Avoiding Liability: Legal Dilemmas Presented by Engaging

Independent Contractors, Unpaid Interns and Other Contingent Workers

Presented by: Larry M. Kazanjian Christopher F. Wohl Treaver K. Hodson

520 Capitol Mall, Suite 600, Sacramento, CA | T 916.442.3552 | palmerkazanjian.com

Seminar may include potentially offensive words and/or images. Such are intended for instructive purposes only.

Humor is not meant to indicate that the presenters take serious legal issues lightly.

Disclaimer

Overview

Introduction to Independent Contractor (“IC”) Issues

Important Decision-Makers Key Terminology Tests Used to Determine

Employment Status Recent Developments Unpaid Interns and Other

Contingent Workers Litigation Trends, Strategy

and Avoidance Practices

Introduction

Why does it matter?• Wage & Hour Violations

◦ California Industrial Welfare Commission (“IWC”) Wage Orders – Enforced by the Division of Labor Standards Enforcement (“DLSE”)

◦ Fair Labor Standards Act (“FLSA”)

Introduction (cont.)

Why does it matter? (cont.)• Other employment law violations:

◦ FEHA, Title VII, ADA, ADEA◦ COBRA, ERISA◦ NLRA

◦ Current standard – “…worker’s retention of the right to engage in entrepreneurial activity rather than his regular exercise of that right that is most relevant for the purpose of determining whether he is an independent contractor under the NLRA.” FedEx v. NLRB (2009) and Wells v. FedEx (2013) (declined to follow as applying state law).

• EDD, FTB, IRS

Important Decision-Makers Federal Regulatory Agencies• Ex) Department of Labor

(“DOL”) - Wage and Hour Division

State Regulatory Agencies• Ex) DLSE/State Labor

Commissioner• Ex) Employment

Development Department(“EDD”)

Federal and State Courts Workers Compensation Insurers

Key Terminology

To “Employ”- to engage, suffer or permit to work.

“Employee”- any person employed by an employer.

“Employer”• Any person, association,

organization, partnership, business trust, limited liability company or corporation who directly or indirectly or through an agent or any other person, employs or exercises control over the wages, hours or working conditions of any person.

Tests of Employment Status

Common-Law Test• “Right to control” emphasized

“Economic Realities” Test• “The nature of the work, and the overall

arrangement between the parties, must be examined…” S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989).

IRS “20 Factor” Test• Form SS – 8: Determination of Worker Status

for Purposes of Federal Employment Taxes and Income Tax Withholding

• irs.gov/pub/irs-pdf/fss8.pdf EDD’s “Employment Determination

Guide” and “Worksheet on Employment Status”• edd.ca.gov/pdf_pub_ctr/de38.pdf

Tests … (cont.)

Simple Example:• A law firm contracts with a

painter to re-paint its office space.

• A law firm contracts with a lawyer to handle extra work.

Recent Legal Developments

Ruiz v. Affinity Logistics Corp. (2012).• Furniture delivery driver filed putative class

action against trucking company on behalf of former and current drivers, alleging drivers were misclassified as ICs rather than employees and entitled to wages, OT pay, and benefits under the FLSA and CA law.

• CA law – ◦ If the type of work performed is usually

done under an employer's direction, it suggests an employer-employee relationship;

◦ If the work is usually done by a specialist without supervision, it suggests an IC relationship.

Recent Legal Developments

Hennighan v. Insphere Ins. Solutions, Inc. (2014).

• Insurance sales agent signed an independent contractor agreement with defendant Insphere under which he was paid only commissions, had his own clients, kept his own hours (more than 50 percent of which were spent out of the office), and paid his own taxes and expenses.

• While Insphere had certain expectations about his sales results, it did not exercise sufficient control over the means and methods that the agent used to do his job to make him an employee. 

Recent Legal Developments

Futrell v. Payday California, Inc. (2010).• Worker brought class action against

payroll processing company operating in the local television commercial production industry, alleging the company failed to pay OT for crowd control services which worker performed during commercial shoot.

• “Control over wages,” for purposes of determining who is an employer under the Labor Code wage statutes, means that an entity has the authority to negotiate and set an employee’s rate of pay, and not that a person or entity is physically involved in the preparation of an employee’s paycheck.

Recent Legal Developments

Arredondo v. Delano Farms Co. (2013).• Field workers filed putative class action

against farm labor contractor and vineyard, Delano Farms, alleging state wage and hour violations. 

• Rather than the contractor alone setting plaintiffs’ rate of pay, Delano Farms and contractor expressly negotiated and set field workers’ rate of pay as part of their contract. 

• Delano Farms negotiated over the workers' wage rate, and even expressed a desire to control those rates so that it would attract the best workers possible […] Delano Farms had “the power or authority to negotiate and set an employee's rate of pay,”  and thus it employed plaintiffs under applicable California law.

Recent Legal Developments

California Labor Code Sections 226.8 and 2753 –

California Willful Misclassification Act

• Effective January 1, 2012• Prohibits employers from

engaging in willful misclassification and charging certain expenses to contractors if forbidden for employees.

• Up to $25,000 penalties imposed for violations.

Unpaid Interns

Current Events• California AB 1443 was introduced in

January 2014. The bill would amend the Fair Employment and Housing Act (“FEHA”) to explicitly ban workplace discrimination and harassment related to interns. – Now under consideration in the

Assembly Appropriations Committee.

• Unpaid interns recently filed separate class action lawsuits against Fox Pictures and Hearst Corporation alleging misclassification and claiming back pay. – Two lawsuits on appeal in federal

court. • Overall intern hiring will fall 3.4% in

2014, according to results of a new survey by the National Association of Colleges and Employers.

Unpaid Interns (cont.)

Federal• DOL’s “totality of the circumstances” test looks

at six (6) different factors. • If all satisfied, worker is not an “employee” – and

not entitled to compensation – under the FLSA.

1. Internship is similar to training which would be given in an educational environment;

2. Experience is for the intern’s benefit;3. Intern does not displace regular employee,

but works under close supervision of existing staff;

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

5. Intern is not necessarily entitled to a job at the conclusion of the internship; and

6. Employer and the intern understand that the intern is not entitled to wages.

Unpaid Interns (cont.)

California• “[…] in order to be exempt from […]

the IWC Orders, the intern’s training must be an essential part of an established course of an accredited school or of an institution approved by a public agency to provide training for licensure or to qualify for a skilled vocation or profession.”

• “The program may not be for the benefit of any one employer, a regular employee may not be displaced by the trainee, and the training must be supervised by the school or a disinterested agency.”◦ See 46.6.6, DLSE Enforcement Policies and

Interpretations Manual.

Unpaid Interns (cont.)

Recent Case Law• Petroski v. H & R Block Enterprises, LLC

(2014).◦ “Tax professionals who worked only during tax season

were not “employees” under [the FLSA] when they completed rehire training; […] and providers' handbooks explained that tax professionals had to complete the training to be eligible for rehire, that doing so was not a guarantee of future employment...”

• Juino v. Livingston Parish Fire Dist. No. 5 (2013).◦ Female volunteer firefighter brought action against fire

department, alleging sexual harassment under Title VII.◦ “In determining whether a volunteer is an employee,

courts conduct a two-step inquiry by requiring that a volunteer first show remuneration as a threshold matter before proceeding to the second step, analyzing the putative employment relationship under the common law agency test.”

Other Contingent Workers

Temporary Employees• Engaging Professional Employer

Organizations (“PEOs”)◦ Indemnification◦ Right to Access/Review◦ Policies◦ Insurance◦ Payroll Practices◦ Hiring/Firing Practices

- Background Checks

• 2013: 3.4 million U.S. jobs via PEOs (2.25% of total employment).- As reported by the National Employment Law Project.

• Sector grew 41% from 2008 to 2012.

Related Litigation

Recent Trends• Employees have minimal burden

of proving damages• Class Actions – More common

due to misclassification rarely being limited to one or two workers.

◦ Low threshold for certification.• Government agencies and courts

are wary of misclassifications and specifically looks for such during recent audits.

• Company practices, regardless of existing written employment agreements, often difficult to defend.

Related Litigation (cont.)

Independent Contractors – Litigation Avoidance and Strategy

• Forbid independent contractors from performing main business functions.

• Permit independent contractors to decide where/when/how to perform work. (Manage results.)

• Avoid training and “on-site” work if possible• Limit duration of work relationship• Limit access to company property• Conduct internal audits to ensure correct classification.• Only provide policies relevant to independent

contractors, e.g. harassment, confidentiality• Issue 1099s to independent contractors

Questions?

Connect with us online:

520 Capitol Mall, Suite 600, Sacramento, CA | T 916.442.3552 | palmerkazanjian.com

Avoiding Liability: Legal Dilemmas Presented by Engaging

Independent Contractors, Unpaid Interns and Other Contingent Workers

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