Tag Archives: wage and hour division

EEOC Suit Against CVS Raises Concerns

The Equal Employment Opportunity Commission has challenged the legality of provisions commonly included in severance, separation or other settlements with employees being terminated. These provisions state that settlement benefits are to be paid only if the employee doesn’t file charges or otherwise communicate with the EEOC.

Employers planning to use such provisions should note a lawsuit filed by the EEOC against the nation’s largest integrated provider of prescriptions and health-related services, CVS Pharmacy.

In Equal Employment Opportunity Commission v. CVS Pharmacy, Inc., CA no. 14-cv-863 (N.D. Ill., 2014), the EEOC charges that CVS unlawfully violated employees’ right to communicate with the EEOC and file discrimination charges. The EEOC says CVS committed the violation through an overly broad severance agreement that included five pages of small print.

The lawsuit claims CVS violated Section 707 of Title VII of the Civil Rights Act of 1964, which prohibits employer conduct that constitutes resistance to the rights protected by Title VII.

The lawsuit also is notable because it is not filed in response to an investigation of a discrimination charge. According to the EEOC, Section 707 permits the agency to seek immediate relief without the same pre-suit administrative process that is required under Section 706 of Title VII, and does not require that the agency’s suit arise from a discrimination charge.

“Charges and communication with employees play a critical role in the EEOC’s enforcement process because they inform the agency of employer practices that might violate the law,” according to the EEOC attorney leading the litigation, John C. Hendrickson. “For this reason, the right to communicate with the EEOC is a right that is protected by federal law. When an employer attempts to limit that communication, the employer effectively is attempting to buy employee silence about potential violations of the law. Put simply, that is a deal that employers cannot lawfully make.”

EEOC District Director Jack Rowe added, “The agency’s most recent strategic enforcement plan identified ‘preserving access to the legal system’ as one of the EEOC’s six strategic enforcement priorities. That was no accident. The importance of employees’ ability to participate in the agency’s process, free from fear of adverse consequences, cannot be overstated. It is always difficult for an employee to report employer discrimination to federal law enforcement officials. Anything that makes that communication harder increases the risk that discrimination will go unremedied.”

The litigation showcases the need for employers to use caution when attempting to prevent employees from reporting to or cooperating with regulators investigating suspected discrimination or other legal violations. The EEOC’s challenge in the CVS litigation is not unique. Challenges have arisen under a wide range of federal and state laws.

The Labor Department Wage and Hour Division has rules that say employers will receive no shield from investigations by the agency or from enforcement of wage and hour laws on settlements with terminated employees that didn’t involve the division. The Justice Department and other government enforcement agencies often view confidentiality provisions as prohibited obstruction or retaliation. In addition, government investigators often view the existence of gag rules as evidence that an organization does not maintain the required culture of compliance.

The CVS litigation also cautions businesses against taking for granted the appropriateness of their current agreements with employees. The EEOC challenge is just one of several developments that can affect the design and use of severance, separation and other settlement agreements with employees intended to resolve employment discrimination claims. While many employers may assume they can safely use agreements used in connection with previous terminations, the CVS litigation highlights the potential advisability of seeking the advice of qualified legal counsel, even if the employer benefited from the advice of legal counsel in drafting the previous agreement.

Firms Must Clean Up Worker Classifications

Businesses should heed the expansion of the Internal Revenue Service voluntary classification program (VCS) as yet another warning to clean up their worker classification practices and defenses for all workers performing services for the business in any non-employee capacity.

When businesses treat workers as nonemployees, yet they render services in such a way that they likely qualify as a common law employees, the businesses run the risk of overlooking or underestimating the costs and liabilities of employing those workers.

The U.S. Department of Labor’s Wage and Hour Division has an ever-lengthening record of businesses subjected to expensive backpay and penalty awards because the businesses failed to pay minimum wage or overtime to workers determined to qualify as common law employees entitled to minimum wage and overtime under the Fair Labor Standards Act.

Originally announced on Sept. 22, 2011, the VCS program as modified by Announcement 2012-45 continues to offer businesses a carrot to reclassify as employees workers who had been misclassified for payroll tax purposes as independent contractors, leased employees or other nonemployee workers. That carrot came with a stick: the IRS’ promise to zealously impose penalties and interest against employers caught misclassifying workers. And the IRS is only one of many agencies on the alert for worker misclassification exposures — worker misclassification also affects wage and hour, safety, immigration, worker’s compensation, employee benefits, negligence and a host of other obligations. Private plaintiffs are also pursuing businesses for misclassification.

All of these exposures carry potentially costly compensation, interest and civil and in some cases even criminal penalties for the businesses and their leaders. Consequently, businesses should act prudently and promptly to address all of these risks and manage their misclassification exposures. Because most businesses uniformly classify workers as either employees or nonemployees for most purposes, business leaders must understand the full scope of their businesses’ misclassification exposures.

VCS Program offers limited relief

Worker misclassification affects a broad range of tax and non-tax legal obligations and risks well beyond income tax withholding, payroll and other employment tax liability and reporting and disclosure. A worker classification challenge or necessity determination should prompt a business to address the worker reclassification and attendant risks in other areas.

Typically, in addition to treating a worker as a nonemployee for tax purposes, a business also will treat the worker as a nonemployee for immigration law eligibility to work, wage and hour, employment discrimination, employee benefits, fringe benefits, workers’ compensation, workplace safety, tort liability and insurance and other purposes.

Healthcare reform increases risks

Businesses can look forward to these risks rising when the “pay or play” employer-shared responsibility, health plan non-discrimination, default enrollment and other new rules take effect under the Patient Protection & Affordable Care Act (ACA). Given these new ACA requirements and the government’s need to get as many workers covered as employees to make them work, the IRS and other agencies are expanding staffing and stepping up enforcement against businesses that misclassify workers. Businesses must understand how workers are counted and classified for purposes of ACA and other federal health plan mandates.

ACA and other federal health plan rules decide what rules apply to which businesses or health plans based on such factors as the number of employees a business is considered to employ, their hours worked and their seasonal or other status. The ACA and other rules vary in the relevant number of employees that trigger applicability of the rule and how businesses must count workers to decide when a particular rule applies. Consequently, trying to predict the employer shared responsibility payment, if any, under Internal Revenue Code (Code) Section 4980H or trying to model the cost of any other federal health benefit mandates requires each business know who counts and how to classify workers for each of these rules. Most of these rules start with a “common law” definition of employee then apply rules to add or ignore various workers. Because most federal health plan rules also take into account ”commonly controlled” and “affiliated” businesses’ employees, businesses also may need to know their information.

For instance, when a business along with all commonly controlled or affiliated employers employs a combined workforce of 50 or more “full-time” and “full-time equivalent employees” but does not offer “affordable,” “minimum essential coverage” to every full-time employee and his dependents under a legally compliant health plan, the business generally should expect to pay a shared responsibility payment for each month that any “full-time” employee receives a tax subsidy or credit for enrolling in one of ACA’s healthcare exchanges.

If the business intends to continue to offer health coverage, it similarly will need to accurately understand which workers count as its employees for purposes of determining who gets coverage and the consequences to the business for those workers that qualify as full-time, common law employees not offered coverage.

In either case, ACA uses the common law employee test as the basis for classification, and the already significant legal and financial consequences for misclassifying workers will rise considerably when ACA gets fully implemented.

Consider relief in the full context

As part of a broad effort, the IRS is offering certain qualifying businesses an opportunity to resolve payroll liabilities arising from past worker misclassifications. The VCS Program settlement opportunity emerged in 2011.Touted by the IRS as providing “greater certainty for employers, workers and the government,” the VCS Program offers eligible businesses the option to pay just more than 1% of the wages paid to the reclassified workers for the past year. The businesses also must meet other criteria. The IRS promises not to conduct a payroll tax audit or assess interest or penalties against the business for unpaid payroll taxes for the previously misclassified workers.

Participation was low, partly because not all businesses with misclassified workers qualified to use the program. The original criteria to enter the VCS Program required that a business:

Be treating the workers as nonemployees;
Consistently have treated the workers as nonemployees;
Have filed all required Forms 1099 for amounts paid to the workers;
Not currently be under IRS audit;
Not be under audit by the Department of Labor or a state agency on the classification of these workers or contesting the classification of the workers in court; and
Agree to extend the statute of limitations on their payroll tax liabilities from three to six years.
After only about 1,000 employers used the VCS Program, the IRS modified it so that employers under IRS audit, other than an employment tax audit, now qualify. The IRS also eliminated the requirement that employers agree to extend their statute of limitations on payroll tax liability.

Many employers may still view use of the VCS Program as too risky because of uncertainties about the proper classification of certain workers in light of the highly specific nature of the determination. Employers may also have concerns about the effect that use of the VCS Program might have on non-tax misclassification exposures for workers who would be reclassified under the VCS Program.

Complications

One of the biggest challenges to getting businesses to change their worker classifications is getting the businesses to accept the notion that long-standing worker classification practices in fact might not be defensible. Although existing precedent and regulatory guidance makes clear that certain long-standing worker classification practices of many businesses would not hold up, business leaders understandably often discount the risk because these classifications historically have faced little or no challenge. Even when business leaders recognize that changing enforcement patterns merit reconsideration, they may be reluctant to reclassify the workers.

The common law employment test often relies on a subjective, highly fact-specific analysis of the circumstances of the worker. The business, rather than the IRS or other agency, generally bears the burden of proving the correctness of its classification of a worker. So, a business must ensure that its decisions can withstand scrutiny under all applicable tests and must retain evidence. Businesses also should exercise special care to avoid relying on overly optimistic assessments of the facts and circumstances.

When the factual evidence creates significant questions, an employing business generally should consider reclassifying or restructuring the position. Often, it also may be desirable to incorporate certain contractual, compensation and other safeguards into the worker relationship, both to support the nonemployee characterization and to minimize future challenges and exposures.

Importance of attorney-client privilege for risk management

Because of the broad exposures arising from misclassification, business leaders generally should work to ensure that their risk analysis and decision-making discussion is positioned for protection under attorney-client privilege and attorney work product privilege.

The interwoven nature of the tax and non-tax risks merits particular awareness by business leaders of the need to use care in deciding the outside advisers that will help in the evaluation of the risks and structuring of solutions. While appropriately structured involvement by accountants and other non-legal consultants can be a valuable tool, the blended nature of the misclassification exposures means that the evidentiary privileges that accountants often assert to help shield their tax-related discussions from discovery are likely to provide inadequate protection. For this reason, business leaders are urged to require that any audits and other activities by these non-legal consultants to evaluate or mitigate exposures be conducted whenever possible within attorney-client privilege. Accordingly, while businesses definitely should use appropriate tax advisers, they will want to first engage counsel and coordinate non-attorney advisers’ activities within the protection of attorney-client privilege

Boston Furs Sued For $1M For Violations of Fair Labor Standards Act

Citing “knowing, deliberate and intentional” violations of federal wage and hour law, the Labor Department is suing Boston Hides and Furs Ltd. and company officials seeking at least $500,000 in back wages and an equal amount in liquidated damages for allegedly underpaying employees of the Chelsea wholesale animal hide business. See Solis v. Boston Hides & Furs Ltd., Anthony Andreottola, Angelo Andreottola and Antoinetta Andreottola Parisi, CV-1:12-CV-11997-MLW. The suit illustrates the significant liability that companies or their owners or management risk by failing to properly pay workers covered by the Fair Labor Standards Act and meet other Fair Labor Standards Act requirements.

Fair Labor Standards Act Wage & Hour Laws Big Business Responsibility
The Fair Labor Standards Act generally requires that an employer pay each covered employee at least the federal minimum wage of $7.25 per hour as well as time and one-half their regular rates for every hour they work beyond 40 per week. When the state minimum wage is higher than the federally mandated wage, and employees work more than 40 hours in a week calculated in accordance with applicable state laws, employees paid at the minimum permissible level are entitled to overtime compensation based on the higher state minimum wage. Time credited may be determined differently under state law versus the Fair Labor Standards Act. Employers must ensure proper crediting, recordkeeping and payment in time to meet both applicable requirements.

The Fair Labor Standards Act also requires employers to maintain accurate records of covered employees’ wages, hours and other conditions of employment and prohibits employers from retaliating against employees who exercise their rights under the law. Special rules also may apply to the employment of children or other special populations.

The rules generally establish a legal presumption that a worker performing services is working as a covered employee of the recipient. Unfortunately, many businesses that receive services often unintentionally incur liability because they ill-advisedly misclassify workers as performing services as independent contractors, salaried employees or otherwise exempt by failing to recognize the implications of this presumption. The presumption that a worker is a covered employee generally means that an employer that treats a worker as exempt bears the burden of proving that a worker is not a covered employee and of keeping accurate records to show that it has properly tracked the hours of and paid each covered employee.

The Fair Labor Standards Act provides that employers who violate the law are, as a general rule, liable to employees for back wages and an equal amount in liquidated damages. State wage and hour laws also typically provide for back pay and liquidated damage awards. Attorneys’ fees and other costs often also are recoverable. In certain instances where the violations are knowing, deliberate and intentional, violators often may risk criminal as well as civil liability.

Labor Department Sues Boston Hides and Furs Ltd For Knowing, Deliberate & Willful Fair Labor Standards Act Violations
The Labor Department lawsuit seeks to recover more than $1 million from Boston Hides and Furs Ltd and various company officials for allegedly engaging in knowing and deliberate violations of the Fair Labor Standards Act minimum wage, overtime and retaliation rules.

The Labor Department filed the lawsuit in federal court in the U.S. District Court for the District of Massachusetts after a Labor Department Wage & Hour Division investigation found the employer committed willful and repeated violations of the minimum wage, overtime and record-keeping provisions of the Fair Labor Standards Act including offering for shipment or sale “hot goods” produced in violation of the law during a period spanning at least three years. The suit also asserts that the company unlawfully retaliated against several workers by firing them after they cooperated with the federal investigation.

In its complaint, the Labor Department claims the investigation found that 14 Boston Hides & Furs employees worked approximately 10 hours per day, six days per week processing hides and furs for shipping to tanneries. These workers were paid a daily cash wage of $50 to $70, which amounted to an hourly pay rate far below the federal minimum wage of $7.25 per hour. The employees also were not paid time and one-half the required state minimum wage of $8 applicable for those hours worked above 40 in a week. Additionally, the defendants failed to keep adequate records of the workers’ employment, work hours and pay rates, and a representative of the defendants falsely told investigators that the company’s payroll records included all employees.

The lawsuit also charges that the defendants ordered employees to hide in a nearby house when Labor Department Wage and Hour Division investigators first arrived at Boston Hides & Furs so they could not be interviewed. Two days after investigators subsequently interviewed the workers, the defendants fired the workers. During their employment, Labor Department claims the workers were threatened and subjected to verbally abusive treatment on an ongoing basis, particularly when they asked about their pay rates.

In addition to back wages and liquidated damages, the Labor Department lawsuit seeks to permanently prohibit the defendants from future Fair Labor Standards Act violations — including a prohibition against shipping any goods handled by workers who were paid in violation of the law — and compensatory and punitive damages for the workers on account of their unlawful firing. The Wage and Hour Division also has assessed $100,000 in civil money penalties against Boston Hides & Furs Ltd. for willful violations of the Fair Labor Standards Act.

Overtime & Other Wage & Hour Enforcement Risks Rising
Employers increasingly risk triggering significant liability by failing to properly characterize, track and pay workers for compensable time in violation of the Fair Labor Standards Act or other laws. Unfortunately, many employers often are overly optimistic or otherwise fail to properly understand and apply Fair Labor Standards Act rules for characterizing on-call or other time, classifying workers as exempt versus non-exempt or making other key determinations.

Employers wearing rose tinted glasses when making wage and hour worker classification or compensable time determinations tend to overlook the significance of the burden of proof they can expect to bear should their classification be challenged. These mistakes can be very costly. Employers that fail to properly pay employees under Federal and state wage and hour regulations face substantial risk. In addition to liability for back pay awards, violation of wage and hour mandates carries substantial civil — and in the case of willful violations, even criminal — liability exposure. Civil awards commonly include back pay, punitive damages and attorneys’ fees.

The potential that noncompliant employers will incur these liabilities has risen significantly in recent years.

Under the Obama Administration, Labor Department officials have made it a priority to enforce overtime, recordkeeping, worker classification and other wage and hour law requirements. While all employers face heightened prosecution risks, federal officials specifically are targeting government contractors, health care, technology and certain other industry employers for special scrutiny. The Labor Department is also using smart phone applications, social media and a host of other new tools to educate and recruit workers in its effort to find and prosecute violators. See, e.g. New Employee Smart Phone App New Tool In Labor Department’s Aggressive Wage & Hour Law Enforcement Campaign Against Restaurant & Other Employers.

Meanwhile, private enforcement of these requirements has also soared following the highly-publicized implementation of updated Fair Labor Standards Act regulations regarding the classification of workers during the last Bush Administration. See Texas Landscaper’s $106,000 In Minimum Wage & Overtime Settlement Reminds Employers To Prepare For FLSA Enforcement, Minimum Wage, Overtime Risks Highlighted By Labor Department Strike Force Targeting Residential Care & Group Homes, Review & Strengthen Defensibility of Existing Worker Classification Practices In Light of Rising Congressional & Regulatory Scrutiny, 250 New Investigators, Renewed DOL Enforcement Emphasis Signal Rising Wage & Hour Risks For Employers, and Quest Diagnostics, Inc. To Pay $688,000 In Overtime Backpay.

Employers Should Strengthen Practices For Defensibility
To minimize exposure under the Fair Labor Standards Act, employers should review and document the defensibility of their existing practices for classifying and compensating workers under existing Federal and state wage and hour laws and take appropriate steps to minimize their potential liability under applicable wages and hour laws. Steps advisable as part of this process include, but are not necessarily limited to:

  • Audit of each position currently classified as exempt to assess its continued sustainability and to develop documentation justifying that characterization;
  • Audit characterization of workers obtained from staffing, employee leasing, independent contractor and other arrangements and implement contractual and other oversight arrangements to minimize risks that these relationships could create if workers are recharacterized as employed by the employer receiving these services;
  • Review the characterization of on-call and other time demands placed on employees to confirm that all compensable time is properly identified, tracked, documented, compensated and reported;
  • Review of existing practices for tracking compensable hours and paying non-exempt employees for compliance with applicable regulations and to identify opportunities to minimize costs and liabilities arising out of the regulatory mandates;
  • If the audit raises questions about the appropriateness of the classification of an employee as exempt, self-initiation of appropriate corrective action after consultation with qualified legal counsel;
  • Review of existing documentation and recordkeeping practices for hourly employees;
  • Exploration of available options and alternatives for calculating required wage payments to non-exempt employees; and
  • Reengineering of work rules and other practices to minimize costs and liabilities as appropriate in light of the regulations.

Because of the potentially significant liability exposure, employers generally will want to consult with qualified legal counsel prior to the commencement of their assessment and to conduct the assessment within the scope of attorney-client privilege to minimize risks that might arise out of communications made in the course of conducting this sensitive investigation.

Record $2.3 Million+ Backpay Order

Shows Underpaying Or Violating Other Rules For Employing Foreign Workers Risky Business

Underpaying and failing to meet other H-2A visa program requirements for its employment of temporary foreign agricultural workers was an extremely costly mistake for Yerington, Nevada-based onion grower Peri & Sons.

Under a consent order entered by U.S. Department of Labor Administrative Law Judge Steven Berlin in San Francisco, Peri & Sons must pay a record total of $2,338,700 in back wages to 1,365 workers, plus a $500,000 civil money penalty to the Department of Labor for failing to properly pay foreign agricultural workers working under the H-2A visa program.

The consent order announced by the Labor Department Wage and Hour Division on July 10, 2012 reminds U.S. businesses of the need to meet compliance responsibilities when employing foreign workers and illustrates the significant risks that employers of foreign workers risk by failing to meet minimum wage and hour, overtime and other requirements for the employment of foreign workers.

The record back pay order stems from charges brought by the Labor Department’s Wage and Hour Division after it determined that Peri & Sons violated the Fair Labor Standards Act and the H-2A visa program requirements by underpaying H-2A employees involved in irrigation, harvesting, packing and shipping of onions sold in grocery stores nationwide.

All of the affected workers came to the U.S. from Mexico under the H-2A temporary agricultural worker visa program. In most cases, their earnings fell below the hourly wage required by the program, as well as below the federal minimum wage of $7.25 per hour for a brief period of time. Investigators also found that workers were not paid for time spent in mandatory pesticide training or reimbursed for subsistence expenses while traveling to and from the U.S. Additionally, Peri & Sons did not pay the worker’s return transportation costs at the end of the contract period.

The H-2A temporary agricultural worker program permits agricultural employers who expect a shortage of domestic workers to bring nonimmigrant foreign workers to the United States to perform temporary or seasonal agricultural work. The employer must file an application stating that a sufficient number of domestic workers are not available and the employment of these workers will not adversely affect the wages and working conditions of similarly employed workers in the U.S.

Employers using the H-2A program also must meet a number of specific conditions relating to recruitment, wages, housing, meals and transportation. See more on H-2A visa employment rules here.

Reflective of the Obama Administration’s heavy emphasis on the enforcement of wage and hour and other laws protective of workers, the Peri & Sons order shows the potential risks that employers run when violating these rules.

To minimize these exposures, employers of H-2A or other workers employed under special visa programs should carefully manage these programs to ensure their ability to demonstrate compliance with all requirements of the visa program, the Fair Labor Standards Act, and other relevant laws.

These programs should include careful and ongoing due diligence to maintain a current understanding of all applicable requirements for the legal employment of these workers and the establishment of systemized processes and documentation, both to maintain compliance and to preserve evidence necessary to demonstrate this compliance against possible investigations or charges.