FedEx was just one company to be caught in an employee misclassification misstep (image via Wikimedia Commons)

FedEx was just one company to be caught in an employee misclassification misstep (image via Wikimedia Commons)

Attorneys who represent corporations are likely to be monitoring the increased federal enforcement of employee misclassification. The result of that enforcement has been much higher fines than we have seen in the past.

This past spring, I heard and then interviewed Dr. David Weil, the Wage and Hour Administrator at the U.S. Department of Labor. He spoke in Phoenix on multiple topics, including such misclassification. It arises more and more, he said, as companies seek to lessen the high costs associated with direct employees. But if every jot and tittle of a worker’s day is circumscribed, defined, and monitored by the corporate parent, can they really be described as independent contractors?

My previous story is here. It includes the full (unedited) audio of my interview with Dr. Weil.

Just so you know that his prognostications are bearing fruit, here are some recent instances of increased focus and occasional prosecution.

One involved FedEx and a $228 million fine.

The other involved the State of California and its focus on Uber.

Labor and employment lawyers, what are you seeing in Arizona? Has the heightened focus been a matter of concern among your clients? Have you been alerting them more regularly about this area of law?

I’d welcome your story or commentary on the topic. Write to me at arizona.attorney@azbar.org.

Dr. David Weil, Director of the Wage & Hour Division of the U.S. Department of Labor, speaks at the University of Arizona Medical School, Phoenix, April 1, 2015. (Photo courtesy of the DOL Wage and Hour Division.)

Dr. David Weil, Director of the Wage & Hour Division of the U.S. Department of Labor, speaks at the University of Arizona Medical School, Phoenix, April 1, 2015. (Photo courtesy of the DOL Wage and Hour Division.)

US Department of Labor logoIt was only back on April 1 that a major dialogue was raised in Arizona about the negative results that flow from employee misclassification. That’s when Dr. David Weil of the Department of Labor Wage and Hour Division spoke to audiences in downtown Phoenix and elsewhere.

Dr. Weil spoke about the combination of carrots and sticks that would be brought to bear to face the challenge.

This week, we got to see a little of the stick as we read a press release. It opens:

“A nearly five-year federal investigation of illegal business practices by 16 defendants in Utah and Arizona has yielded $700,000 in back wages, damages, penalties and other guarantees for more than 1,000 construction industry workers in the Southwest, the U.S. Department of Labor announced today.”

“Consent judgments put an end to an effort by the defendants—operating collectively as CSG Workforce Partners, Universal Contracting, LLC and Arizona Tract/Arizona CLA—to claim that their workers were not employees. The defendants required the construction workers to become ‘member/owners’ of limited liability companies, stripping them of federal and state protections that come with employee status. These construction workers were building houses in Utah and Arizona as employees one day and then the next day were performing the same work on the same job sites for the same companies but without the protection of federal and state wage and safety laws. The companies, in turn, avoided paying hundreds of thousands of dollars in payroll taxes.”

You can read the entire release here. All of the targeted Arizona firms are listed at the bottom, as is the case name and caption number.

Adding to the value of the news to Arizona lawyers and others is a blog post by Labor Secretary Tom Perez himself. In it, he describes the legal action being taken in Utah and Arizona. And he gives valuable insight into the way this nefarious business gets done:

“The state of Utah was a helpful partner in the Wage and Hour Division’s investigation of these defendants, providing information from the state’s Worker Classification Coordinated Enforcement Council, an entity created by the state legislature to combat misclassification. The state ultimately outlawed the defendants’ business model by requiring workers compensation and unemployment insurance for members of LLCs. In response, the companies packed up, headed to Arizona, and set up shop under a new name, but with the same scheme.”

Perez concludes:

“The Utah and Arizona judgments send a strong, clear message: employers can’t hide behind deceptive legal partnerships to cut corners and save money on the backs of their employees. It’s our hope that this and other enforcement actions will serve as a credible deterrent that influences behavior throughout the economy. Especially in the fissured workplace, we will continue to be vigilant about protecting workers, taxpayers and law-abiding employers.”

If you represent clients in related industries, is this a wake-up call? Is misclassification as big a problem as it’s made out to be? Write to me at arizona.attorney@azbar.org.

P.S. Arizona has another close link to the Secretary: Four high-school kids from the Grand Canyon State just won an ABA award for best Magna Carta video. Among the luminaries they met in Washington DC in mid-April was Labor Secretary Perez. Here they all are:

U.S. Department of Labor Secretary Tom Perez meets with Arizona high school students who won first place in the ABA's 2015 Magna Carta video competition, April 2015.

U.S. Department of Labor Secretary Tom Perez meets with Arizona high school students who won first place in the ABA’s 2015 Magna Carta video competition, April 2015. (Full story in the June 2015 Arizona Attorney Magazine)

 

Dr. David Weil, Director of the Wage & Hour Division of the U.S. Department of Labor, speaks at the University of Arizona Medical School, Phoenix, April 1, 2015. On stage are Wage and Hour Division Phoenix District Director Eric Murray (at left) and Attorney Matt Meaker, who was also the event coordinator (Photo courtesy of the DOL Wage and Hour Division.)

Dr. David Weil, Director of the Wage & Hour Division of the U.S. Department of Labor, speaks at the University of Arizona Medical School, Phoenix, April 1, 2015. On stage are Wage and Hour Division Phoenix District Director Eric Murray (at left) and Attorney Matt Meaker, who was also the event coordinator (Photo courtesy of the DOL Wage and Hour Division.)

A recent visit to Arizona by a federal official was made possible by attorneys and others concerned about employee misclassification. The result was a day of speaking events and community meetings for Dr. David Weil, Director of the Wage & Hour Division of the U.S. Department of Labor.

It’s hard to overestimate the economic and other problems that misclassification causes.

At an April 1 event, Wage and Hour Division Phoenix District Director Eric Murray said that fully one-half of his office’s time is taken up with the issue. It affects: individual workers who may be underpaid, state and other agencies that get artificially lower revenue because of the errors, and businesses that may be forced into difficult decisions regarding compliance.

Wage and Hour Division Phoenix District Director Eric Murray speaks at employee misclassification event, April 1, 2015.

Wage and Hour Division Phoenix District Director Eric Murray speaks at employee misclassification event, April 1, 2015.

That constellation of problems led lawyers like Matt Meaker to form the Employee Misclassification Compliance Assistance Program (EMCAP) Working Group. He is the group’s Chair, and he took the lead on bringing the issue to the attention of the federal agency.

The subject generates much passion, Meaker said at the April 1 event. But it is not an easy subject to confront.

“Good guys want to compete on a level playing field,” Meaker told a roomful of employment lawyers, contractors and their representatives, and others. “They want to be good stewards of industry.”

Attorney Matt Meaker speaks at employee misclassification event, April 1, 2015.

Attorney Matt Meaker speaks at employee misclassification event, April 1, 2015.

And so a working group created a pilot program that became EMCAP. It allows “candid talks about business decisions, not just legal issues.”

The keynote speaker at the University of Arizona auditorium in downtown Phoenix was Dr. David Weil. In public remarks and a half-hour interview afterward, he explored the landscape of misclassification, its roots and future possible solutions.

Highlighting the politically fraught nature of his position, Weil was the first Senate-confirmed Wage and Hour Administrator in a decade. As he did in his confirmation hearings (introduced by Sen. Elizabeth Warren), he spoke in Phoenix at length on misclassification.

A portion of his confirmation hearing is below; his remarks on misclassification begin at 2:40 (though Senator Warren’s intro is worth watching too):

Given that political landscape, it’s not surprising that Weil comes from a business school (at Boston University). In Phoenix, he described his business bona fides and said he was “proud of his decades in a business school.” And he described the mission of the Department of Labor as twofold: to understand that business is a fundamental part of our economy, and to protect workers.

But on the elevator-pitch version of the DOL’s mission, Weil is crystal-clear: “Our job is to make sure people get a fair day’s pay for a fair day’s work.”

The reality of the department’s resources complicates that vision considerably. Weil discussed the strategic thinking that must go into enforcement decisions. As DOL staffers gaze at a landscape with 7.3 million workplaces, they have become adept at reviewing data to identify red flags. They also look closely at industries that have had traditional problems with misclassification—construction, janitorial, hospitals, restaurants, and logistics, to name a few.

Weil used the title of his book The Fissured Workplace to explain more deeply the challenging predicaments presented by an evolving economy. As companies have decided to focus on “core competencies” and shed “ancillary” activities, efficiencies have increased, even as the number of people on the payroll has decreased.

But what happens to those ancillary functions and all the people who used to do them? Often, they remain, but are now employed by a third-party entity, ostensibly more adept at that particular function.

That kind of outsourcing and subcontracting is not new, Weil admits. But what is new is the stringent and detailed standards that the large brands impose on those third-party firms and their many employees. The larger companies need to ensure a consistent delivery of all their brand elements, and so they often control non-employees’ work lives down to the granular level. And they have new and developing technologies that allow the larger brands to monitor every moment in the lives of their products and the workers.

So … are those workers employees, or not? Often, the larger brands rely on a strategy that says “not.”

Weil and we may sympathize with the challenge faced by those companies. A branded cellphone must work exactly the same, wherever it was manufactured. A person checking into a chain hotel expects a nearly identical level of customer experience, whether they are in Dubuque or Dallas. But some companies may be crossing the misclassification line.

The challenge may be just as great for companies that are not in violation. As they view their industry’s landscape, what if they find they cannot compete without certain questionable strategies?

That, said Weil, is where groups like EMCAP come in. Yes, DOL enforcement must be vigorous, and collaborations with state departments of labor must be robust. But business buy-in and self-regulation are vital.

Wage and Hour Division Administrator Dr. David Weil speaking with American Subcontractors Association of Arizona CEO Carol Floco (at left) and Attorney Julie Pace. (Photo courtesy Wage and Hour Division.)

Wage and Hour Division Administrator Dr. David Weil speaking with American Subcontractors Association of Arizona CEO Carol Floco (at left) and Attorney Julie Pace. (Photo courtesy Wage and Hour Division.)

Via EMCAP and similar approaches nationwide, employers may gather and use dialogue and other methods to curtail bad practices.

“When you hear from a peer, a fellow employer,” said Weil, “that is incredibly powerful.”

He cites the Florida citrus industry as an example of successful self-policing. He said that when the DOL shared data about which subcontractors were regularly violative in misclassification and in regard to worker rights, larger producers asked for a copy of their maps. Pointing to the red dots indicating poor performers, some industry leaders said, “We don’t want to do business with the red bubbles.”

And that altered toolbox of strategies is just fine with the Wage & Hour Director.

“We’re not into a game of gotcha,” said Weil, “but compliance.”

Though enforcement is still a tool, he said, the primary focus must be “thinking creatively about changing business decisions.”

My unedited follow-up interview with Dr. David Weil is here:

 

And more background on EMCAP is here. We may follow up with Matt Meaker and his partner Helen Holden on the committee’s progress.