defines the term “employ” very broadly. “Employ” is defined to include “to suffer or permit to work.” 29 U.S.C §203(g).

• Covered and non-exempt individuals must be compensated under the law for the services they perform for a company.

There is no rigid rule…

Employees are Expensive

• Minimum Wage• Overtime• Health Benefits• Workers

Compensation• Unemployment

Insurance• Employer’s share of

taxes• Etc.

Available exemptions from employee status• Qualify as an Intern • Qualify as an

Independent Contractor

The Fox Searchlight Case

Consider this…• Timmy wants to be a

fashion designer• Notoriously difficult

industry to enter• Applies for many

positions, most of which are unpaid

• Takes a position with a clothing design start-up

The Position1. Start-up claims they are offering Timmy a way to

build his name in the industry2. Timmy comes to work, is allowed to be creative

and make his own designs. He is provided with ample material to do so.

3. Timmy does meaningful work, is highly involved in the design and production of clothes that are sold on the start-ups website

4. If the designs that Timmy creates gain traction and 30 units are sold on the website, then the start-up promises to hire Timmy as a permanent designer

What do you think?

Pay Timmy?

Unpaid Intern?

Fact Sheet #711. Similar to vocational training or an educational

environment2. The internship experience is for the benefit of

the intern 3. The intern does not displace regular employees,

but works under close supervision of existing staff

4. The employer derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded

5. No job guarantee6. It’s understood that no wages will be earned

1. Is the Internship Similar to an

Educational Environment?

• Structured around an academic experienceo Especially if affiliated with an

academic institution

• Training or useful knowledge is offered

• Internship provides the individual with skills that can be used in multiple employment settings

2. Who is the Primary Beneficiary of

the Activity?EMPLOYEEEMPLOYER

3. Does Worker Displace a Regular

Employee?

Skill-building Tasks

• Shadowing• Creating new projects• Researching the

industry• Making personal

connections

Remedial Tasks

• Drafting cover letters• Answering phones• Making deliveries• Making photocopies• Running errands• Organizing filing

cabinets• Assembling office

furniture

4. Does the Employer Receive Immediate

Advantage from the Work Performed?

• May take employer more time to review intern’s work than if they did it themself.

• Impedes the employer’s operations• Job shadowing• “close and constant supervision” • Perform no or minimal value work

5. No Promised Jobs• Internship of fixed duration, established prior to

the outset to the internship

• Generally, should not be used as “trial period” for full-time position

6. No Entitlement To Wages

• Reimbursement of out-of-pocket expenses may be allowed (e.g. transportation costs)

• Employer and intern both understand intern is not entitled to wages from employer during internship

Takeaways

• The six-factor test is the test• All factors must be met• Employment references, job-specific new skills,

and professional connections are not enough• If a paid employee would have to perform the

intern duties, it is not an internship.

What is Timmy’s Classification?

1. Line on the resume; foot in door

2. Independence and creativity allowed

3. Meaningful work, not clerical tasks

4. Potential for full-time job

PANEL?!

Panel Discussion of Fact Sheet #71

1. Similar to vocational training or an educational environment

2. The internship experience is for the benefit of the intern

3. The intern does not displace regular employees, but works under close supervision of existing staff

4. The employer derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded

5. No job guarantee6. It’s understood that no wages will be earned

What now?

When you have to pay, do it the right

way

The Developer•Sam is hired to build a website or product for NewCo.•Sam signs a non-compete.•Sam is told to come to work at NewCo’s incubator space.•Sam is told to come to meetings so that he can keep up with the company happenings.•NewCo pays for a copy of WebsiteBuilderPro® for Sam to use

What do you think?

• Consultant?• Employee?

The Key: Control

• Company has the right to control the worker.

• Behavioral Control• Financial Control• Relationship of Parties

Behavioral ControlEmployee Consultant

• Works on premises of employer.

• Uses tools of employer.

• Receives training.• Reports to the

company daily.• Receives instructions.• Evaluation system.

• Sets own hours.

• Decides how to accomplish a project.

Financial ControlEmployee Consultant

• Paid based on time.

• Reimburses expenses of worker.

• Paid flat fee.• No reimbursement.• Ability to profit/loss.• Significant investment

in tools.• Able to put services on

the market, seek other business opportunities.

Relationship of PartiesEmployee Consultant

• Typically hired for an indefinite period.

• Provides key activities to a business that the business is likely to want to control or direct.

• Typically hired for a project or specific period.

• Has a written contract outlining responsibilities indicative of a consultant relationship.

The Developer•Sam is hired to build a website or product for NewCo.•Sam signs a non-compete.•Sam is told to come to work at NewCo’s incubator space.•Sam is told to come to meetings so that he can keep up with the company happenings.•NewCo pays for a copy of WebsiteBuilderPro® for Sam to use

Penalties for Misclassification

• Federal, state, and/or local law may prescribe personal liability for $ owed to a misclassified worker

• Back taxes, back wages, overtime, unemployment…

Penalties in PACriminal Civil

• Fire or discriminate against whistleblower?o $500 - $1000 fineo 10 – 90 days incarceration

• Pay less than prescribed rate?o $75 - $300 fineo 10 – 60 days incarceration

• Payment of missing wages

• Costs & attorney’s fees

• Liquidated damages

Penalties in PAEACH WEEK + EACH EMPLOYEE = SEPARATE

OFFENSE

Penalties in NYCriminal Civil

• Misdemeanor (first offense)o $500 - $2000 fineo Up to one year incarceration

• Felony (second offense within six years)o $500 - $20,000o Up to one year + one day

incarceration

• Payment of missing wages

• Prejudgment interest + attorney’s fees

• 100% liquidated damages

EMPLOYEE

CONSULTANT

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