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Employment Practices Toolkit

Classify Workers Correctly

Three ways employers misclassify workers – exempt employees, independent contractors and interns

Exempt Versus Nonexempt

The most common mistake is misclassifying an employee as “exempt” and, as a result, failing to pay overtime.  The basics of the topic are familiar: under the FLSA and some state laws, many employees (usually called “hourly” or “non-exempt” employees) must be paid time-and-a-half their regular rate of pay for any hours worked over 40 hours per workweek.  The law presumes every employee is entitled to overtime pay if the employee works more than 40 hours a week.  Some employees can be “exempt” from this overtime requirement, meaning employers need not pay them overtime no matter how many hours they work.  However, the burden is on the employer to show that any particular employee is “exempt” from the overtime requirement.

This is where things can get tricky.  In deciding whether to classify an employee as exempt, instead of nonexempt, “common sense” can lead an employer astray.  An employee is not necessarily exempt because the employee supervises others or has a title that includes the words “manager” or “supervisor” or “executive.”  An employee is also not necessarily exempt because she or he is paid a salary or has a college degree.  Moreover, an employee’s job description or which duties the employee is expected or assumed to perform are not controlling.  What the employee actually does controls.

What makes an employee exempt or nonexempt from overtime pay is (1) whether the employee actually performs job duties that the U.S. Department of Labor (DOL) has listed as exempt in its regulations; and (2) in many cases, whether the employee is paid on a “salary basis,” meaning at least $455 per week that is not subject to reduction based on the quantity or quality of work.  This means, for example, that an exempt employee’s pay cannot be reduced because the employee showed up late, left early, or took a longer-than-allowed lunch.

Why does this matter?  If an employer wrongly classifies an employee as “exempt,” then the employer has not been paying the employee overtime, which can add up to significant money damages.  Plus, the employee is entitled to have those damages doubled and then also recover her attorney’s fees.  The employee need not prove the employer intentionally did anything wrong.

Employee Versus Independent Contractor

The FLSA and most state wage-hour laws apply only to “employees.”  So, employers need not pay independent contractors overtime pay.  But, the determination of whether a worker is an employee or an independent contractor is highly fact-specific, and there are no hard and fast rules.  Due to the relative ease of misclassification, independent-contractor classifications have been increasingly challenged by the DOL and in class and collective actions.

The economic reality test is most often applied to determine whether a particular worker is an independent contractor - who is not covered by the FLSA - or a covered employee.  The employer-employee relationship under the FLSA is tested by “economic reality” rather than “technical concepts.”  Merely labeling the worker an “independent contractor” or having him sign a contract will not be determinative of whether the worker is, in fact, an independent contractor.

When an employer asserts that the individual in question is an independent contractor, there is no bright line test.  Rather, courts review the totality of the circumstances in determining the economic reality of the relationship.  The following factors to be relevant considerations in determining employee status: degree of control; investment in facilities; opportunity for profit and loss; permanency of the relationship; and required skill.

Paid Employee Versus Unpaid Intern

Thousands of college students and recent graduates enter workplaces as unpaid “interns.”  Companies are pleased to have extra workers to complete projects and help overburdened employees, and in return, these young individuals obtain much-needed experience in their chosen fields.  If both parties are arguably benefiting from these relationships, what could go wrong?  Unfortunately, the law takes a surprisingly narrow view of who can be treated as an unpaid intern -- or in FLSA parlance, an unpaid “trainee.”

Whether an intern may safely be considered a “trainee” and not an “employee” under the FLSA (and a number of state laws) again often requires a fact-specific inquiry, and will largely depend on the circumstances surrounding the worker's duties.  Simply labeling an individual as a “trainee” or “intern” does not necessarily make the individual one under the FLSA.  In fact, many unpaid interns are actually employees entitled to protections of the FLSA including minimum wage and overtime.  In evaluating an internship relationship, remember that presently, the DOL applies the FLSA to internships at for-profit organizations only.

As a result, employers in the private sector must enter into internship relationships with caution.  DOL has developed a six-factor test for determining whether trainees are employees within the meaning of the FLSA.  According to the Division, internships will be viewed as employment unless all of the following six factors are met:

  1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
  2. The training is for the benefit of the trainee;
  3. The trainees do not displace regular employees, but work under close observation;
  4. The employer that provides the training derives no immediate advantage from the activities of the trainees; on occasion its operation may actually be impeded;
  5. The trainees are not necessarily entitled to a job at the completion of the training period; and
  6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent training.

One final point on this topic.  “Volunteers” are treated differently than interns or trainees under the FLSA, and again, employers must be wary of this classification.  As an initial matter, individuals may not “volunteer” services to private-sector for-profit employers.  Any individual providing voluntary services for such an employer may do so only as an intern/trainee as discussed above.

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Article created by Jackson Lewis and republished here with permission.

Disclaimer

The information provided in this resource does not constitute legal, medical or any other professional advice, nor does it establish a standard of care. This resource has been created as an aid to you in your practice. The ultimate decision on how to use the information provided rests solely with you, the PolicyOwner.