WASHINGTON — Wage and hour laws and regulation are not a topic most dry cleaners and other small- and mid-sized business owners enjoy contemplating or keeping track of, but it’s essential for the health of their companies to stay on top of a subject that is often shifting with the winds.
This was the message of Bradford Kelley and Mike Paglialonga of Littler Mendelson P.C., a national law firm that specializes in labor and employment law. The pair recently spoke in the presentation “Wage and Hour Compliance for Small Business,” hosted by the National Federation of Independent Business (NFIB).
In Part 1 of this series, we examined the differing minimum wage laws on the federal, state and local level. In Part 2, we continued by exploring the rules and questions around overtime. Today, we’ll conclude by looking at where independent contractors and interns fall into this discussion, and discuss ways employers can ensure they are staying compliant with wage and hour laws and regulation.
Who are the Independent Contractors?
“The topic of independent contractors is usually brought up in the context of what's called ‘misclassification,’” Kelley says, “and what that really comes down to is: is a worker an employee, or are they an independent contractor? And, historically, this has been subject to a lot of flip-flops on the federal level.”
The case law that has developed, and usually points to what the courts decide on this issue, is known as the “economic realities” test, Kelley says.
“I think the easiest way to understand the difference between a contractor and an employee,” he says, “is the level of control — how much control do you have over that person? Is it somebody that you're hiring to do a very minor task or something that's very specialized? When you call up a plumber or an electrician to do something in your house, you wouldn't assume that hiring them to do that work makes you an employer of that electrician or that plumber. They are there to do a job, and they bring their own materials and their own tools.”
Kelley points out that, as in the case of minimum wage and overtime, who independent contractors are and what is the business owner responsible for can change on the state or local level.
“Some often have much more stringent requirements for what constitutes an independent contractor,” he says, “and at the federal level, there's a lot of uncertainty at this point with that.”
“There's no ‘one-size-fits-all’ answer to this,” Paglialonga says. “People might say, ‘I have a great independent contractor agreement. I got it off this website.’ It might be a great contract. It might be written beautifully, but the (economic realities) test really looks at what is the reality. Structuring both the agreement and the relationship in a way that insulates the business from having these contractors considered to be employees is critical.”
Bring in the Interns
“Everyone wants to employ the next generation of leaders and talent,” Paglialonga says, “but there are some requirements to pay interns, whether or not these are employees.”
The U.S. Department of Labor lists the seven following factors when determining if an intern should be paid for his or her labor at the company:
- The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee — and vice versa.
- The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
- The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.
The ultimate question is who is determined to be the primary beneficiary of the relationship, Kelley says.
“Does it benefit the employer, or does it benefit the intern?” he asks. “When you think about that in the educational context,” he says, “are they gaining good experiences at that internship that's really going to benefit them in the long run? Who does it benefit? If it benefits the employer, then it probably is more likely to be found to be an employee rather than an intern.”
“You've seen nationally and on the state-by-state level a real onslaught of suits and regulatory efforts to reduce the amount of unpaid interns,” Paglialonga says. “The days of interns going to get coffee and just being around for the summer are largely over. A lot of the permissible internships we see now are really education based, combined with colleges and schools. Part of the standard looks at if the internship actually harms or costs the employer to have them. Are they actually impeding their own work because they have to train this person?”
There is a type of internship that can provide the employer with valuable help without having to pay the intern, Kelley says.
“A really good one for small businesses to consider is the skill bridge military internship,” he says. “The Department of Defense partnered with some of the other agencies to provide an unpaid military internship for the last six months of a military member's time and service. Under this program, they're still paid by the Department of Defense, so they receive their salary and all their benefits — they're prohibited from receiving anything from the civilian employer. It's one of the best internship programs out there.”
Finding Guidance
“So, what can we do, other than be perfect?” Paglialonga asks.
Trying to ensure or increase compliance, he says, isn’t an easy task. “As a smaller business, you might not have your own in-house attorneys or HR. This is a place where pulling in resources and having regular reviews and doing compliance audits and compliance reviews can be incredibly helpful.”
Paglialonga notes that these don’t have to be massive, all-encompassing efforts. “A lot of these reviews can be done on a more limited basis, but can have a huge payoff on that,” he says.
In addition to external reviews, having well-crafted arbitration agreements in place with employees can be a valuable use of time and resources.
“These allow the employer and the employees to agree to terms that they will go to an independent arbitrator, which unfortunately often does have to be paid for by the employer,” Paglialonga says. “But it keeps those claims out of court, and it typically can keep those claims out of a class action.”
He says that, while it can be costly to pay an arbitrator, it can save time and money in a crisis.
“When we are looking at somebody wanting to file a claim against a business for $500 in lost wages, that's not very palatable to attract to a plaintiff attorney,” he says, “but doing it for 50 employees in an arbitration agreement can be critical.”
For Part 1, click HERE. For Part 2, click HERE.
Have a question or comment? E-mail our editor Dave Davis at [email protected].
