You may be surprised to learn that M. Patricia Smith, the former Administrator of the Wage and Hour Division of the U.S. Department of Labor declared that the janitorial industry to be a “fissured industry.” What exactly does that mean?

A “fissured industry” is one in which the actual work is performed by employees, independent contractors or the people who own the cleaning company. If the company uses “employees,” as that term is defined by the Fair Labor Standards Act (the basic federal wage and hour law), there are certain legal consequences.

First, the company will have to pay the minimum wage rate for all hours up to 40 per week and overtime for all hours over 40 per week. Second, the company will have to make payments for social security contributions, workers compensation and disability premiums, unemployment taxes and withholdings for income taxes. Third, employees are free to join unions, demand wage and benefit increases and go on strike.

On the other hand, if the company uses “independent contractors” to do the work, none of these requirements apply. The company simply pays the independent contractor the agreed-upon sum and nothing more.

The use of independent contractors is so beneficial that many companies call anybody who does work for them “independent contractors.” Naturally, the Department of Labor, unions and attorneys who make a living suing employers are skeptical. In fact, this type of litigation — known as “misclassification” litigation — has been the most prevalent type of lawsuit in my office for the past several years. Why has this kind of litigation suddenly become so popular? There are a number of reasons — all of them bad for companies.

• Fee shifting. If a plaintiff prevails in whole or even in part a wage/hour case, Federal law requires the company to pay the Plaintiff’s legal fees. This alone is a major incentive for hungry attorneys to start lawsuits.

• Liquidated damages and interest. If unpaid or improperly calculated wages are found to be due and owing, federal law requires liquidated damages of 100 percent. This means that the employer could pay two dollars for every dollar actually owed. In addition there is simple interest.

• Records. Many companies that do not pay proper wages also do not keep proper records. If the employer fails to keep accurate records of hours actually worked, there is a legal presumption that the hours claimed by the employees are correct. This leads to astounding and fraudulent inflation of otherwise legitimate claims.

• Other liabilities. If there is a finding that purported “independent contractors” are in fact “employees,” the liability might not be limited to unpaid wages and overtime. Every government agency that deals with employment can make claims of its own. For example, the Internal Revenue service can claim that statutory withholdings were not made for income tax purposes. Fines and interest will be levied. This scenario could repeat itself with numerous agencies such as the Social Security Administration and the Department of Labor.

It should be obvious to all that proper worker classification is a high-stakes game. What are the rules? In our next installment, we’ll help you play to win.

Perry Heidecker is senior counsel for Milman Labuda Law Group PLLC, Lake Success, N.Y. The firm is a full-service Employment Law practice focused on counseling, preventive advice and training, policy and procedure design, representation before administrative agencies, litigation, and appeals.




POSTED ON: 10/16/2013