Independent Contractor or Employee? New DOL Guidance Concludes Most Independent Contractors are Misclassified.

The U.S. Department of Labor (“DOL”) recently issued an Administrator’s Interpretation addressing the common misclassification of employees as independent contractors under the Fair Labor Standards Act (“FLSA”). The misclassification of employees as independent contractors may lead to those employees failing to receive certain workplace protections, such as minimum wage and overtime compensation under the FLSA. The DOL concludes that most workers qualify as employees under the FLSA’s definition.

Employers often use the common law “control test” to determine whether a worker is an employee or an independent contractor. The “control test” analyzes whether a worker is an employee or independent contractor based on the employer’s control over the worker. While the “control test” has been adopted by courts in the context of other employment statutes, the DOL makes clear that the FLSA’s broad definition of “employ” as including “to suffer or permit to work” is more expansive than the control test. The agency says that for purposes of determining FLSA applicability, the focus must be on the economic realities of the relationship – that is, “whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” The guidance then discusses the six factors that courts have developed to determine whether a worker is an employee or independent contractor under this “economic realities” test.

The six factors to be considered in determining whether a worker is an employee or an independent contractor for purposes of the FLSA are: “(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.” The guidance states that these factors are not a checklist, but are to be “examined and analyzed in relation to one another.” The analysis is qualitative, not quantitative, and the FLSA’s intended expansive covered must be considered.

Given the broad statutory definition of “employ” under the FLSA, the DOL concludes that most workers are employees that are economically dependent on their employer, and would not qualify as an independent contractor that is truly in business for him or herself. The DOL is concerned about the trend of misclassification of employees as independent contractors, especially in industries with low-wage workers.

While an employer may have independent contractor agreements with its workers, such agreements are not relevant to the analysis of the workers’ status under the FLSA. In light of this guidance from DOL, employers should review whether their independent contractors are properly classified, or if they are employees under the “economic realities” test. If these workers are misclassified, employers should take proactive steps to avoid or minimize potential litigation that could result in significant liability for unpaid wages and overtime.

Stephanie Wilson is an attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com.

Hadeed Carpet’s Subpeona Against Yelp Gets Swept Under the Rug

The Virginia Supreme Court made it harder for businesses stung by anonymous social media postings to fight back and get information identifying the people who post online comments.  In Yelp v. Hadeed Carpet Cleaning, the court threw out a Virginia Subpoena and Contempt Order against Yelp after the social media giant refused to turn over documents identifying people who anonymously posted negative social media comments about Hadeed.

In a decision that sidestepped free speech issues presented by going after negative social media commentary, the court concluded that in order to force Yelp to fork over the identifying documents that were stored in San Francisco, Hadeed had to go to a San Francisco court and get a subpoena there to get the documents.  This decision yields a convoluted result, since such a business trying to unmask an anonymous social media purveyor of defamatory online statements needs to go ‘coast to coast’ in order to get a Virginia court to obtain documents in California.  This is not an efficient use of company resources already suffering from false online commentary.  Also, as the dissenting justices pointed out, this result is clearly outdated since companies like Yelp probably have documents electronically available all over the country, and treating these materials like they are sitting in a 1950’s file cabinet seems absurd.

Businesses and executives need to be aware of this decision, and the fact that they can still go after anonymous online social media postings that are false and defamatory.  They just need to go through an extra hoop to get a subpoena that is issued from the jurisdiction where such information is located to get the information identifying who posted false online information.  Companies can still get their day in court to fight false online social media postings, but will have to do so more methodically as they fight back to maintain their online reputations.

Seth Berenzweig is managing and founding partner of Berenzweig Leonard, LLP, and often appears in the national media to discuss breaking business news.

Yelp Gets a Pass On Negative Social Media Post

The Fourth Circuit Court of Appeals recently issued a decision having a big impact on how businesses must deal with disparaging commentary on social media.  In Westlake Legal Group v. Yelp, Inc., the court rejected a Virginia law firm’s claim against Yelp complaining about defamatory comments on the firm posted on Yelp’s website.  Yelp asserted that the case should be dismissed, arguing that federal law provided it and other social media companies immunity from such lawsuits.

The Fourth Circuit Court of Appeals agreed with Yelp and dismissed the firm’s case, rejecting the argument that the victim of a false social media post can sue computer service providers.  Citing the Communications Decency Act (‘CDA’), the court ruled that the CDA bars such businesses “from holding interactive computer service providers legally responsible for information created and developed by third parties.”  Basically deeming Yelp an electronic billboard immune for posts that could be defamatory, the court ruled that Yelp could not be sued without facts showing that “that any alleged drafting or revision [by Yelp] … was something more than a website operator performs as part of its traditional editorial function.”

The Westlake decision is significant for several reasons.  It shows that if any individual or business wants to legally challenge defamatory social media, it should ‘keep its powder dry’ and not waste time and money suing the social media company posting the content.  Social media providers like Yelp will likely get a broad pass of immunity for such claims.  Rather, anyone challenging anonymous false statements on social media should focus on so-called ‘unmasking’ cases which could permit subpoenas for business records from the Yelps of the world (such as recently allowed in the Madeed Carpet case) to identify and attack the actual author of the post.  Understanding these rules of the road for challenging disparaging social media can make the difference between protecting one’s reputation and wasting valuable time and money.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard, LLP, and often appears on national media to discuss breaking news business developments.

Will Jonathan Gruber’s Comments Impact the Supreme Court?

Jonathan Gruber, the MIT professor who was paid by the government to consult on the creation of the Affordable Care Act, recently made headlines with his controversial ObamaCare comments about the “stupidity of the American voter.”  His other comments, however, deserve a second look.  One comment shows how the Chief Justice may have been misguided by the government in his tie-breaking vote to support the Affordable Care Act, while another comment could have a big impact when the Supreme Court soon decides a landmark case.

The Supreme Court’s narrow vote supporting the Affordable Care Act depended on Chief Justice Robert’s conclusion that the Act created a tax, and thus fell within one of the constitutionally enumerated powers of Congress to support its creation of the Act.  However, Gruber’s controversial comments included his assertion that the bill “was written in a tortured way to make sure CBO did not score the mandate as taxes.”  If this comment was accurate, it conflicts with the Justice Department’s argument, accepted by the Chief Justice in casting his tie-breaking vote to support the law, that the Act created a tax and Congress therefore had the authority to enact it.

Gruber also asserted that Congress “want[ed] to sort of squeeze the states” to feel pressure to set up their own insurance exchanges, and that “if you’re a state and you don’t set up an exchange, that means your citizens don’t get tax credits.”  Once again, Gruber is conflicting with the Administration’s position in the upcoming King v. Burwell Supreme Court case.  In King, the Supreme Court will decide if the government exceeded its authority in promoting tax credits and subsidies for residents of states that did not create their own exchange.  According to the language of the Affordable Care Act and Gruber’s own comments, such credits are not allowed – for two thirds of the states that never gave in to the ‘squeeze’ to set up their own exchange - and therefore a big part of ObamaCare’s financial engine should fail.  This contrasts with the Administration’s argument pulling the Court in the opposite direction, asserting that the Act intended to allow credits and subsidies for all such states in order to fund ObamaCare.

Both sides cannot be right, and the Justices will need to resolve this in a few months. If the majority of the Court follows the language of the statute and takes professor Gruber’s comments to heart, a big part of ObamaCare’s funding will be disallowed since the credits and subsidies challenged in King will be struck down.  In the meantime, the next time a former consultant for the Administration makes sarcastic comments about the American voter and the law, he may want to consider whether the nine people wearing robes in the Supreme Court building will hear what he has to say before they cast their next vote.  Time will tell if his words will influence the Supreme Court to reach a different result.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard, LLP, and is a Fox Business and Bloomberg TV contributor on breaking news such as ObamaCare and Supreme Court cases.

Handling Workplace Concerns Over the Ebola Crisis

Concerns associated with the spread of Ebola are growing. The World Health Organization has declared the virus an “international health emergency” and the Centers for Disease Control confirmed that the U.S. has now experienced several cases of the virus. Although it’s still too early to deem this a major health crisis in the United States, concerns are growing and employers need to be prepared to address questions about the transmission and handling of Ebola.

Though the media attention surrounding Ebola continues to grow, health authorities are still advising that the risk of actually transmitting the disease is low, and therefore, employers should be mindful not to overreact and risk running afoul of discrimination laws that can come into play when dealing with infectious diseases. Of particular note, the Americans with Disabilities Act (“ADA”) prohibits employers from discriminating against people with disabilities. Given its severity, and the broad interpretation of “disability,” Ebola arguably qualifies as a disability under the ADA. Though the ADA restricts employers from making disability-related inquiries, an employer is allowed to conduct a medical examination if they have a reasonable belief that a particular employee’s disability poses a direct threat to the workplace. A direct threat is defined as significant risk of substantial harm to the health or safety of that employee or others in the workplace and such risk cannot be eliminated or reduced by a reasonable accommodation.

The direct threat exception cannot be based on fears or misconceptions, but rather, the employer must take into consideration current medical knowledge from health authorities and objective evidence. For example, an employer could not require a medical examination simply because one of its employees recently traveled to West Africa. That could open an employer up to a so-called “regarded as” discrimination claim under the ADA, or a potential national origin discrimination claim.

Though the EEOC has not issued anything specific to Ebola, the agency did issue guidance during the H1N1 pandemic in 2009 that employers should note in addressing Ebola. The guidance provides useful information if Ebola spreads to a pandemic similar to H1N1, including:

• If an employee shows Ebola-like symptoms, employers may advise such employee to go home;
• Employers may ask employees if they are experiencing Ebola-like symptoms, yet all information must be kept confidential;
• Employers may ask whether employees have traveled to an area where Ebola has been present, such as West Africa;
• Employers can encourage employees to telework; and
• Employers may inquire into why an employee has been absent from work if the employer suspects it was for a medical reason.

Ultimately, if current fears of Ebola expand into a broader reality in the United States, employers must be equipped with various actions they can take to provide a safe working environment. If employers are considering conducting medical examinations or making employment decisions based on a suspected case of Ebola, employers should first consider consulting with an attorney as well as engaging with a medical provider familiar with this disease.

Nick Johnson is an attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at njohnson@BerenzweigLaw.com. 

Court Weighs In On Validity of Liquidated Damages Clauses

It is not uncommon for business contracts to contain a liquidated damages clause that provides a set amount to be paid in the event a party breaches the contract. However, a recent decision from the Fairfax County Circuit Court could significantly impact how companies structure liquidated damages provisions in their contracts. In Sagatov Builders LLC v. Christian Hunt, the Seller (Sagatov Builders) and Buyer (Christian Hunt) entered into a contract for the purchase of real property.  As part of the contract, the Buyer was obligated to deliver a deposit of $50,000. The Seller subsequently filed a lawsuit alleging that the Buyer breached the contract and sought to retain the deposit as liquidated damages based upon a damages provision in the contract. The damages provision provided that—in the event of the Buyer’s default—the Seller would have the option to either retain the deposit as liquidated damages or pursue actual damages against the Buyer. The Buyer sought to dismiss the lawsuit arguing that an optional liquidated damages clause is a penalty as a matter of law, and the Seller was required to prove actual damages.

In considering the enforceability of the option clause, the Fairfax Circuit Court noted that to be enforceable, the liquidated amount must (1) be a reasonable estimation of actual damages which by their nature are difficult to ascertain, effectively avoiding all future questions of damage, and (2) not function as a penalty.
The court determined that the damage provision clearly did not avoid all future questions of damage and therefore the arrangement “fails to achieve the fundamental purpose of a stipulated damage provision.”  The provision also functioned as a penalty since it was intended only to be operative where the deposit exceeded the actual damages incurred, “establishing the implication that the parties intended to punish the defaulting party.”

As a result of this holding, parties must now show caution in designing a liquidated damages provision.  Since liquidated damages are intended to reflect future harm that is inherently difficult to calculate, contracting parties are now in the awkward position of needing to accurately determine a stipulated amount beforehand, or relying on litigation to prove actual damages. If parties decide upon a liquidated damages provision, this case should serve as guidance to no longer include the option to pursue actual damages if damages end up amounting to far more than the amount stipulated in the contract. This case should also serve as a good reminder to business owners and executives to revisit your commonly used boilerplate language that may be found in your contracts to ensure they are compliant and up-to-date with existing case law.

Nick Johnson is an attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at njohnson@BerenzweigLaw.com. 

Supreme Court Allows Closely-Held Corporations to Opt Out of Obamacare Birth Control Mandate

On June 30, 2014, the Supreme Court ruled in a 5-4 decision that closely-held for-profit corporations may opt out of regulations issued under the Patient Protection and Affordable Care Act (ACA) mandating insurance plan coverage for certain contraceptive drugs. 

Three corporations brought the action under the Religious Freedom and Restoration Act of 1993 (RFRA), which prohibits the Government from substantially burdening a person’s exercise of religion unless the government shows that such a burden is the least restrictive means to further a compelling governmental interest.  In Burwell v. Hobby Lobby Stores, Inc., the Court not only considered the legality of the contraceptive mandate under the RFRA analysis, but also addressed whether a for-profit corporation has standing as “a person” under the statute.

Writing for the majority, Justice Alito ruled that the contraceptive mandate was unlawful under the RFRA and constituted a substantial burden on a corporation’s right to conduct business in accordance with its religious beliefs. The Court concluded that, in enacting the RFRA, Congress intended to provide broad protection to the exercise of religion, including religious exercises practiced by the natural persons associated with closely-held corporations.  The majority noted that the legal fiction in which a corporation is considered a person for certain purposes is really intended to provide protection for the natural persons associated with that company since corporations, “separate and apart from the human beings who own, run, and are employed by them, cannot do anything at all.”  Extending the scope of protection offered by the RFRA is therefore intended to benefit the human beings comprising the corporation, rather than the intangible entity itself.  

In her dissenting opinion, Justice Ginsburg disagreed that a for-profit corporation qualified as a “person” under the RFRA because a corporation is artificial and has no conscience, and therefore cannot practice religion.   The dissent noted that religious entities and other nonprofits are exceptions to this principle because they “exist to serve a community of believers.”  For-profit companies, on the other hand, are likely composed of workers of diverse religions and are motivated by commercial profit. In the dissent’s view, upon incorporating a for-profit business and escaping personal liability for its obligations, the owners essentially sever their right to contest government regulation of that business based upon their religious beliefs.  Justice Ginsburg expressed further concern that providing for-profit closely-held corporations a cause of action would proliferate RFRA claims by encouraging “corporations of any size, public or private…to seek religion-based exemptions from regulations they deem offensive to their faith.”

Although the majority only considered whether a closely-held for-profit corporation could constitute a person, Justice Ginsburg’s observation that the ruling would likely proliferate claims from corporations of all sizes is worthy of note.  Despite tailoring the language of its holding to closely held corporations, the Hobby Lobby decision technically does not preclude the extension of RFRA protection beyond the close corporation context.  The majority expressly acknowledged this possibility by refusing to interpret “person” to include natural persons and “some but not all corporations.”  Furthermore, although the holding centers upon four specific contraceptive drugs, the majority does not suggest that these are the only medical treatments and procedures mandated by the ACA which may be actionable under the RFRA.  Perhaps mandatory insurance coverage for vaccinations and blood transfusions will be next on the chopping block.  Since the decision is not constrained within Obamacare regulation, maybe religiously inclined businesses will seek to opt out of anti-discrimination regulations.  The Hobby Lobby decision ultimately provides corporations carrying out business in a manner reflecting sincere religious beliefs with the means to challenge any number of government regulations that burden its operation.

David Moon is a summer intern with Berenzweig Leonard, LLP.  He can be reached at dmoon@berenzweiglaw.com.