The Anatomy of a Wage and Hour Disaster

In the Press · February 1, 2007

1. A drywall company classifies Phyllis, a drywall installer, as an
independent contractor. Subsequently, the company becomes concerned about the
classification and requests that Phyllis become an employee. However, the
company relents when Phyllis expresses her preference to remain an independent
contractor.

  • Has the company
    correctly classified Phyllis?
  • Do you have enough
    facts to answer the question?
  • What additional facts
    would you want to know?
  • Does it matter that
    Phyllis wants to be an independent contractor?

Answer: The company has not correctly classified Phyllis.
This fact pattern would amount to a violation of prong two of the Massachusetts
statute (Chapter 149, § 148B) that requires that the service be performed
outside the usual course of business of the employer. Here, Phyllis is
performing an essential part of the employer’s business. That Phyllis or any
worker wants to be classified as an
independent contractor is not determinative.

2. Chicken King operates a fast food chain. Store managers earn a salary of
$75,000 per year and assistant managers earn a salary of $60,000 per year. The
store manager usually works the day shift and the assistant manager usually
covers the weekend and night shifts. The store manager or assistant manager on
duty supervises the part-time hourly employees, which number between 12 and 20
at any one time. The assistant managers schedule employees, assign work,
oversee product quality, speak with customers, train employees and perform cash
reconciliation duties. Many of these tasks are governed by detailed
instructions contained in Chicken King’s operating manual. Assistant managers
also spend a portion of their time performing the same tasks as hourly
employees, such as taking orders. The store managers rely on recommendations by
the assistant managers as to which employees to promote and which deserve
raises. 

  • Are the assistant managers eligible for overtime pay for hours worked
    over 40 in a given week?

Answer: No.
The assistant managers satisfy the executive employee exemption because they
earn more than $455 per week on a salaried basis. In addition, their primary
duties are managing the store and performing management functions such as
assigning work and training employees (even though they sometimes perform
non-managerial functions). They direct the work of two or more FTE’s, and the
store manager relies upon their recommendations regarding employee raises and
promotions.

3. An accounting firm hires Stan and Ollie to move office furniture at the
firm’s office, whenever the need arises — usually about six times per year as
employees shift offices. Stan and Ollie provide work under a purchase order
which specifies that the accounting firm does not control how they go about
their work. Stan and Ollie move the furniture during off-hours when there is
generally no one from the firm in the office. Stan and Ollie provide similar
services for other companies. The accounting firm classifies Stan and Ollie as
independent contractors. 

  • Has the company
    correctly classified Stan and Ollie?
  • What if Stan and Ollie
    are asked to move furniture at the firm on a weekly basis?


Answer
:
The accounting firm has correctly classified Stan and Ollie. Even if Stan and
Ollie moved furniture more regularly for the accounting firm, they could likely
still be classified as independent contractors because the moving of furniture
is incidental and not essential to the accounting firm’s business.

4. Big Rock Financial Consulting, LLC is a financial services firm. The
company employs senior financial counselors whose primary duty is to analyze
the client’s financial situation and make investment recommendations. The
senior financial counselors also sell financial products and earn a commission
on such sales in addition to their $125,000 base salary. The company also
employs associate financial counselors whose primary duty is to collect
financial data from the client and enter it into the computer using a complex
financial software package and then present the material to the senior
financial counselor. The associate financial counselors come from top Ivy
League schools and participate in an intensive three-month financial services
training program before being paired with a senior financial counselor. The
associate financial counselors also do some selling of the company’s financial
products, and are paid a base salary of $75,000 per year, plus commission. 

  • Are the senior
    financial counselors exempt from overtime pay?
  • Are the associate
    financial counselors exempt from overtime pay?

AnswerThe senior financial
counselors are exempt from overtime pay as they satisfy the administrative
employee exemption. They are paid more than $455 per week on a salaried basis,
their primary duty is performing office or non-manual work directly related to
the management policies or business operations of Big Rock’s customers, and
their primary duty requires that they exercise discretion and independent
judgment with respect to matters of significance. The fact that the SFC also
does some selling is not enough to change their primary duty and destroy the
exemption. The associate financial counselors are probably non-exempt and thus
entitled to overtime pay because they do not exercise discretion and independent
judgment with respect to matters of significance. However, if the commission
earned by the AFC’s puts them at an annual compensation level of $100,000 per
year or more, they may satisfy the highly compensated employee exemption.

5. A temporary agency provides a number of temporary technical writers to a
software company. The temps works for six months alongside company employees
who are also software writers. The temp agency treats the temps as employees in
all relevant respects (payroll, W-2, workers compensation, unemployment
insurance etc.), and provides a certain amount of on-site supervision. The
company provides more generous benefits than the temp agency, including a
pension plan available to all employees.

  • Do the temps have a
    claim to the software company’s more generous benefits?
  • What if the temps
    remain with the company for two years?

Answer: The temps would probably
not have a claim to the software company’s more generous benefits if the agency
is treating them as employees, maintains a degree of control over their
performance, and the contract does not extend for too long. Two years is
pushing it, however, and there is a risk the software company may be deemed a
joint employer.

6. Green Acres is an elder community that provides a variety of living
arrangements. Dr. Richard Livewell is an on-site doctor who has a physician’s
assistant, Sally Cleanwater. Sally graduated from a four-year college which
included completion of an accredited physician assistant program and has been
certified by the national physician assistant board. Sally receives an annual
salary of $65,000. 

  • Is Sally entitled to overtime pay for hours worked over 40 in a given
    week?
  • Would your answer change if you learned that when Sally took a two-day
    leave of absence to care for her father, Green Acres deducted two days of pay
    from her biweekly compensation? 

Answer: No. Sally qualifies for
the learned professional employee exemption and therefore is not entitled to
overtime pay. Her course of study, which was necessary for her work as a
physician’s assistant, qualified her for the exemption. The fact that her
employer made a salary deduction when no work was performed for a full week did
not destroy the exemption.  If the
employer made a salary deduction when Sally missed two days of work in a given
week, Sally would likely still qualify for the exemption as an employer is
permitted to make deductions from pay for full day absences for personal
reasons other than sickness or disability, but cannot make partial day
deductions without potentially destroying the exemption.

7. During peak season, a heating oil company hires independent contractors
to deliver fuel oil.  The contractors
incorporate and enter into a contract whereby their corporation agrees to
provide fuel oil delivery services for the company. There is no difference
between the duties of the drivers characterized as "employees" and
those characterized as "independent contractors." Finally, the
contractors each had to sign non-competition agreements.

  • Has the company
    correctly classified the drivers as independent contractors?

Answer:
Probably not. One factor that usually impacts against independent contractor
status is when the independent contractor is doing the same work as employees.
Also, having an independent contractor sign a non-compete agreement weighs
heavily against independent contractor status as it directly undercuts the
contractor’s independence.

8. Scoop Wilson is a reporter for the Your
Town Weekly
, a local newspaper, and his primary beat is to cover town
meetings and local sporting events. Scoop has a journalism degree. His articles
are intelligent and detailed and accurately report what occurred at the town
meetings and sporting events.  Scoop is
paid $500 per week for his work. 

  • Is Scoop Wilson entitled to overtime pay for hours worked over 40 in a
    given week?
  • Would it change your answer if Scoop’s beat was movie reviews and he was
    noted for his creative and humorous flourishes?

Answer: Yes. Scoop is entitled to
overtime pay. He does not satisfy the requirements of the creative professional
employee exemption because while his articles require intelligence and
accuracy, they do not require invention, imagination, originality or talent. If
Scoop’s beat were movie reviews and he was known for his creative and humorous
flourishes, there is a strong likelihood that he would satisfy the creative
professional employee exemption.

9. Shelly Sanders, a computer programmer, is laid off when Software Giant,
Inc., downsizes. Software Giant agrees to pay Shelly a flat fee to complete a
one-time project to create a certain product. It is not clear how long it will
take to complete the project, and Shelly is not guaranteed any minimum payment
for the hours spent on the program. Software Giant provides Shelly with no instructions
beyond specifications for the product itself. Shelly and Software Giant have a
written contract, which provides that Shelly is considered to be an independent
contractor, is required to pay federal and state taxes, and receives no
benefits from Software Giant. Software Giant will file a Form 1099.  Shelly works at home and is not expected or
allowed to attend monthly meetings of the software development group.

  • Has Software Giant
    correctly characterized Shelly?
  • Would it matter if the
    project was the same one Shelly was working on when she was classified as
    an employee as opposed to a new project

Answer:
Under the IRS’s more flexible independent contractor test, Shelly probably
qualifies as an independent contractor. However, if the project is the same one
Shelly was working on as an employee it would be problematic to classify her as
an independent contractor since she would be an employee one day and an
independent contractor the next day, doing the same work.  

Under
Massachusetts statutory law (Chapter 149, § 148B), it would be hard to avoid
the fact that Shelly is writing software for a software company which would
certainly appear to be in the company’s usual course of business. Therefore,
Shelly would need to be classified as an employee under Massachusetts law.

10. Suzanne Friendly is a pharmaceutical sales representative for Big Pharma
Co. Her primary duties consist of meeting with doctors in an assigned territory
to provide them with Big Pharma’s approved and carefully scripted information
and materials about its pharmaceutical products. Suzanne’s objective is to
encourage doctors to prescribe Big Pharma’s products. Suzanne has a base salary
of $150,000 per year and a bonus based on regional sales figures that can earn
her as much as an additional $200,000. Recently, due to the high demand for Big
Pharma’s H2B2 vaccine, Suzanne has worked 80 hour weeks. 

  • Is Suzanne entitled to overtime pay for hours worked over 40 in a given
    week?

Answer: Probably yes. Many courts have held that pharmaceutical
sales representatives do not truly make sales and thus do not qualify for the
outside sales exemption (although a few hold otherwise).  Suzanne probably does not satisfy the highly
compensated employee exemption because even though she earns more than $100,000
per year, she does not customarily and regularly perform one or more of the
exempt duties or responsibilities of the executive, professional or
administrative employee.  

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