Mitigate or Litigate: Flexible Working & Legal Exposure


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Mitigate or Litigate: Flexible Working & Legal Exposure

  1. 1. MITIGATE OR LITIGATE:Flexible Working and Legal Exposureby Littler Mendelson and FlexPaths February 2011LITTLER AUTHORS FLEXPATHS AUTHORBrian Dixon Ilyse Shuman Sandy BurudSue Douglas Meredith ShoopPhilip Gordon J. René ToadvineThomas Benjamin Huggett William Hays WeissmanChris Leh
  2. 2. IMPORTANT NOTICEThis publication is not a do-it-yourself guide to resolving employment disputes or handling employment litigation. Nonetheless, employers involved in ongoing disputes and litigation will nd the information extremely useful in understanding the issues raised and their legal context. The Littler Report is not a substitute for experienced legal counsel and does not provide legal advice or attempt to address the numerous factual issues that inevitably arise in any employment-related dispute. Copyright ©2011 Littler Mendelson, P.C. All material contained within this publication is protected by copyright law and may not be reproduced without the express written consent of Littler Mendelson.
  3. 3. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREWith over 800 attorneys and 50 of ces, Littler Mendelson is the nation’s largest law rm exclusively devoted to representingmanagement in employment and labor law matters. FlexPaths, a certi ed women-owned business founded in 2005, is a leadingprovider of web-based and consultative exible working solutions for corporations, governments and people seeking employmentin organizations that have a exible working culture. Littler presents this paper with FlexPaths discussing the growth of exible work,the legal and policy implications of exible work, and providing best practices recommendations for employers. COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. i
  4. 4. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSURE Table of Contents SECTION / TOPIC PAGE I. INTRODUCTION—TRENDS IN FLEXIBLE WORK by Sandy Burud of FlexPaths 1 II. LEGAL ISSUES RAISED BY FLEXIBLE WORK by Littler Mendelson Attorneys 3 A. Telework—Legal Implications 3 1. Wage & Hour 3 2. Workplace Safety [OSHA] 3 3. Privacy and Data Protection 4 4. Employment Taxes 5 B. Flexible Work Schedules—Legal Implications 7 1. Wage & Hour 7 2. Employee Bene ts 8 3. Employment Discrimination [ADA, ADEA, Title VII] 11 C. Flexible Employment Relationships—Legal Implications 13 1. Wage & Hour 13 2. Employment Taxes 14 3. Contingent Workforce 14 III. POLICY CONSIDERATIONS AND IMPLICATIONS by Sandy Burud of FlexPaths and Littler Mendelson Attorneys 16 IV. MOVING FORWARD by Sandy Burud of FlexPaths and Littler Mendelson Attorneys 18 V. Endnotes 20ii LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™
  5. 5. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREMITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREI. INTRODUCTION—TRENDS IN FLEXIBLE WORK spur-of-the-moment when a snow storm shuts down the mass by Sandy Burud of FlexPaths transit system, people work from home. Flexible work is the future of work a continual evolution More companies and employees are also exing the employmentthat characterizes the “new normal” of a global working culture. e relationship combining or alternating contingent, contracted andlegal implications of this transformation in how, when, and where freelance work with regular is done are substantial. Its rapid growth makes it essential thatemployers understand and mitigate legal exposure associated with How is Flexible Work Changing?how exible work is executed. e familiar forms of exible working ( exible schedules, telework, reduced work schedules) are morphing into what is simplyWhat is Flexible Work? a more uid approach to the time and place in which work is done. is paper will consider legal issues related to three basic types of From Starbucks at midnight it is becoming “anytime, anywhere” exible work: exible work schedules and locations (e.g., telework), work powered by technology and expected by the Facebookless than full-time work, and exible employment relationships. generation. Ubiquitous broadband, cloud computing, smart phones Flexible work schedules and telework the most familiar forms and laptops are creating a “virtualization” of the workplace. eof exible work are possible at most companies today. According workplace, in fact, isn’t always a “place” the Society of Human Resource Management, 51% of companies is change is a metamorphosis away from the traditional workhave exible work schedule options such as a change of start or stop schedules, central work locations, and linear careers that are artifactstimes or compressed work weeks (four ten-hour days; “9-80s” of the Industrial Age when a machine driven economy prospered80 hours worked over nine days, etc.). Slightly more than half of with a homogeneous workforce working 9 to 5 at a commoncompanies with exible schedules allow all employees to work on a location full time without interruption throughout a career. at ex schedule with certain core hours.1 Age was characterized by work done in the same place, at the same Sixty percent of companies have telework/remote/virtual work time, in the same way centralized, synchronized, standardized.options (work from home, a satellite o ce or other location) every But now, in this age of knowledge and technology, human ideasday or a few days a week. Access to telework is typically restricted and a ention, not machines, drive performance. Business successto speci c jobs, but 16% of employers allow all employees to requires mobility, versatility, and innovation. Work environmentswork remotely.2 must take on the organic nature of humans acting like humans, In addition to exing the “when” and “where” of work, rather than like machines. People are more likely to generate newemployees can increasingly ex how much. ey can work on a ideas and respond to the diversity of customers when their ownreduced schedule (temporarily or longer term), share a job, phase work environment promotes their individuality and autonomy. 4into retirement or back to work a er a leave, or self-fund a sabbatical.Fi y-eight percent of companies have part-time or reduced work Flexible working at its essence re ects this transformation fromschedule options; 15% have phased retirement; 11% have job a mechanized, one-size- ts-all approach on which current businesssharing. irty-six percent allow employees to reduce work hours practice (and regulation) is based, to a customized way of working,during a transition period, e.g., a er adoption of a child; 64% of unique to the individual and the business situation.these allow all employees to reduce work hours.3 While many It is essential to a knowledge-based culture because it is aemployers have had part-time jobs, what is new is the fact that less fundamental shi in the locus of control, suited to knowledge work.than full-time positions are now possible in salaried professional, Until now management dictated when and where work was done;advancement-track, managerial and executive positions. now employees and teams are more e ective if they exercise more A decade ago, exible work options were limited to formal in uence and choice. Knowledge workers know best how to get theirarrangements negotiated in advance with a manager and o entimes jobs done. ey should be accountable for results, not just activityHR. Today they include informal change in hours or place on the and given more autonomy to work in the way they work best. COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. 1
  6. 6. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREWhat is Driving the Growth of Flexible Work? External Catalysts In addition to employers embracing exible work for these Business Imperatives business-driven reasons, external forces are also pushing it for the Initially employers “allowed” exible work to accommodate public bene ts it yields.employees’ complex lives. Flexible work was a program, a perk,a bene t, a reward. Now, employers are actually promoting it, as a Many states and municipalities, the Environmental Protection Agency (EPA), and policy makers are promoting exible work forbusiness-driven tool to support other business goals, which is why environmental reasons. Over 20 states have invested in establishingits growth is accelerating. coordinating agencies to facilitate telework. Flexible schedules, e business goals it supports are varied. As fewer jobs require compressed work weeks and telework all reduce the number ofa physical presence, businesses encourage (even require) employees commutes and shi travel toward o -peak work remotely to save real estate costs and reduce their carbon By one estimate, $1 trillion (7.2% of GDP) is wasted annuallyfootprint. In an increasing number of jobs, there is no “o ce” to go in time and vehicle expenses commuting.11 Increasing the numberinto. Companies are “home-shoring” customer service and other of full-time equivalent teleworkers by 10% would reduce gasolinejobs instead of “o -shoring” them, eliminating facilities space and consumption by 4.4 billion gallons per year, as people commutingboosting productivity through increased employee engagement. to work in personal vehicles consume 44 billion gallons per year. Disaster planning managers are insisting that teams be Commuters in private vehicles also release 424 million tons ofequipped and trained to work remotely so the business can sustain carbon dioxide into the atmosphere a year,12 23 million tons ofoperations on short notice in an emergency. Business operations carbon monoxide, 1.8 million tons of volatile organic carbons andcan be interrupted by something as minor as a power outage or 1.5 million tons of oxides of nitrogen.13 Plus, an estimated 3.5 billionas large as a major disaster. Disaster preparedness and business square feet of saved commercial space would save 35 million metriccontinuity have become a priority as one in ve U.S. businesses tons of greenhouse gases; the avoided construction would savewill su er a disaster that causes it to cease operations for a time.5 another 36.4 million metric tons of greenhouse pollution.14Roughly two-thirds of the companies that go through a severe crisisfail within two years.6 If the workforce is already equipped, trained Implications of the Transformationand pro cient at working from home or an alternate workplace, it In the next few years we will see organizations placing muchcan literally save the business. According to a 2008 survey of 450 greater a ention on the operational and legal issues associated withprivate companies, when a company has telework, it is four times shi ing to this evolving new work paradigm. While many havemore likely that employees can continue working if o ces are had exible work policies in place, their practices o en began asclosed due to a disaster.7 individual “deals” between a few highly-valued employees and their Expanding exible work also helps employers lower health manager, o en behind closed doors. Far from transparent, the intent of managers was to not open the oodgates and to limit the numbercare costs, by reducing employee stress, depression and burnout. of such deals. ese ad hoc arrangements were not only deliberatelyTeleworkers and workers on compressed work weeks, for example, invisible but inconsistent and even discriminatory, o en relyinguse the time they would otherwise spend commuting to exercise and on a single manager’s a itude, knowledge and comfort level andsleep more8 and follow be er health practices in general. 9 how the employee presented his or her “case.” In many companies Businesses have avoided the disruption of wholesale layo s today, because of that legacy, exible work is inconsistently o ered,by o ering employees the opportunity to work on a reduced work silo-ed in Human Resources as an employee “program”, sometimesschedule–for a short time or permanently. e business can reduce promoted only to certain demographic groups (to women, foroverhead, retain employees with institutional knowledge that example), and not integrated into business processes or culture.would have been lost through downsizing, and restore operations Employees can hesitate to take advantage of the opportunity, fearingmore e ciently. a subtle or not-so-subtle penalty. Managers the lynchpin are Finally, staggering employees work hours via exible scheduling o en ambivalent, apprehensive, and ill-equipped to change howenables a business to serve customers over longer service hours and they have done more time zones. Forty- ve percent of companies say the demand For many organizations the transitional stage is the mostfor 24/7 services prompted them to adopt exible work options.10 challenging moving from discreet exible work policies for what2 LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™
  7. 7. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREare considered “non-traditional” employees, to a systemic and there are subsequent changes in employment. Employees who arepervasive change in how work is done, performance measured, and advised in advance that they have multiple worksites are less likely toteams communicate a ecting the majority. ese are complex have compensable travel time when traveling to such sites.changes in organizational systems, a itudes, and behaviors and not Generally, there are relaxed rules for compensating the travelaccomplished overnight or without careful scrutiny and planning. time of employees who travel on overnight trips. However, some is change in how work is done and how people are managed states limit the use of the relaxed rules.calls for particular a ention to the legal implications employers Some cost control can be a ained with respect to employeesshould be aware of in implementing exible work practices, the most who travel frequently by providing a lower rate of pay for the timenotable of which are highlighted in the following section. spent traveling. Where a lower rate of pay is used, that lesser rateII. LEGAL ISSUES RAISED BY FLEXIBLE WORK must apply to all travel whether occurring during or a er the by Littler Mendelson Attorneys regular business day. An employer must determine whether state law will require overtime to be paid based on the wage rate in e ect is discussion is organized into three sections to cover the during the overtime hours of work or as an additional one half ofdistinct legal issues related to: (1) telework, (2) exible schedules the weighted average of the wages paid in that week for travel andand (3) exible employment relationships. It provides a general regular work.discussion of the legal implications of exible work based on thecurrent state of the law and provides best practices recommendations Points to Rememberfor employers. When applicable, employers should advise employees at the A. Telework—Legal Implications start of employment that they are expected to have more than For purposes of this section, teleworking is de ned as a work one worksite because employees who are advised in advancerelationship in which a worker spends a signi cant amount of the that they will have multiple worksites are less likely to havenormal workday at home, using a computer, a modem, a facsimile compensable travel time.and telephone, or other similar equipment, to conduct business for If employers provide a lower rate of pay for employees foran employer. Allowing an employee to work at di erent locations travel time, that lesser rate must apply to all travel, regardlessrequires special a ention apart from the issues posed by employees of when it has occurred. Consult your local state law towho work exible work hours. determine how to calculate overtime pay for travel time and regular work time. 1. Wage & Hour If an employee regularly works at home, the employee may 2. Workplace Safety [OSHA]assert that the travel from home to the employer’s o ces is travel ere are several workplace safety-related issues an employerfrom one worksite to another “in the course of the day” and it is should be aware of when o ering employees the option to teleworkcompensable work time. As a result, an employee who is hired to from at home, and who is then required to travel to the employer’s A er a congressional inquiry into the privacy and overbreadthpremises, may also incur compensable travel time. Di erent courts concerns about the Occupational Safety and Health Administrationhave reached di erent results on this issue and further inquiry should (OSHA) enforcing safety and health requirements in home-basedbe made before assuming that travel between home and an o ce or a worksites, OSHA issued a compliance directive clarifying that:customer site is not work time for employees who regularly performwork at home. OSHA will not conduct inspections of employees’ home o ces. Similarly, an employee who is hired to work in a particularo ce may incur compensable work time if the employee is allowed OSHA will not hold employers liable for employees’ hometo travel to more distant locations. For such an employee, travel o ces, and does not expect employers to inspect the home“out of town” on a single day-trip generally requires payment for o ces of their employees.the travel that exceeds the commute to the regular, local o ce. e If OSHA receives a complaint about a home o ce, thecompensability of such time can vary with the expectations set as complainant will be advised of OSHA’s policy. If an employee makesto where the employee will work at the time of hire and if/when a speci c request, OSHA may informally let employers know of COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. 3
  8. 8. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREcomplaints about home o ce conditions, but will not follow-up protection and security of con dential information. Privacy andwith the employer or employee.15 data security issues regarding those workers who work at home or Employers who are required, because of their size or industry in other remote locations fall into the following major categories:classi cation, by the Occupational Safety and Health Act (“OSH Access to Con dential Information. A business shouldAct”) to keep records of work-related injuries and illnesses, continue determine what con dential information it will give a remote workerto be responsible for keeping such records, regardless of whether access to and, conversely, to what information it will not give thethe injuries occur in the factory, in a home o ce, or elsewhere, as worker access. It should also determine whether and how to tracklong as they are work-related, and meet the recordability criteria of the information that is accessed.federal regulations. Use of Equipment. A business should determine to what extent Under prior guidance, OSHA had recommended that employers it will require a remote worker to use company-owned equipment orrequire employees working at home-based worksites to complete a peripherals and to what extent it will allow that worker to use his or hersafety checklist covering the following items: own equipment and peripherals. A business should also decide what 1. Functioning smoke detectors limitations to place on the use of all equipment in connection with the business of the company and establish protocols for the return of 2. Multiple exits from the work area (e.g., door and window) all company equipment and data upon termination of employment. 3. Proper ergonomic set up of desk areas Ownership of Information. A company should ensure that 4. Hall, aisles and passageways free of debris, cords and spills equipment and con dential information it shares with those 5. Adequate illumination working at home or at a remote location will remain the property of the company. 6. E ective grounding and insulation of electric equipment Transmission and Transfer of Information. A person who Even in the absence of federal regulation, employers are well works o -site and obtains access to con dential information o enadvised to provide employees with a checklist of items to review must transfer that information electronically or transfer it in hard-and consider. copy form to be able to use it remotely. e business should determine Employers in most states are covered by workers’ compensation what methods and forms of data transfer will be acceptable forlaws that require payment of compensation in case of personal remote workers to use. In addition, although the law might allow theinjury arising out of and in the course of employment. ere are transmission of con dential information from one state or country,very few reported cases involving workers’ compensation claims the corresponding law of the recipient state or country may not,of home-based workers, but the law does not distinguish between underscoring the need to become familiar with applicable law.home-based and o ce-based worksites. Employers should ensure Storage and Safeguarding of Information. A business shouldthat workers’ compensation coverage is provided for home-based determine whether and how a worker will be required to store andworksites and that policies and procedures are in place for reporting safeguard con dential information and prevent access by others,any at home injuries. such as household members and service providers who enter the 3. Privacy and Data Protection worker’s home. Every business possesses con dential and private information Preservation of Information. Although workers at home orabout its business operations, employees, customers, and third other remote locations may access or use con dential informationparties that it has a legal duty to protect. Such information includes a transmi ed or otherwise obtained from the company, they maycompany’s trade secrets, nancial information concerning customers modify that information, create new con dential information oror partners, private information about employees’ family situations, obtain information from a third party that the company needs toand personal health information of employees or third parties whose protect. e business should determine what information the remotedata the business uses or processes. Myriad legal issues relating to worker will have to preserve for the transmission or transfer back toprivacy and data protection apply regardless of whether a worker the on-site or o -site or works full-time or part-time.16 Implementing Litigation Hold. Federal courts are becoming However, businesses that permit or require certain workers increasingly aggressive in imposing sanctions on litigants thatto work at home or o -site face additional challenges as to the do not properly preserve discoverable, electronic information.4 LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™
  9. 9. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREAn organization should consider how potentially discoverable 8. Destruction of Con dential Informationinformation in the possession of remote workers will be preserved 9. Retrieval of Information from Remote Computer orfor litigation. Equipment Destruction/Disposal of Information. e business should Train Workers and Managers About the Policies and Enforcedetermine when, under what circumstances, by whom, and by what Violations. Each person seeking to work at home or remotely, andmeans electronic or hard copies of con dential information and those who manage their work, should be trained about the company’sstorage media containing it will be destroyed. privacy and data protection policies, how to identify situations in Retrieval of Information. e company should also determine which speci c data security tools should be used, and how to usehow and by what means to quickly retrieve information from a them to safeguard data. Training should also address how to identifyremote worker if there is an internal or external investigation, a security incident and what to do when one occurs. Further,termination of the worker’s employment or contract, or termination the company privacy and data protection policies will requireof the exible work arrangement for some other reason. the involvement of human resources, security and information technology personnel to apply and enforce them, so they shouldPoints to Remember have input into and be carefully trained about the policies. To address privacy and security issues that arise when businesses Require Each Worker Who Performs Duties from a Remoteallow employees or contractors to work at home or remotely, Location to Enter into a Telecommuting or Remote Workeremployers should take the following steps: Agreement. With respect to privacy issues, a telecommuting Limit Eligibility for Working from Remote Locations. agreement, among other things, should: incorporate the company’sConsider which workers are appropriate candidates for working privacy policies, including limitations on access; seek consentfrom home or remotely based on employee suitability and to company monitoring of and access to any computer or othertrustworthiness, job responsibilities and the needs of the business. electronic device (whether company-owned or personal); secureDevelop a process for careful selection of those who are eligible commitments to report immediately any unauthorized access or lossto work remotely. Conduct adequate background checks on those of company equipment or data; require participation in any internalseeking to work remotely, including current employees who have not or external investigation concerning the equipment or data storedrecently been subject to a background check. And retain discretion on the equipment; and require the return of all company equipmentto modify or terminate those arrangements. and data upon termination of employment. In addition, remote workers should be required to execute non-disclosure covenants Evaluate Current Policies. Ensure that all policy handbooks either as part of their telecommuting agreement or in a separate non-and codes of conduct, particularly those addressing monitoring disclosure agreement.of employees’ electronic communications, expressly cover allworkers, employees and contractors, whether they work on or o 4. Employment Taxesthe premises. Other than the status of the worker, the single biggest tax issue Establish Policies and IT Practices Speci cally Applicable to employers face when dealing with exible workers occurs when aWorking from Remote Locations. ese policies and IT practices telecommuting worker lives in a di erent state from the one in whichshould address the following aspects of protecting privacy and he or she is assigned or otherwise would perform his or her security: ere are two speci c considerations in such cases: (1) the proper 1. Access to the Employers’ Computer System and Data state to report and pay unemployment insurance taxes; and (2) state income tax withholding. 2. Use of Company Computer and Other Equipment 3. Ownership of Equipment & Con dential Information State Unemployment Insurance Taxes 4. Transfer or Transmission of Con dential Information e rst consideration is the state to which state unemployment insurance taxes must be paid. Regardless of how many states an 5. Storage and Safeguarding of Information employee works in, unemployment insurance taxes are only paid to 6. Preservation of Information a single state. All states use the same four-part test to determine the 7. Implementing a Litigation Hold proper state to report and pay unemployment insurance taxes: COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. 5
  10. 10. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSURE How Multistate Withholding Works – Figure 1 John Smith resides in State A Smith works in State A Smith works in State B three days per week two days per week NO Does Does NO No income No income State A have an State B have an tax withholding tax withholding income tax? income tax? YES YES Exceptions: As resident, subject As nonresident, subject to reciprocity agreements to tax on all income tax on B-source income and administrative rules Employer withholds on Smith can adjust withholding Employer withholds on Smith can adjust all wages for State A and may be able to claim OSTC B-source wages for State B withholding Source-B = days in State B over Total work days * Wages 1. Localization communications from customers or others, to replenish stocks 2. Base of operations or supplies, to repair equipment, or to perform other functions relating to the rendition of services. For example, if an employee 3. Place of direction and control telecommutes but is assigned to an o ce location, where he or she 4. State of employee’s residence comes for meetings, obtains supplies, etc., such o ce location would is test must be applied in hierarchical order; that is, it must be considered a base of operations. rst be determined if the work is localized to a particular state. An If the employee’s services are neither localized nor subjectemployee’s services are “localized” in a particular state if all or most to a base of operations, the third test is the place of direction andof the employee’s services are performed in such state, with only control. Under that test, if an employee performs some services in aincidental services performed elsewhere (for example, where the state and it is also the place from which employer exercises basic andout-of-state service is temporary or transient in nature or consists general direction and control over all the employee’s services, thenof isolated transactions). Where the services performed outside of unemployment insurance taxes are sourced to such state.the state are either permanent, substantial, or unrelated, it cannot be Finally, if none of the previous three tests apply, thentreated as localized to a particular state. unemployment insurance taxes are sourced to the employee’s state If an employee’s services are not localized to a particular state of residence. For states that have other employment taxes (such as(because, for example, he or she spends 33 percent of his or her state disability insurance taxes (SDI) in California), they are sourcedtime in three separate states), then the next test to apply is the base according to the same rules that apply to unemployment insuranceof operations. Under this test, unemployment insurance taxes are taxes. us, for example, if an employee works both in Californiapaid to the state in which the employee has his or her only base of and Oregon, if it is determined that unemployment taxes should beoperations. A base of operations is generally considered to be a more sourced to California, then the employee must also pay Californiaor less permanent place from which the employee starts work and SDI taxes. However, if unemployment taxes must be sourced tocustomarily returns to receive employer’s instructions, to receive Oregon, then the employee does not pay California SDI taxes.6 LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™
  11. 11. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREMultistate Income Tax Withholding B. Flexible Work Schedules— Unlike unemployment insurance taxes that are paid to a single Legal Implicationsstate, income taxes may be paid to several states. us, when an An employer in the private sector who is considering exibleemployee works in more than one state, an employer may be obligated work schedules or managing a exible workforce should be mindfulto withhold and remit income taxes to more than one state. e states of the potential costs of employees working varying hours. Carefulhave very di erent rules about when income taxes may be withheld. planning, however, can provide substantial exibility at no increaseFor example, New York and Connecticut both have a 14-day rule in cost. Flexible work schedules are de ned as a variation in start orthat states if an employee is working in the state for 14 days or less, stop times, a full-time work schedule compressed into fewer than ve days a week, and other variations, such as annualized hours (lookingthen there is no income tax withholding. Other states use a dollar at hours annually, even if not spread evenly throughout the year).threshold. In addition, some states have reciprocity agreements. Forexample, if an employee lives in New Jersey but works in Pennsylvania, 1. Wage & Hourthe employer is not required to withhold Pennsylvania income taxes Part-Time Flexible Work Schedulesunder an agreement between New Jersey and Pennsylvania. Allowing employees who are employed less than full time to In the context of exible work, the issue o en arises in the work exible hours presents a unique set of concerns. For example,context of an employee who telecommutes from home either on in states where daily overtime is required (such as California ora part-time or full-time basis. In such cases, employers will need Alaska, and possibly, Nevada), an employee who works less thanto determine whether they are required to withhold and remit full-time may still be entitled to overtime pay if the employee worksincome taxes in both states. See Figures 1 and 2 for a decision tree more than eight hours in a given day. An employee may be entitled tothat shows how to determine whether an employer must withhold daily overtime premiums if the employee works more than 10 hoursincome taxes. in a given day at a mill or factory in certain states (such as Oregon), How Multistate Withholding Works – Figure 2 John Smith resides in Washington Smith works in Washington Smith works in California two days per week three days per week Does Does No income NO Washington have California have an tax withholding an income income tax? tax? YES Exceptions: As nonresident, Smith subject to reciprocity agreements tax on California-source income and administrative rules Employer withholds Smith can adjust on California-source withholding HYPOTHETICAL: wages for California but no WA tax Total Wages = $100,000 CA-source wages = $60,000 Pay period = monthly California source wages = DE 4 = married, 4 withholding allowances 145 CA work days / Withholding = $92.66 (per table) 242 total work days * Wages COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. 7
  12. 12. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREor works more than 12 hours in a day or more than 12 continuous Colorado requires overtime a er 12 hours of work in a day or a erhours in certain states (such as Colorado). 12 continuous hours of work for employees who are covered by the Exempt employees who work part-time schedules present other state’s wage orders. Other states require premium pay for work onproblems. e U.S. Department of Labor (DOL) has said that the a seventh day of work in a single workweek or, in some cases, onsalary of an overtime-exempt, part-time employee must be prorated Sundays and holidays.based on the number of days that the employee regularly works. For Where there is a daily overtime requirement, overtime costsexample, an employee who regularly works four days in a week and can be avoided by requiring employees to work no more than themisses one day of work in a week may be docked one quarter of the maximum number of straight-time hours each work day. isemployee’s salary for the absence if the absence is due to vacation allows employees to vary when they start work each day. is may,or due to illness or injury before sick leave bene ts accrue or a er depending on an employer’s policy, allow employees to spread theirsuch bene ts are exhausted. If a part-time, exempt employee works hours of work across six days in a week so long as the daily and weeklyvarying hours from day-to-day, docking the employee in uniform overtime thresholds were not exceeded. Work could be spreadincrements based upon the number of days of work missed in a over all seven days in the workweek without overtime as long as anworkweek may not make economic sense to the employee or the employee did not work in a jurisdiction that required premiums foremployer. And, docking an exempt employee on an hour-for-hour a seventh day of work in a workweek or other special premiums thatbasis for anything other than intermi ent or reduced scheduled are based on the day of the week worked.FMLA leave would compromise the exempt employee’s exempt Some states that require daily overtime provide an optionstatus. If the employee works such limited hours as to not qualify to work more than eight hours per day without the payment offor sick leave bene ts, the employee cannot be docked for full-day overtime premiums. is permits a “compressed work week,” oneabsences without compromising the employee’s exempt status. form of a exible schedule, where 40 hours are compressed into lessWhile compromising the overtime-exempt status of an employee than ve days a week or 80 hours into ten days bi-weekly. Generally, awho regularly works less than 40 hours per week may not appear to special procedure must be followed for such a schedule to be workedbe problematic, such employees may occasionally work more than without the payment of overtime. In California, for example, the40 hours per week. Furthermore, any improper docking practice implementation of a straight-time schedule of four, ten-hour days ofmay expand to a ect the salaries of exempt employees who regularly work per week requires a wri en disclosure to the employees aboutwork more than 40 hours in a week. the e ect of the schedule, duly noticed meetings during regular Finally, California’s Labor Commissioner has said that there working hours to discuss the schedule, a secret ballot electioncannot be part-time, overtime-exempt employees. In the states that in which two-thirds of the employees approve of the schedule, arequire daily overtime, part-time exempt employment is of more waiting period of 30 days before employees are required to worksigni cant concern. the schedule, and notice to the State’s Division of Labor Statistics and Research. In Alaska, a schedule of four, ten-hour days per weekFull-Time Flexible Work Schedules is generally permissible if the employee and the employer have Allowing hourly employees to choose their starting and ending signed a wri en agreement, the wri en agreement has been ledtimes is appealing, but has to be reconciled with the major cost with the Labor Department, and the Labor Department has issuedconsideration of overtime. If employees are allowed to vary the total a certi cate approving the plan. In Nevada, a schedule of four, ten-number of hours worked from one workweek to the next, then an hour days per week with the mutual agreement of both parties willemployee may earn overtime in one week and then work less than a not require the payment of daily overtime premiums. In both cases,full-time schedule in the following week. once such a schedule is adopted, it must be followed quite precisely or be re-implemented if a material change in the schedule is to occur. e challenges of exible starting and ending times require An employer wishing to use such schedules should carefully reviewclose a ention in states that require daily overtime. ose states the requirements before implementing such a schedule.include California and Alaska, which require overtime a er eighthours of work in a day, and Nevada, which requires overtime a er 2. Employee Bene tseight hours of work in a day for employees that are paid less than one As a general rule, an employee’s status as a exible scheduleand one-half times Nevada’s minimum wage. Oregon requires daily worker should not impact such individual’s eligibility forovertime a er 10 hours of work in a day for factory and mill workers. participation in an employer’s employee bene t plans and8 LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™
  13. 13. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREarrangements. One exception to this general rule, however, is with Section 410(a) of the Code and Section 202(a) of ERISA staterespect to part-time, seasonal and temporary workers.17 As a result, generally that a plan cannot exclude an employee from participationan employer must decide whether it desires to provide certain on account of age or service if the employee has a ained at leastemployee bene ts to its part-time workers. In reaching a decision, age 21 and completed at least one year of service (i.e., a 12-monththe employer should review general employment discrimination period in which the employee completes at least 1,000 hours oflaws to ensure that any potential exclusion will not have the e ect of service). In interpreting Section 410(a) of the Code, the Internalexcluding a protected class. For example, if an employer’s part-time Revenue Service (IRS) stated in an IRS Field Directive issued onworkers are predominantly women who choose to work part-time November 22, 1994, that the exclusion of part-time employees asso that they are able to spend more time taking care of their families, a class from plan participation imposes an indirect service-basedthe employer may face potential legal exposure for employment requirement that results in a per se violation of Section 410(a) of thediscrimination if it excludes such part-time workers from certain of Code and Treasury regulations promulgated thereunder, which is aits employee bene t plans. As a result, and in an e ort to minimize tax quali cation error that could lead to the Retirement Plan losingthis potential legal exposure, an employer may wish to provide its tax-quali ed status under the Code.proportional bene ts to its part-time workers. DOL regulations promulgated under Section 202(a) of ERISA Based on an employer’s decision to provide (or not provide) incorporate the requirements of Section 410 of the Code, stating:certain employee bene ts to its part-time workers, the employer [A]n employee pension bene t plan [which includesshould carefully review and, to the extent necessary, revise each of an ERISA-governed 403(b) plan] may not requireits employee bene t plans to speci cally include in or exclude from as a condition of participation in the plan, that anparticipation its part-time workers. In addition, with respect to health employee complete a period of service with theand welfare plans, the employer should review and, if necessary, employer in excess of the limitations established byseek to negotiate revisions to any underlying insurance contracts section 202 of [ERISA] and section 410 of the Code.and agreements with applicable carriers to speci cally include in [See DOL Regulation § 2530.202-1(a).]or exclude from participation its part-time workers. In doing so, theemployer should consult with employee bene ts counsel to ensure As a result, and consistent with the IRS, the DOL takes thethat it is permissible under applicable law with respect to each plan position that a plan provision that excludes a class of employeesto so include or exclude from participation its part-time workers. from plan participation on account of a service based requirement violates Section 202 of ERISA. Generally, with respect to inclusion in participation, aslong as the plan language provides for participation and, with e importance of Section 410(a) of the Code and Section 202respect to any health or welfare bene ts, the underlying insurance of ERISA to part-time workers is that if an employer excludes fromcontracts and agreements with the applicable carriers provide for retirement plan participation part-time workers as a class, the IRSsuch participation, there will not be any issues under the Internal and DOL will conclude that such exclusion is a per se violation ofRevenue Code of 1986, as amended (the “Code”) or the Employee the Code and ERISA. Additionally, if an employer excludes fromRetirement Income Security Act of 1974, as amended (ERISA) with retirement plan participation a class of employees that on its facerespect to including part-time workers in any employee bene t plan. appears to be a permissible exclusion, for example, the employerHowever, to the extent the employer desires to exclude its part-time excludes all employees employed in Division A of the company,workers from participation in a speci c plan, in addition to ensuring and if all such employees are either entirely or predominantly part-that the plan language excludes them from participation, the time employees, the IRS and DOL may take the position that theemployer should consult with counsel to ensure that such exclusion exclusion of the Division A employees from plan participation is ais permissible under the Code and ERISA (particularly problematic per se violation of the Code and ERISA. However, if the numberwith regard to retirement plans, as discussed below). of part-time employees compared to full-time employees in Division A is small (or if there is a reasonable mix of both and it is Quali ed Retirement Plans and ERISA-governed 403(b) representative of the employer’s workforce generally), the exclusionPlans (“Retirement Plans”). Retirement Plans must comply with from participation of Division A employees (that includes a certainthe Code’s and ERISA’s minimum age and service rules, which set number of part-time employees) is more likely to survive IRS andforth the minimum age and service requirements that a Retirement ERISA scrutiny. Where an employer generally permits employees toPlan can impose on employees with respect to plan participation. start participating in a retirement plan without a one-year waiting COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. 9
  14. 14. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREperiod, the employer could exclude employees who are classi ed as Health Care Reform legislation imposes an excise tax on the employer“part-time” or some similar category, provided that those employees in an amount equal to $100 per day, per a ected participant.18are allowed to start participating a er they have completed a “year Due to the above-mentioned requirements, and similar to theof service” (referring to the 1,000 hours of service in a 12-month Retirement Plan discussion above, depending on an employer’speriod) and avoid violating the service requirements of the employee demographics, if the employer’s part-time workersCode and ERISA. are either entirely or predominantly non-highly compensated In addition to the Code’s and ERISA’s minimum age and individuals, it may be necessary to permit such employees toservice rules, the Code’s minimum coverage rules under Section participate in the employer’s self-insured (or, if non-grandfathered,410(b) of the Code require Retirement Plans to cover (i.e., bene t) fully-insured) group health plan and receive the same bene tsa non-discriminatory group of employees. A Retirement Plan is as highly compensated individuals in order to pass the non-discriminatory as to plan coverage if it discriminates in favor of highly discrimination rules under Section 105(h) of the Code.compensated employees (generally employees who are 5% owners Second, the Code also contains rules similar to the Sectionor whose compensation exceeds a certain threshold $110,000 for 105(h) rules discussed above with respect to participation in and2011, indexed annually for in ation). Depending on an employer’s bene ts under a Section 125 (cafeteria) plan, a exible spendingemployee demographics, if the employer’s part-time workers are account (both medical and dependent care assistance), a healtheither entirely or predominantly non-highly compensated employees, reimbursement arrangement and an adoption assistance plan. As ait may be necessary to permit such employees to participate in the result, depending on the employer’s employee demographics, if theRetirement Plan in order to pass the Code’s minimum coverage test. employer’s part-time workers are either entirely or predominantly Health and Welfare Plans. Similar to the discussion above non-highly compensated individuals/non-key employees, it mayregarding inclusion in plan participation, with respect to exclusion be necessary to permit the part-time workers to participate in suchfrom participation in a health and welfare plan, generally, as long as plans in order to satisfy the applicable non-discrimination rules.the plan language provides for such exclusion and the underlying Finally, and, as previously stated, though beyond the scopeinsurance contracts and agreements with the applicable carriers of this paper, it is to be noted that e ective beginning in 2014, theprovide for such exclusion, there generally will not be any issues Health Care Reform legislation’s “play or pay” rules relating to groupunder the Code or ERISA with respect to excluding part-time health plan coverage provided to full-time employees (i.e., averageemployees from participation in a health and welfare plan. However, of 30 or more hours per week) may impact an employer’s decisionthere are several exceptions to this general rule. to exclude certain part-time workers from the employer’s group e rst exception relates to an employer’s group health health plan.plan. Similar to the Code’s minimum coverage test that appliesto Retirement Plans, Section 105(h) of the Code contains non- COBRA Continuation Coveragediscrimination rules with respect to self-insured group health plans. One nal area deserving of consideration is COB . To theTo the extent such a plan discriminates in favor of highly compensated extent a full-time employee’s transition from regular employee statusindividuals with respect to eligibility to participate or bene ts to part-time status results in a reduction in work hours such thatprovided under the plan, the highly compensated individuals will the employee no longer quali es for coverage under an employer’sbe taxed on bene ts received under such plan. A highly compensated group health plan, the reduction resulting from the change inindividual generally is either: (1) one of the ve highest-paid o cers; status would be a qualifying event under COB (permi ing the(2) a shareholder who owns more than 10 percent of the company; employee to continue his or her group health coverage in e ector (3) among the highest paid 25% of all employees. prior to that change under applicable COB rules). e employer, In addition, though beyond the scope of this paper, it is to be as plan administrator, would have to provide the required COBnoted that e ective for plan years commencing on and a er September notice to the employee and permit the employee to elect COB23, 2010, the recently enacted Health Care Reform legislation also continuation coverage under the plan.requires non-grandfathered, fully-insured plans to satisfy the non-discrimination rules of Section 105(h) of the Code. If a fully-insured Points to Remember:plan does not satisfy such rules, instead of subjecting bene ts received As a general rule, an employee’s status as a exible scheduleby highly compensated individuals to taxation, it appears that the worker should not impact such individual’s eligibility for10 LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™
  15. 15. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSURE participation in an employer’s employee bene t plans but employers must take into account that not all persons with and arrangements. disabilities need, or want, to work from home. Further, if exible An exception to the general rule exists for part-time, seasonal work would impose an undue burden, or if the essential functions and temporary workers. Nonetheless, depending on an of the job cannot be performed remotely, exible work is not employer’s employee demographics, it may be necessary mandatory under the ADA. For example, where face-to-face contact to include such employees in plan participation in order to with coworkers, clients or customers is necessary, location- exible satisfy the various compliance tests that apply to such plans work is not required. Nor must an employer o er a exible work under the Code and ERISA. location where alternative accommodations are possible. An employer may select any e ective accommodation, even if it is not 3. Employment Discrimination [ADA, ADEA, the one preferred by the employee. However, if an employer o ers Title VII]19 exible location generally, it must allow employees with disabilities Employers need to ensure that they do not o er exible an equal opportunity to participate in this options, such as exible work schedules or locations, in adiscriminatory manner. Likewise, employers must ensure that the Family Rights Discrimination Claim in exible work options they o er do not adversely impact a protectedclass of employees under federal equal employment opportunity Velez v. Novartis Pharmaceuticals Corp.,laws, including Title VII of the Civil Rights Act (Title VII),20 the No. 04 Civ. 9194v(S.D.N.Y.)Americans with Disabilities Act (ADA),21 the Age Discrimination On May 19, 2010, a federal jury in New York orderedin Employment Act (ADEA),22 the Equal Pay Act (EPA)23 and the Novartis Pharmaceutical Corp. to pay over $3 million inCivil Rights Acts of 1866 and 1871.24 State and local laws imposefurther complications by creating additional protected classes. e compensatory damages to twelve female plaintiffs, andcentral requirement under each of these statutes is relatively simple, $250 million in punitive damages to the class of 5600however: employers must not exhibit a bias against any protected current and former female Novartis employees representedclass in connection with exible work. by the plaintiffs. Under the ADA, exible work schedules and locations may The 2005 class action complaint in Novartis allegedconstitute an appropriate accommodation for a disabled employee.25 gender discrimination, pregnancy discrimination, andSimilarly, exible work may provide a convenient and accessible Family Responsibilities Discrimination (FRD), as well asway for caregivers to continue to work and care for a child or interference with FMLA rights. Plaintiffs claimed that theydisabled loved one. Further, the Equal Employment Opportunity had been discriminated against on the basis of gender inCommission recently suggested in a “best practices” publication that promotions, pay, and treatment, and subjected to gendero ering exible workplace policies that help employees to balance hostility and retaliation. In addition, the plaintiffs allegedtheir work and family responsibilities may decrease complaints of discrimination based on pregnancy and motherhood,discrimination.26 claiming that women were red while on maternity leave In many respects, therefore, exible work can enhance e orts to and mocked by supervisors if they were visibly pregnant.create and maintain a diverse and inclusive workforce and eliminate The plaintiffs alleged liability under three discriminationdiscriminatory bias in the workplace. However, exible work theories: disparate treatment, pattern and practice, andpractices need to be carefully implemented and regularly monitored disparate ensure that they do not facilitate discriminatory practices and/ora itudes in the workplace. The Novartis jury found that Novartis’ actual practices did not live up to their written policies. While the juryFlexible Work and Accommodation noted that Novartis had progressive written ex-time e ADA requires employers with 15 or more employees policies, those policies were not followed in practice, andto provide reasonable accommodation for quali ed applicants those who used ex-time schedules suffered a “ exibilityand employees with disabilities. Flexible work, including exible stigma” that resulted in lost promotions and locations, may constitute an appropriate accommodation, COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. 11
  16. 16. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREAssigning Flexible Work Assuming male workers do not, or should not, prefer to spend Flexible work may not be assigned or denied on the basis of time with their families rather than at work.a worker’s protected classi cation or family situation, but most Assuming female workers prefer, or should prefer, to spendtypically problematic are race, gender, age, and disability, in time with their families rather than time at work.association with disability or caregiver status. e assignment or Assuming female workers and caregivers are less capable thandenial of exible work on the basis of any protected characteristics other workers.or caregiver status constitutes unlawful discrimination under federallaw. Some of the prohibited conduct related to workers’ election to Assuming individuals with disabilities prefer, or shouldparticipate in exible-work programs include: prefer, reduced hours or a exible schedule. Asking female applicants and employees, but not Finally, in many states, marital status is also a protected male applicants and employees, about their child care classi cation.27 As a result, the above stereotypes and prohibited responsibilities. practices should be examined with respect to marital status in many jurisdictions. Treating men, younger employees, or workers without caregiving responsibilities more favorably than caregivers. Workplace Attitudes and Promotion Steering women, older employees, and employees with e a itudes of managers and other employees regarding caregiving responsibilities to exible work arrangements that employees who take advantage of exible work opportunities can are lower paid or provide less opportunity for promotion. create as much exposure to liability as the policies under which Treating persons of color who have caregiving responsibilities exible work is o ered. For example, in a recent class action alleging di erently than other workers with caregiving responsibilities gender discrimination, one class member quoted her supervisor due to gender, race, and/or national origin-based stereotypes. as indicating he did not like to hire young women, and further explaining, “ rst comes love, then comes marriage, then comes ex Treating male workers who participate in exible work time and a baby carriage.”28 ough the company maintained exible programs more, or less, favorably than female workers who work policies for the bene t of all of its employees, and o ered them participate in exible work programs. in an otherwise nondiscriminatory manner, the a itudes of its Steering individuals with disabilities to work o -site, despite supervisors and non- ex-time employees toward employees who their ability to perform work on-site with a reasonable work exibly were su ciently discriminatory to result in a substantial accommodation. judgment against the employer for gender bias. e proliferation of Providing accommodations, including exible work such perspectives could also result in a nding of unlawful hostile opportunities, for temporary medical conditions, but not work environment harassment on the basis of gender or association for pregnancy. with an individual with a disability. Employers should thoroughly train their managers and human Further, employees who work under a exible work programresource professionals to recognize and discourage the workplace may have a cause of action under a theory of disparate impact ifstereotypes that result in discriminatory employment decisions in they are not o ered the same opportunities for pay increases andconnection with exible work. Some common stereotypes which promotions as others who do not participate in exible work. Becausemay result in unlawful conduct include: a disproportionate number of the employees who work exibly are women and caregivers, the grant of disparate bene ts or wages Assuming female workers’ caretaking responsibilities to such employees could result in a nding of gender or disability will interfere with their ability to succeed in a fast-paced discrimination. As a result, compensation practices and performance environment. appraisal systems should be carefully monitored to ensure the Assuming female workers, older workers, and caregivers who employees who work exibly are not inadvertently undervalued participate in exible work are less commi ed to their jobs simply because they put in less “face time” due to working remotely. than other employees. Of course, a plainti alleging disparate impact must identify Assuming older workers prefer, or should prefer, the reduced appropriate comparators for the purpose of establishing disparate or exible schedule of exible work. impact, which may be di cult if he or she works fewer hours or12 LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™
  17. 17. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSUREperforms di erent duties than employees who do not participate to how a worker is paid, the bene ts that worker is entitled to, andin exible work. However, to the extent overall hours worked or the federal and state tax withholdings an employer is obligated toduties performed are similar or even identical, employers must make pay. Independent contractor misclassi cation is a hot-bu on issue,sure that their compensation and performance appraisal systems, with many states recently enacting misclassi cation legislationas well as promotional and other employment opportunities, are and plainti s procuring large class action se lements pertaining toneither designed, nor implemented in a manner that results in a misclassi cation.disproportionate adverse e ect upon ex-time workers. 1. Wage & HourPoints to Remember An individual who is truly an independent contractor, raises Caregivers, disabled employees, and new mothers may few wage-and-hour concerns. However, when assessing whether appreciate having exible work options that allow them to an independent contractor relationship quali es as such, a business continue to participate in the work force despite competing must be sensitive to the fact that contractors that are paid in an demands on their time. However, exible work arrangements employee-like fashion (such as on a salaried basis, or by the hour) should also be granted to new fathers and, in many states, are less likely to be found to be independent contractors. non-caregivers to prevent the appearance or e ect of reverse Freelance workers, being those who work intermi ently on an discrimination or discrimination in violation of state law. as-needed basis, generally present few wage payment concerns if Participation in a exible work program should be voluntary they are paid by the hour for all their hours of work and are paid under all circumstances, and should not be vigorously overtime for all such hours. “recommended” to one class of individual at a greater rate As noted in section II.B.1 above, it is di cult to reconcile the than another. DOL’s rule that salaries must be prorated in uniform daily increments Managers should be trained regarding the proper application when such employees may work widely varying hours from one day of exible work policies and should be on alert for hostile to the next. In addition, the general rule that a salary can be prorated for initial and nal weeks of work may not apply to employees who a itudes among employees and other managers toward work on intermi ent basis. employees who choose to participate in such programs. e wage-and-hour concerns of project-based workers are Managers and human resource professionals should also be relatively limited. If such employees are entitled to overtime and thoroughly trained to respond to complaints of discrimination are paid for all their hours of work, then the fact that an employee among exible work employees or their coworkers, and to is retained on a project basis is of limited concern. A project-based protect against retaliation. employee who is paid a salary as an overtime-exempt employee C. Flexible Employment Relationships— will present few concerns if the employee works essentially the Legal Implications same hours from day to day. As noted in section II.B.1 above, it is Employers face unique legal concerns when dealing with di cult to reconcile the salary-pay requirement with the schedulesworkers who are engaged in exible employment relationships. of overtime-exempt employees who are allowed to work widely ere are many di erent types of workers who fall into the exible varying intermi ent schedules.employment relationship category, and some are employees whileothers are not. For example, eelance workers are workers who are Points to Rememberself-employed and are typically hired on an as-needed basis. Similarly, Businesses should be careful not to inadvertently createproject-based workers are hired to do speci c projects or assignments, an employment relationship with workers that they haveand may be employees or independent contractors. Independent classi ed as independent contractors. In particular, a companycontractors are workers who contract to do work according to their should be mindful of its payroll practices. In order to avoidown processes and methods and they are not subject to another’s creating employment relationships, a company should avoidcontrol except for what is speci ed in an agreement for a speci c practices such as identifying itself as “employer” on paychecksjob. As will be discussed in detail below, there is a stringent test for or using the same payroll practices for contractors that it usesdetermining whether a worker is an independent contractor or an for employees (e.g., paying contractors by the hour or on aemployee, and that determination has a number of implications as salaried basis). COPYRIGH T ©2011 L I T T L ER MENDEL SON, P.C. 13
  18. 18. MITIGATE OR LITIGATE: FLEXIBLE WORKING AND LEGAL EXPOSURE 2. Employment Taxes income tax purposes. e U.S. Supreme Court has explained that Assuming that exible workers are employees and not absent speci c statutory authorization applying a di erent standard,independent contractors, the same tax rules that apply to regular full- the common law control test applies.34time employees also apply to workers that work exible schedules; e common law control test, also called the “usual commonthat is, all wages paid are subject to employment tax withholding and law rules,” states that if an employer has the right to control themust be reported on IRS Form W-2. Again, this is true regardless of means by which the worker performs his or her services as well as thewhether the employee only works for a single day, part-time or only ends, the worker is an employee.35 e existence of the employer’sa few hours per month. Employers that use independent contractors right to control is critical; the exercise of that control is not. us,do not have to withhold and remit taxes on amounts paid, but must the Treasury Regulations state that “it is not necessary that thereport such amounts if more than $600 on IRS Form 1099-MISC, employer actually direct or control the manner in which the servicesbox 7, nonemployee compensation.29 are performed; it is su cient if he has the right to do so.”36 For federal tax purposes, employment taxes include: In contrast, “if an individual is subject to the control or direction 1. Personal income taxes,30 which fund general government of another merely as to the result to be accomplished by the work services and not as to the means and methods for accomplishing the result, he is an independent contractor.”37 Each case must be determined by 2. Social Security taxes,31 which fund retirement payments to its own facts and circumstances. individuals 3. Medicare taxes,32 which fund medical coverage payments for individuals 4. Federal Unemployment Tax Act (FUTA) taxes,33 which Independent Contractor Misclassi cation fund unemployment insurance bene ts Claim in Paula Labrie v. UPS Supply Chain For state tax purposes, all states have an unemployment Solutions Inc. (No. 08-3182, N.D. tax that complements FUTA. is tax is paid by employers Se lement Approved Mar. 17, 2010)and thus is not deducted from employees’ wages. Most states alsohave a personal income tax. Some states also have other employment In their Fair Labor Standards Act (FLSA) class action ledtaxes. For example, California has a state disability insurance tax on July 2, 2008, a class of over 200 delivery drivers for(SDI) that is paid by employees but deducted by the employer. UPS Supply Chain Solutions Inc. alleged that the company For a comprehensive discussion of how to properly determine misclassi ed them as independent contractors and, as awhether a worker is an employee or an independent contractor for result, failed to pay them proper wages and bene ts underInternal Revenue Code and other purposes, see section II.C.3 below. federal and California law. 3. Contingent Workforce After engaging in 16 months of litigation with substantial ere are several tests used to determine whether a worker is discovery that included the production of thousands ofan employee or an independent contractor. e tests vary by the documents and more than 35 depositions and a lengthylaw in question, such as the Internal Revenue Code (that is, federal mediation process, the parties settled in late 2009. As parttaxes), the Fair Labor Standards Act (FLSA), etc. ey also vary of the settlement, UPS Supply Chain Solutions Inc. agreed toamong the states for di erent purposes. ere are three major tests pay $12.8 million to the class. After deductions for fees andused to determine whether a worker is an employee or independent expenses, the settlement was divided up with two-thirds ofcontractor: (1) the common law control test; (2) the economicreality test; and (3) the ABC test. the funds going to class members with California law claims and the remaining third divided among those with FLSAThe Common Law Control Test claims. The settlement agreement further provided for up e most important test is the common law control test. is to $1.5 million in attorneys’ fees to class counsel.test is used for federal employment tax purposes as well as ERISA.It is also used by roughly half the states for state unemployment and14 LI LER MENDELSON, P.C. EMPLOYMENT & L ABOR L AW SOLUTIONS WORLDWIDE ™