We’ve gotten several questions about the rules around furloughs and other reductions in pay. The Department of Labor has issued a timely new guidance entitled Frequently Asked Questions Regarding Furloughs and Other Reductions in Pay and Hours Worked Issues.

Here are the highlights . . .

If an employer is having trouble meeting payroll, does it still need to pay non-exempt employees on the regular payday?

Yes. Failure to do so violates the Fair Labor Standards Act (FLSA).

Is it legal for an employer to reduce the wages or hours of hourly employees?

Yes, as long as minimum wage and overtime laws are followed.

Does an employer need to pay an hourly employee for a full day of work if s/he was scheduled for a full day but only worked a partial day due to lack of work?

No. The FLSA does not require employers to pay non-exempt employees for hours not worked.

Can an employer reduce an exempt employee’s salary due to a slowdown?

Reductions in an exempt employee’s salary normally causes a loss of exemption, requiring payment of overtime and minimum wage. However, in some cases, a prospective reduction may not cause a loss of the exemption so long as other FLSA tests are met. (I’ll be posting more specifics on this particular question soon.)

Can an employer reduce the leave of a salaried exempt employee?

Generally, yes, provided that the employee still gets paid his/her salary in any week in which work is performed.

Can an exempt employee volunteer to take time off due to lack of work?

Yes (but it must be truly voluntary).

Can an employee still be on-call or performing work at home during a furlough day?

Whether on-call time is hours worked depends on the circumstances. Generally, if an employee is “engaged to wait,” it’s work time. If the employee is only “waiting to be engaged,” it’s not.

What are the penalties for violations?

Potential penalties include back wages and liquidated damages in an equal amount, plus interest, attorneys’ fees and court costs. Willful violations may result in criminal penalties, including fines and imprisonment.

(Special thanks once again to the Connecticut Employment Law Blog)

In a case that some employers will find ironic, an arbitrator has ruled that the EEOC violated the Fair Labor Standards Act by misclassifying hundreds of its employees.

According to a press release issued by the American Federation of Government Employees (AFGE), the ruling applies to roughly 600 investigators and 100 mediators employed by the EEOC.

The arbitration resulted from a grievance filed in 2006 by the AFGE.  The AFGE contends that a “multi-year hiring freeze” created “staggering backlogs” that forced employees to “work through lunch, stay late, take work home, and work weekends.” 

“The agency saved money by misclassifying these employees as exempt,” said Levi Morrow of the AFGE.  “For a government agency charged with ensuring that other employers follow the law, this decision should be an embarrassment.”

According to the AFGE, the arbitrator has ordered the parties to “meet to arrive at a resolution of the appropriate remedy.”

Each week, we post a thought-provoking question for your consideration.  Here’s last week’s question, along with your answers:

What hit an all-time high in 2007?

a.  Race harassment claims (3%)
b.  Recoveries under the Federal Labor Standards Act (32%)
c.  The number of federal civil trials (5%)
d.  Lies told by elected officials (8%)
e.  Both “a” and “b” (27%)
f.   Both  ”a” and “c” (22%)
g.  None of the above (3%)

The correct answer is “e”:  both racial harassment claims and FLSA recoveries hit an all-time high last year.

According to the EEOC, racial harassment claims have more than doubled since the 1990s and hit a record high of 6,977 last year.  That seems almost unfathomable when you consider that:  (1) the Civil Rights Act has been in place more than forty years; (2) the EEOC has been educating employers and enforcing the law for several decades; (3) virtually all U.S. employers have had anti-harassment and anti-discrimination policies and procedures in place for years; and (4) millions of managers go through diversity and anti-harassment training every year.  What was even more troubling were the allegations in some of the key cases, including racial epithets, death threats and nooses hanging in the workplace.

As for FLSA wage and hour rulings, a study by the law firm of Seyfarth Shaw shows that they have now moved into the #1 overall spot, ahead of even discrimination and ERISA claims.  The DOL alone recovered more than $220 million in back wages in 2007.  At times it seemed there was news of a new multi-million-dollar FLSA class action being filed practically every week.

Our readers are now batting a respectable .545 (12 right, 10 wrong) on our weekly questions.  The next one will be coming your way soon.

Thanks for your participation!

The Department of Labor announced that Dow Chemical will pay $861,647 to settle overtime claims.

The payment will be made to 648 engineers following a two-year DOL investigation that concluded that the company violated the Fair Labor Standards Act by failing to pay the employees for time spent in mandatory training. 

The lesson?  Under the FLSA, training must be counted as work time unless it is truly voluntary, outside normal working hours, unrelated to the job and no other work is being concurrently performed.

The Department of Labor’s Wage and Hour Division set a new record in 2007, recovering more than $220 million in back wages for violations of the Fair Labor Standards Act and other statutes.

The Division concluded more than 30,000 compliance actions in 2007.  The numbers include:  (1) more than $30 million in back wages recovered from Wal-Mart for nearly 80,000 employees; (2) more than $57 million in back wages for more than 85,000 employees in “low-wage industries” (e.g., agriculture, restaurants, hospitality and day care); and (3) more than $15 million collected for approximately 12,000 employees for violations of the DOL’s 2004 white-collar exemption rule.

Many of the other recoveries were from the hurricane-ravaged Gulf Coast Region, where the Division has opened numerous offices due to ongoing FLSA concerns.  Similar activity in that region is anticipated to continue for at least the next three years.

The lesson?  As we’ve discussed on numerous occasions, one of the very best things an employer can do right now to lessen potential legal liability is to ensure that exempt/non-exempt classifications and overtime policies are in strict compliance with the law.

A new study by the law firm of Seyfarth Shaw confirms what we’ve been seeing in the headlines all year:  wage and hour class actions are booming.

The firm’s 4th Annual Workplace Class Action Litigation Report identifies several major trends in the world of employment lawsuits:

#1:  Wage and Hour Suits Are King.  According to the report, the volume of wage and hour lawsuits continues to rise “exponentially.”  In 2007, Fair Labor Standards Act class actions produced more rulings than even employment discrimination and ERISA benefits cases.

#2:  Plaintiffs Prefer State Court.  Most of the litigation growth was at the state court level, particularly in California, Florida, Illinois, New Jersey, New York, Pennsylvania and Texas.  In short, Plaintiffs’ attorneys tend to favor the perceived “home court” advantage offered by state courts.

#3:  $$$ Damages Continue to Rise.   Damages recovered in employment lawsuits continued to increase in 2007.  Several nationwide class actions resulted in massive settlements as plaintiffs’ lawyers continue to find new and creative legal theories to fuel large-scale litigation.  

What Will 2008 Bring?  More of the same.  Each of the above trends is expected to continue in 2008.

The lesson?  As Gerald Maatman, the report’s General Editor, noted:  “identifying, addressing, and remediating class action vulnerabilities” should be at the top of every employer’s list of 2008 priorities. 

In other words, imagine what the world’s toughest plaintiffs’ firm would sue you for and fix it before they get a chance.

On the heels of a $17.4 million verdict and the filing of a 20,000+-member class action, it now appears that FedEx may also be facing a $319 million fine from the IRS due to the company’s alleged misclassification of employees as independent contractors.

The potential fine was disclosed in FedEx’s most recent Form 10-Q filing, which stated that IRS auditors have “tentatively concluded, subject to further discussion,” that the company’s delivery operators should be reclassified as employees for federal employment tax purposes. 

FedEx maintains that it has “strong defenses to the IRS’s tentative assessment and will vigorously defend our position, as we continue to believe that FedEx Ground’s owner-operators are independent contractors.”  However, the company also disclosed that it is making “changes to its relationship with the contractors that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by our contractors.”

Reactions from organized labor were decidedly different.  “What a great Christmas gift to FedEx Ground workers who have suffered under FedEx’s illegal independent contractor scam,” Teamsters President Jim Hoffa said.  “FedEx has been skirting the law, and the Teamsters welcome the IRS decision.”

The IRS audit and fine apparently only relate to the 2002 tax year.  Additional fines totalling well over a billion dollars could be forthcoming as the IRS audits additional years.

The lesson?  As we’ve said many times before, misclassifying employees as independent contractors can be hazardous to your company’s health.  The rule of thumb:  If an employer has behavioral or financial control over a person, that person is an employee, not an independent contractor.

The California Supreme Court upheld a lower court ruling that 209 FedEx drivers are employees and not independent contractors.  As a result, the company must pay a total of $17.4 million in reimbursements, costs and attorneys’ fees.

As discussed in a recent Questions of the Week, true independent contractors are relatively rare.  The test for independent contractor status is ambiguous and confusing and is different in workers’ comp, tax and other contexts.  Indeed, the IRS test used to be called the “Twenty Factor Test.”  Not long ago, it was “shortened” to the “Four Factor Test” each of which, unfortunately, contains five criteria each.

Generally speaking, all of the tests come down to this:  Does the company control the person or is s/he truly an independent agent serving more than one company?

The court in the FedEx case found that “FedEx’s control over every exquisite detail of the drivers’ performance, including the color of their socks and the style of their hair, supports the trial court’s conclusion that the drivers are employees, not independent contractors.”  In addition, the drivers were required to wear a FedEx uniform, work rigid schedules set by FedEx, buy or lease a truck meeting FedEx specifications and generally subjected to strict oversight in performing their duties.

The lesson?  Misclassifying employees as independent contractors can be hazardous to your company’s health.  The rule of thumb:  If an employer has behavioral or financial control over a person, that person ain’t an independent contractor.

In yet another big-dollar Fair Labor Standards Act (FLSA) lawsuit, payouts are set to begin under an $8.8 million settlement between Radio Shack and employees who claimed they were cheated out of overtime.

The settlement relates to five separate actions filed in 2002 against the company in Illinois, Pennsylvania, Florida and New York.  Like the multitude of other FLSA cases on which we have reported, the primary allegation was that Radio Shack improperly misclassified “manager” employees as exempt to avoid paying overtime.

The lesson?  Once again, one of the very best things you can do to avoid big-ticket liability is to review exempt/non-exempt classifications to ensure that they are 100% solid under the law.  Courts (and plaintiffs’ attorneys) continue to be very hard on employers where there’s even a hint of employee misclassification.

These types of cases are truly becoming an industry unto themselves.  Wonder why plaintiffs’ attorneys find them so attractive?  I’ll give you 4,730,321 reasons — that’s the amount of fees and costs that went to the attorneys in this case, more than half the total proceeds.

That makes my head hurt.

Each week, we post a thought-provoking question for your consideration.  Here’s last week’s question, along with your answers . . .

How do you tell if an independent contractor is really an independent contractor (as opposed to an employee)?

a.  It depends on a confusing, ambiguous multi-factor test dependent on behavioral control, financial control and the parties’ overall relationship that differs in workers’ compensation, tax and other contexts (44%)

b.  It is the employer’s option to choose either status, depending on which is more advantageous from a tax perspective (2%)

c.  It is the employee’s option to choose (4%)

d.  Under the newly passed Contractor Clarification Act (CCA), a person can be an independent contractor only if s/he (1) is separately incorporated, (2) provides services to other companies and (3) works in a recognized “independent profession” as defined under the law (50%)   

The correct answer is “a.”  Unfortunately, there’s no such thing as the “Contractor Clarification Act.”

The test for independent contractor status is confusing and is different in workers’ comp, tax and other contexts.  Indeed, the IRS test used to be called the “Twenty Factor Test.”  Not long ago, it was “shortened” to the “Four Factor Test” each of which, unfortunately, contains five criteria each.

Generally speaking, all of the tests come down to whether the company controls the person or whether s/he is truly an independent agent serving more than one company.  In our experience, true independent contractors are a rare breed.  If you have financial and behavioral control over a person, s/he is probably an employee and not an independent contractor.

Our viewers are now batting .500 overall (6 right, 6 wrong) on our weekly questions.

The next one will be coming your way soon.  Thanks for your participation!