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Departments Practice Areas Education J.D., University of Missouri-Kansas City, 1990, University of Missouri-Kansas City Law Review BS, Business Administration, University of Kansas, 1987 Admissions Missouri, 1990 Trial Employment Litigation Corporate Directors & Officers Liability Litigation Business Litigation Class Actions Labor and Employment [email protected] Kansas City Phone: 816.374.0565 Fax: 816.374.0509 JAMES C SULLIVAN Shareholder James C. Sullivan is a lead shareholder of the Firm's Labor and Employment Practice. He focuses his practice on the defense and trial of a wide variety of employment claims and business/commercial disputes, including discrimination and wrongful termination claims, FSLA and other wage payment claims, officer and director liability claims and contract disputes. Mr. Sullivan has successfully represented employers throughout the country in defeating attempts to certify employment and consumer cases as class actions. In addition to large complex litigation, he has also successfully tried claims alleging sexual harassment, race discrimination, age discrimination and breach of employment agreements, including restrictive covenant issues. Memberships and Affiliations The Missouri Bar Lawyers Association of Kansas City Kansas City Metropolitan Bar Association Labor and Employment Law Committee, Former Chair Federal Court Committee Transportation Lawyers Association Missouri Motor Carriers Association Former General Chair of Division One Missouri Supreme Court Region IV Disciplinary Committee Distinctions Recognized in Top Lawyers by Litigation 2009 - A Supplement to The American Lawyer & Corporate Counsel Listed in Best Lawyers in America for Commercial Litigation and Labor and Employment Law, 2009-10 Future Star recognition by Benchmark Litigation Kansas City Tomorrow Class XX graduate (a leadership program of the Civic Council of Greater Kansas City) Successfully completed the trial academy of the Missouri Organization of Defense Lawyers (Class of 1994) and the International Association of Defense Counsel (Class of 1996) Named by Super Lawyers magazine as one of the top attorneys in Missouri and Kansas for Employment Litigation: Defense, 2008-2009 EXPERIENCE Mr. Sullivan's representative experience includes: Defended large interstate motor carrier against claims of a putative class of employee truck drivers who claimed that defendant improperly calculated the drivers’ pay. The trial court denied plaintiffs’ motion for class certification. Case settled favorably for client after denial of class certification. Marion v. Werner Enterprises, Inc., 2009 WL 3754392 (D. Neb. Nov. 2, 2009). Successfully defended mortgage brokerage company against claims of age discrimination and retaliation, and successfully upheld trial court’s ruling before the United States Court of Appeals for the 11th Circuit. Van Portfliet v. H&R Block

JAMES C SULLIVAN - PolsinelliJames C.€Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.€ He focuses his practice on the defense and trial of a wide variety

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Page 1: JAMES C SULLIVAN - PolsinelliJames C.€Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.€ He focuses his practice on the defense and trial of a wide variety

Departments

Practice Areas

EducationJ.D., University of

Missouri-Kansas City, 1990, University of Missouri-Kansas City Law Review

BS, Business Administration, University of Kansas, 1987

AdmissionsMissouri, 1990

Trial

Employment Litigation Corporate Directors &

Officers Liability Litigation

Business Litigation Class Actions Labor and Employment

[email protected] Kansas City

Phone: 816.374.0565Fax: 816.374.0509

JAMES C SULLIVAN Shareholder

James C. Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.  He focuses his practice on the defense and trial of a wide variety of employment claims and business/commercial disputes, including discrimination and wrongful termination claims, FSLA and other wage payment claims, officer and director liability claims and contract disputes. Mr. Sullivan has successfully represented employers throughout the country in defeating attempts to certify employment and consumer cases as class actions. In addition to large complex litigation, he has also successfully tried claims alleging sexual harassment, race discrimination, age discrimination and breach of employment agreements, including restrictive covenant issues.

Memberships and Affiliations

■ The Missouri Bar ■ Lawyers Association of Kansas City ■ Kansas City Metropolitan Bar Association

■ Labor and Employment Law Committee, Former Chair ■ Federal Court Committee

■ Transportation Lawyers Association ■ Missouri Motor Carriers Association ■ Former General Chair of Division One Missouri Supreme Court Region IV Disciplinary

Committee

Distinctions

■ Recognized in Top Lawyers by Litigation 2009 - A Supplement to The American Lawyer & Corporate Counsel

■ Listed in Best Lawyers in America for Commercial Litigation and Labor and Employment Law, 2009-10

■ Future Star recognition by Benchmark Litigation ■ Kansas City Tomorrow Class XX graduate (a leadership program of the Civic Council of

Greater Kansas City) ■ Successfully completed the trial academy of the Missouri Organization of Defense Lawyers

(Class of 1994) and the International Association of Defense Counsel (Class of 1996) ■ Named by Super Lawyers magazine as one of the top attorneys in Missouri and Kansas for

Employment Litigation: Defense, 2008-2009

EXPERIENCE

Mr. Sullivan's representative experience includes:

■ Defended large interstate motor carrier against claims of a putative class of employee truck drivers who claimed that defendant improperly calculated the drivers’ pay. The trial court denied plaintiffs’ motion for class certification. Case settled favorably for client after denial of class certification. Marion v. Werner Enterprises, Inc., 2009 WL 3754392 (D. Neb. Nov. 2, 2009).

■ Successfully defended mortgage brokerage company against claims of age discrimination and retaliation, and successfully upheld trial court’s ruling before the United States Court of Appeals for the 11th Circuit. Van Portfliet v. H&R Block

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Mortgage, Inc., 2007 WL 2773995 (M.D. Fla. September 21, 2007), aff’d, 2008 WL 3864439 (11th Cir. 2008).

■ Successfully defended interstate motor carrier against claims of a proposed class of owner-operator truck drivers who claimed that motor carrier improperly calculated driver compensation and violated FMCSA Truth-in-Leasing regulations applicable to agreements between owner-operator truck drivers and interstate motor carriers. Trial court denied plaintiffs’ motion for class certification and granted summary judgment on all of plaintiffs’ substantive claims for monetary and injunctive relief. Case is currently on appeal. Owner-Operator Independent Drivers Ass’n, Inc. v. Swift Transportation Co., Inc.,

■ Successfully defended the Kansas City, Missouri Police Department against claims of age and sex discrimination and retaliation, and successfully upheld the trial court’s findings before the United States Court of Appeals for the 8th Circuit. Thomas v. Kansas City, Missouri Police Department, 2006 WL 27117 (W.D. Mo. 2006), aff’d, 483 F.3d 516 (8th Cir. 2007).

■ Defended motor carrier against claims by three female drivers that they had been sexually harassed by their male co-drivers. Jury returned a verdict in favor of motor carrier on two of the three female drivers and returned a verdict of $70,000 for one plaintiff.  Last settlement demand exceeded $1 million. Huffman v. New Prime, Inc., 2004 WL 1401967 (W.D. Mo. June 22, 2004), and 2003 WL 22424878 (W.D. Mo. July 24, 2003).

■ Successfully defended interstate motor carrier against claims of a proposed class of owner-operator truck drivers who claimed that motor carrier improperly calculated driver compensation and violated FMCSA Truth-in-Leasing regulations applicable to agreements between owner-operator truck drivers and interstate motor carriers. Trial court denied plaintiffs’ motion for class certification and granted summary judgment on all of plaintiffs’ substantive claims. The trial court’s rulings were successfully upheld on appeal to the United States Court of Appeals for the 8th Circuit. Owner-Operator Independent Drivers Ass’n v. New Prime, Inc., 250 F.Supp.2d 1151 (W.D. Mo. 2002); Owner-Operator Independent Drivers Ass’n v. New Prime Inc., 213 F.R.D. 537 (W.D. Mo. 2002); Owner-Operator Independent Drivers Ass’n v. New Prime Inc., 339 F.3d 1001 (8th Cir. 2003).

■ Successfully defended interstate motor carrier against claims of a proposed class of owner-operator truck drivers who claimed that they should have been classified as employees rather than independent contractors. The trial court denied plaintiffs’ motion for class certification. Case settled favorably for client after denial of class certification.  Warta v. New Prime, Inc., Case No. 103CC0015, Circuit Court of Greene County, Missouri.

■ Defeated plaintiffs’ motion for class certification of current and former employees alleging racial discrimination including hostile work environment, promotions and retaliation. Lang v. Kansas City Power & Light Co., 199 F.R.D. 640 (W.D. Mo. 2001).

■ Successfully defended large steel manufacturer against claims of age discrimination and retaliation. Bowles v. National Steel Corp., Case No. 00-CV-0448-SOW (W.D. Mo. 2001).

■ Defended local utility company in race discrimination, hostile work environment and retaliation claims. Jury returned a verdict for plaintiff of $45,000, where last settlement demand was $700,000. Madrigal v. Kansas City Power & Light Co., No. 99-CV-0526-FJG (2002).

■ Defended subsidiary of major utility company against claims by former president of breach of employment contract and negligent misrepresentation. Judgment of the trial court was affirmed by the United States Court of Appeals for the 8th Circuit. Jenkins. v. KLT, Inc., 308 F.3d 850 (8th Cir. 2002).

PUBLICATIONS & PRESENTATIONS

September 2007

Owner-Operator Issues 2008 Truckload Carriers Association, Independent Contractor Division Annual Meeting

September 2006

Case Filing and Jury Trial Trends in Kansas City Metropolitan Area2006 Labor, Employment and Benefits Symposium

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April 2006 Comment on the Hyatt Regency Class Action LawsuitComment on the Hyatt Regency Class Action Lawsuit

October 2005 Owner-Operator Issues 2005 Truckload Carriers Association - Independent Contractors Division Annual Meeting

August 2005 Current Trends in Owner-Operator Litigation Truckload Carriers Association

2005 Private Rights of Action to Enforce the Truth-in-Leasing Regulations in CourtTransportation Law Journal

July 2004 Owner-Operator Class Actions: Big Trouble for Unwary CarriersATA Litigation Center General Counsel Forum

April 2004 Juries in MissouriLabor, Employment and Benefits Update 2004

November 2003

Cross Examining PlaintiffsAssociated Industries of Missouri, Human Resource Conference

January 2000 Target for an Owner-Operator Lawsuit? ATA Management Conference

October 2003 Leasing Rules Litigation: Is Your Company a Target for an Owner-Operator Lawsuit? 2003 ATA Management Conference

February 2002 Counsel on Education in Management, Managing Employee Discipline, Discharge and Documentation in Kansas2003 Truckload Carriers Association - Independent Contractors Division Annual Meeting

August 2001 Preventing Retaliation Claims Before They Even Occur: Strategies to Stop the Onslaught of Punitive DamagesCounsel on Education in Management, Personnel Law Update

June 2001 Issues of Admissible and Inadmissible Evidence from the Plaintiff's and Defendant's PerspectiveKansas City Metropolitan Bar Association, Current Developments in Labor and Employment Law

June 2001 Title VII and Section 1981 Issues - Promotions, Pay, Harassment and Conditions of EmploymentLorman Education Services, Introduction to Employment and Labor Law in Kansas

June 2000 Discovery in Employment Litigation - How You Can Help Your Attorney Win the CaseLorman Education Services, Introduction to Employment and Labor Law in Kansas

January 2000 Owner/Operator Suits: Is Your Company a Target?ATA Litigation Center General Counsel Forum

June 1999 Enforcement of Covenants Not to Compete and Non-Solicitation Agreements in MissouriKansas City Metropolitan Bar Association

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1989 The Government Contractor Defense: Extending Sovereign Immunity to the LimitsUniversity of Missouri-Kansas City Law Review, Vol. 5, No. 3, 1989.

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1

Risky Business Classifying Workers as Employees or Independent Contractors and the Implications for Misclassification

Presented by: James L. Sullivan

©2010 Polsinelli Shughart PC

Increased Government Scrutiny

IRS Initiative to Investigate Worker Classification– Department of Labor announces employee

misclassification initiative– Proposed budget of $12 million for field

investigator training– An Additional 4,700 investigations

Proposed “Employee Misclassification Prevention Act”

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©2010 Polsinelli Shughart PC

Classification of Workers As Employees or Independent Contractors

The IRS has traditionally used a twenty factor testThe IRS has attempted to simplify the test now using three main categories– Behavioral control– Financial control– Type of relationship

©2010 Polsinelli Shughart PC

Behavioral Control

Type of instruction givenDegree of instructionEvaluation systemTraining

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3

©2010 Polsinelli Shughart PC

Financial Control

Unreimbursed expensesSignificant investmentServices available in the market Method of paymentOpportunity for profit or loss

©2010 Polsinelli Shughart PC

Type of Relationship

Written contractsEmployee benefitsThe permanency of the relationshipServices provided as a key activity of the business

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4

©2010 Polsinelli Shughart PC

Implications of Misclassification of Employees as Independent Contractors

Liability for federal, state and local income taxes Social Security contributions under the Federal Insurance Contributions ActTaxes under the Federal Unemployment Tax ActPenalties and interestState unemployment taxesWorkers’ compensation benefits

©2010 Polsinelli Shughart PC

Section 530 Safe Harbor

Employer treated worker as an independent contractor for federal tax purposes – filed Form 1099Employer has treated workers holding similar positions as independent contractorsThe employer has a “reasonable basis” for treating the worker as an independent contractor– Legal precedent– Past IRS determination– Longstanding practice in the industry

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©2010 Polsinelli Shughart PC

Employee Classification Under the Fair Labor Standards Act

Economic Realities Test– Are services an integral part of the

business– Permanency of the relationship– The contractor’s investment in facilities and

equipment– The nature and degree of control by the business– Contractor’s opportunity for profit or loss– Contractor’s competition in the open market– The degree of independent business organization

and operation

©2010 Polsinelli Shughart PC

Employee Misclassification Prevention Act

Intended to amend the Fair Labor Standards Act to make it a violation of the act to misclassify employees as independent contractors

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©2010 Polsinelli Shughart PC

Employee Misclassification Prevention Act

Requires business to keep records of all independent contractorsProvide notice to all workers as to their status as an employee or non-employeeCreates a presumption of employment of employer fails to keep records or provide the required noticeDoubles the amount of liquidated damages availableIncreases civil penalties to up to $1,100 per employee and up to $5,000 per employee for repeat or willful violatorsAmends the Social Security Act, as a condition to receive federal grants for state unemployment, to require states create employer auditing programs and to create their own penalties for worker misclassification

About the Presenter

James L. SullivanPolsinelli Shughart PC

120 West 12th StreetKansas City, Missouri

64105816.374.0565

[email protected]

James L. Sullivan focuses his practice on the defense and trial of a wide variety of employment claims and business/ commercial disputes, including discrimination and wrongful termination claims, FSLA and other wage payment claims, officer and director liability claims and contract disputes.

polsinelli.com

Page 11: JAMES C SULLIVAN - PolsinelliJames C.€Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.€ He focuses his practice on the defense and trial of a wide variety

1 2709852.01

Classifying Workers as Employees or Independent Contractors And the Implications for Misclassification James C. Sullivan ______________________________________________________________________________

The federal government has undertaken several actions aimed at cracking down on employee misclassification. The Internal Revenue Service and the Department of Labor have each recently announced increased efforts to investigate employers that misclassify employees as independent contractors. In February, 2010, the IRS started a program to conduct random audits of approximately 6,000 U.S. businesses that use independent contractors. These audits are expected to be conducted over the next three years.

On February 1, 2010, Secretary of Labor Hilda Solis released the proposed fiscal year budget for the U.S. Department of Labor that includes an Employee Misclassification Initiative that is intended to strengthen and coordinate federal and state efforts to enforce labor violations that result from misclassification of employees as independent contractors. The DOL’s proposed budget includes a request for $12 million to support field investigator training in the area of worker classification and an additional 4,700 investigations.

In April, 2010, both houses of Congress introduced the “Employee Misclassification Prevention Act” (S. 3254, H.R. 5107) that is intended to place increased burdens on employers that use independent contractors.

Employers should proceed cautiously when employing independent contractors, as the requirements for this classification will be applied stringently. While employers can avoid the expense and burden associated with hiring employees, the costs for misclassifying employees as independent contractors can prove devastating for the employer.

I. Classification of Workers As Employees or Independent Contractors

The IRS has traditionally used the common law “right to control” test to determine whether an individual is correctly classified as an independent contractor as opposed to an employee. The purpose of the so-called “right to control” test is to determine whether the employer has “the right to direct and control the means and details of the work.” The IRS had used what had become know as the "Twenty Factor" test.1 Under pressure from Congress and from representatives of labor and business, the IRS has attempted to simplify and refine the test, consolidating the twenty factors into three main groups: behavioral control, financial control, and the type of relationship between the parties.

1 A copy of the traditional IRS twenty factor test is attached hereto.

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IRS Publication 15-A, 2010 Edition.2 The IRS reviews the following factors in determining whether a worker is an employee or an independent contractor:

Behavioral Control Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of—

1. Type of Instruction Given. An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:

a. When and where to do the work b. What tools or equipment to use c. What workers to hire or to assist with the work d. Where to purchase supplies and services e. What work must be performed by a specified individual f. What order or sequence to follow

2. Degree of Instruction. The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.

3. Evaluation System. If an evaluation system measures the details of how the work is performed, then this factor would point to an employee. If the evaluation system measures the end result, then this can point to either an employee or independent contractor.

4. Training. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial Control Facts that show whether the business has a right to control the business aspects of the worker's job include:

1. Unreimbursed Expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Such expenses includes items like rent, wages and salaries of employees, insurance, repairs and maintenance,

2 This publication can be downloaded at http://www.irs.gov/pub/irs-pdf/p15a.pdf (PDF).

Another good IRS resource for understanding the independent contractor tests is at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html.

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3

supplies, travel and leasing of equipment. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important in determining independent contractor status. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.

2. Significant Investment. An employee usually has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

3. Services Available in the Market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

4. Method of Payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is generally paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

5. Opportunity for Profit or Loss. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money. Having the ability to incur a loss indicates that the worker is an independent contractor. An independent contractor can make a profit or loss. Since an employer usually provides employees a workplace, tools, materials, equipment, and supplies needed for the work, and generally pays the costs of doing business, employees do not have an opportunity to make a profit or loss.

Type of Relationship Facts that show the parties’ type of relationship include:

1. Written Contracts. Although a written contract may state that the worker is an employee or independent contractor, this is not sufficient alone to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor. However, in close cases, the written contract can make a difference.

2. Employee Benefits. Employee benefits include items such as insurance, a pension plan, vacation pay, or sick pay. The power to grant benefits carries with it the power to take them away, which is a power generally exercised by employers over

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employees. A true independent contractor will finance his or her own benefits out of the overall profits of the enterprise.

3. The Permanency of the Relationship. If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

4. Services Provided as a Key Activity of the Business. If a worker provides services that are a key aspect of the company's regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

II. Implications for Misclassification of Employees as Independent Contractors Misclassification of an employee as independent contractor may create substantial liabilities for the employer. The employer may be liable for federal income taxes and state and local taxes, as well as taxes under the Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). The employer will also be liable for any applicable penalties and interest. Misclassification of employees as independent contractors may also create liability for the employer for ERISA governed benefits plans, including insurance, retirement and 401K benefits.3 In addition, employers may be liable for unpaid contributions to the state unemployment fund and workers’ compensation benefits. In the event that the misclassification is applied to broad scope of workers, the liability can be substantial. III. Safe Harbor Provision for Certain Employers Section 530 of the Revenue Act of 1978 provides a safe harbor rule that, for some employers, can minimize their uncertainty when it comes to proper treatment of workers as employees or independent contractors for purposes of federal employment taxes. This rule provides that an employer cannot be penalized for its characterization of a particular worker as an independent contractor if all three of these requirements are met:

1 The employer has treated the worker for federal tax purposes as an independent contractor, filing all required federal tax returns with respect to the worker(s) (Forms

3 Liability for ERISA benefits for independent contractors who are found to be

employees will be determined based upon the language of the employer’s plan documents. See e.g., Curry v. CTB McGraw Hill, LLC, 296 Fed.Appx. 563, No. 06-CV-15397 (9th Cir. 2008) (“we have not held that all common law employees are entitled to benefits under ERISA … Instead we look to the terms of the plans at issue to determine who is entitled to coverage.”)

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1099-MISC) in a manner that is consistent with the treatment of the individual as an independent contractor; and

2 the employer has consistently treated all persons holding substantially similar positions as independent contractors for federal tax filing purposes (taking into consideration the functions performed and the relationship between the taxpayer and the workers); and

3 the employer must have had a “reasonable basis” for treating the worker as an independent contractor. Three factors an employer may rely on for its reasonable basis are:

ν judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer

or

ν a past audit by the IRS in which there was no assessment for the employer’s treatment of workers holding positions substantially similar to the position held by the worker in question

or

ν longstanding recognized practice of a significant segment of the industry in which the individual works.

In recent years, the safe harbor provided by Section 530 has come under some attack. In 2007, then Senator Barack Obama introduced the “Independent Contractor Proper Classification Act of 2007.” Among other things, the proposed legislation would have eliminated the ability of employers to rely on industry practice as a basis for claiming the safe harbor. The Senate bill was referred to the Senate Committee on Finance, but never made it out of committee. At present, the safe harbor provisions of Section 530 remain in effect.

IV. Employee Classification Under the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) regulates wage and overtime requirements for employees. The FLSA defines employee very broadly as “any individual employed by an employer.” Given this vague definition, state and federal courts have typically applied the economic realities test in determining a worker’s status under the FLSA.

The economic realities test generally revolves around the amount of monetary risk the worker has in the job (in other words, if the worker can finish the job with a monetary loss, then he or she will typically be considered an independent contractor) and whether the work to be performed is part of the core business of the employer. The courts also

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6

look to whether the employee has the right to control how the work is performed. In applying the economic realities test, the courts look to the following factors:4

• The extent to which the services provided are an integral part of the principal’s business.

• The permanency of the relationship.

• The amount of the contractor’s investment in facilities and equipment

• The nature and degree of control by the principal.

• The contractor’s opportunity for profit or loss.

• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the independent contractor.

• The degree of independent business organization and operation.

Some courts refer to this test as the “hybrid” test, while others continue to call it the economic realities test. As part of the economic realities test, the courts look to the circumstances of the whole activity and not any one of the aforementioned factors.

If it is determined that an employer-employee relationship exists, the employer is required to pay at least the federal minimum wage and one and one-half his/her regular rate of pay for all hours worked in excess of 40 hours per week. Employers found to have misclassified workers as independent contractors may be liable for back pay, interest and penalties.

V. The Proposed “Employee Misclassification Prevent Act”

On April 22, 2010, the Employee Misclassification Prevention Act (“the Act”) was introduced in both houses of Congress. (S. 3254, H.R. 5107). The Act proposes sweeping changes to the landscape regarding the classification of workers as independent contractors. The Act would make amendments to the Fair Labor Standards Act (FLSA) and make it a violation of the FLSA to misclassify a worker as independent contractor when the worker was really an employee.

The significant portions of the Act are as follows:

• Requires every person to keep records of non-employees (contractors) who perform labor or services (except substitute work), including through an entity

4 U.S. Department of Labor, Wage and Hour Division, Fact Sheet # 13: Employment

Relationship under the Fair Labor Standards Act.

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such as a trust, estate, partnership, association, company, or corporation, for remuneration

• Requires every person to provide notice to each new employee and new non-employee, including (a) their classification as an employee or non-employee, (b) information concerning their rights under the law, (c) a statement directing the individual to a Department of Labor web site established for the purpose of providing further information about the rights of employees under the law, and (d) a statement providing as follows: “Your rights to wage, hour, and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you may have been misclassified, contact the U.S. Department of Labor.”

• Creates a presumption that a worker is an employee of the employer if (a) the employer fails to make and maintain the records required under the Act, or (b) if the employer fails to provide the notice described above.

• Makes it unlawful for any person to: (1) discharge or otherwise discriminate against an individual (including an employee) who has opposed any practice, or filed a complaint or instituted any proceeding related to this Act, including with respect to an individual's status as an employee or non-employee; and (2) fail to classify accurately an employee or non-employee.

• Doubles the amount of liquidated damages.

• Subjects a person who: (1) violates such requirements (including recordkeeping requirements) to a civil penalty of up to $1,100; or (2) repeatedly or willfully violates such requirements to a civil penalty of up to $5,000 for each violation.

• Directs the Secretary of Labor to establish a webpage on the Department of Labor website that summarizes the rights of employees under this Act and other appropriate information.

• Amends the Social Security Act to require, as a condition for a federal grant for the administration of state unemployment compensation, for the state's unemployment compensation law to include a provision for: (1) auditing programs that identify employers that have not registered under the state law or that are paying unreported compensation where the effect is to exclude employees from unemployment compensation coverage; and (2) establishing administrative penalties for misclassifying employees or paying unreported unemployment compensation to employees.

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• Requires any office, administration, or division of the Department of Labor to report any misclassification of an employee by a person subject to the FLSA that it discovers to the Department's Wage and Hour Division (WHD). Authorizes the WHD to report such information to the Internal Revenue Service (IRS).

The House version of the bill has been referred to the Committee on Education and Labor and the Committee on Ways and Means. The Senate version of the bill has been referred to the Committee on Health, Education, Labor and Pensions. The Senate Committee held hearings on the bill on June 17, 2010.

Polsinelli Shughart PC provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship.

Copyright © 2010 Polsinelli Shughart PC.

Page 19: JAMES C SULLIVAN - PolsinelliJames C.€Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.€ He focuses his practice on the defense and trial of a wide variety
Page 20: JAMES C SULLIVAN - PolsinelliJames C.€Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.€ He focuses his practice on the defense and trial of a wide variety
Page 21: JAMES C SULLIVAN - PolsinelliJames C.€Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.€ He focuses his practice on the defense and trial of a wide variety
Page 22: JAMES C SULLIVAN - PolsinelliJames C.€Sullivan is a lead shareholder of the Firm's Labor and Employment Practice.€ He focuses his practice on the defense and trial of a wide variety