News and Articles

When Your Intern is Really an Employee: Avoiding Triple Liability After Glatt v. Fox Searchlight Pictures, Inc.

Erin Lloyd - Friday, October 02, 2015

Many businesses work with interns at one point or another, using them for special projects or hiring them on an annual or other regular basis to work side by side with traditional staff members. Often, businesses do not pay their interns, reasoning that it is an educational experience and, in fact, students sometimes get school credit or even compensation from their school for an unpaid internship. In a landmark case this summer, a Federal court for the Second Circuit (which covers New York) clarified the circumstances in which an interns is excluded from basic employee protections, and all businesses should take note of the new rules that apply to unpaid interns.

Generally speaking, with the exception of “professional” and other highly compensated, salaried workers, most employees must be paid at least minimum wage for every hour worked up to 40 hours in a week, and must also be paid overtime for all hours worked beyond 40 in any given week, at a rate of time and a half of their usual hourly rate. These requirements are mandated by both the Federal Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”), and employees cannot waive these statutory rights.

In the past, there has been much disagreement about whether “interns” qualify as “employees”—and thus, whether the FLSA and NYLL even apply to interns. The U.S. Supreme Court, in 1947, held that individuals participating in a training program were not employees and the FLSA did not apply to them because they did not displace regular workers, were not promised employment after the training program, which was similar to training offered by a vocational school, and the employer did not receive any immediate advantage to its business from the work performed by the trainees. (Walling v. Portland Terminal Co., 330 U.S. 148). Based in part on this decision, the U.S. Department of Labor published guidance setting for six criteria which, if all were met, allowed for the trainee/worker to be treated as exempt from FLSA.

However, while the DOL required all six criteria to be met, courts—and specifically, the district court in Glatt v. Fox Searchlight Pictures, Inc., No. 11 Civ 6784 (WHP) (SDNY June 11, 2013)—employed more of a balancing test, evaluating whether most of the factors, on balance, indicated the individual was an employee or an intern/trainee.

On appeal, the Second Circuit declined to adopt either the DOL’s strict six-factor test or the lower court’s balancing test and, instead, adopted its own balancing test which it referred to as the “primary beneficiary test”. The Court wrote, “The primary beneficiary test has two salient features. First, it focuses on what the intern receives in exchange for his work. Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.” Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478-CV, 13-4481-CV at p. 14 (2d Cir. July 2, 2015) (internal citations omitted).

The Court set forth a list of “non-exhaustive factors” that it said courts (and therefore, employers) should evaluate and consider when determining whether an intern should be considered an employee for purposes of the FLSA (and NYLL), including:

1. 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.

2. 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.

3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.

4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.

5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.

6. 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.

7. 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 Court noted that “[t]he purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real-world setting,” and the non-exhaustive list of considerations is thought to reflect that purpose as well as balance it with economic realities of today’s workforce. The overarching concern for employers, based on Glatt, should be to develop an internship program that clearly provides the primary benefit to the student-intern and has the student-intern’s educational and experiential experience at its core.

It is important to note that if an intern is not paid—or is paid less than minimum wage, or is not paid for overtime pursuant to the law—and a court later determines that the intern should have been classified as an employee, a violation of the FLSA and NYLL will likely be found. In that case, courts can award back pay based on what the employee should have been paid, as well as up to 100% of that amount under each of those statutes. In other words, in the worst-case scenario, employers could be forced to pay three times what they should have paid in the first instance. On top of that, in most cases the employer is responsible for paying the employee’s attorneys’ fees, which can be in the tens of thousands for even a simple case. For these reasons, it is essential that employers and interns take a hard look at the Glatt factors and their own internship program to ensure compliance and seek legal guidance, when appropriate. Our attorneys can help you if you have not been properly paid as an intern, or if you are an employer who wants to maintain or develop a strong internship program that will steer clear of any legal liability.

For more information, employees and employers can contact us here

Employee or Independent Contractor? You May be Surprised by the Answer.

Erin Lloyd - Friday, October 02, 2015

For years now, businesses have been hiring independent contractors at increasing rates, in part reflecting the shift in our economy over the last decade, and in part reflecting attempts by businesses to limit costs and have a more flexible work force. We often hear from clients, “Our independent contractors use their own computer and work from home, so they supply their own tools work independently,” or “We have an independent contractor agreement, so they’ve agreed they are independent contractors.” What many of our clients don’t know is that none of these facts—and, indeed, many others cited by our clients—will turn an “employee” into an “independent contractor” under the law. Recently, the U.S. Department of Labor (“DOL”) issued an interpretation that clarified both the standard used to determine if someone is truly an employee or an independent contractor, and the extent to which the Federal and State Departments of Labor and other agencies are cracking down on misclassification.

Why Does This Distinction Even Matter?

Before discussing how courts and the DOL (as well as the IRS and other government agencies) define employee versus independent contractors, it is worth taking a moment to consider some of the reasons the distinction between the two is important. This issue affects the rights of individuals, the obligations of employers, and can also shed some light on the various factors courts and the government find important in this determination.

First, only “employees” are entitled to a minimum wage and overtime pay.[1] Independent contractors are entitled to offer their services at any rate they wish, and a business is free to negotiate lower rates with independent contractors or even alternative payment arrangements, such as in-kind payments.

While this may seem like a great benefit to any business, keep in mind that if an employee is misclassified as an independent contractor and the business did not conform to the wage and hour laws that apply to an employee, the employer runs the very real risk of facing a lawsuit in state or federal court. The Fair Labor Standards Act, a federal law, allows covered, non-exempt employees who were either 1) not paid for all hours worked, 2) paid less than minimum wage, or 3) not paid for overtime, to collect all the back pay they are entitled to plus 100% of those damages on top of the back pay for 2 to 3 years. Likewise, in New York, the New York Labor Law may permit the same employee to receive another 100% on top of that, and can go back 6 years. Further, both statutes allow the employee’s attorney(s) to recovery their reasonable attorney’s fees from the employer on top of the employee’s damages. That kind of judgment will very quickly cancel out any savings the business enjoyed by misclassifying the employee.

Of course, in an economically competitive environment, workers can sometimes face the Hobson’s choice between being unemployed or taking a position that they know is misclassified as “independent contractor,” overlooking the wage and hour violations of the employer. However, this is precisely the kind of work environment that the Fair Labor Standards Act was enacted to avoid in the early part of the 20th Century.

Beyond wage and hour protections, many other worker protections apply only to “employees,” including anti-discrimination statutes, family leave protections, disability and unemployment statutes, and more.

For example, businesses do not have to purchase unemployment insurance in New York for independent contractors, and independent contractors are likewise not entitled to receive unemployment benefits when their contract with a business ends. This is because independent contractors are thought of as individuals who are in business for themselves, whether they are acting as a sole proprietor or under a corporate form. But an individual who is truly an employee is entitled to collect unemployment if they qualify and, therefore, their employer is expected to pay into the system to provide that coverage.

The DOL and Courts Balance a Series of Factors, and No Single Factor is Determinative

When conducting an inquiry into whether a worker or group of workers has been misclassified by an employer as independent contractors, the U.S. DOL and Federal Courts, and to some extent the New York State DOL, apply what has been referred to as the “economic realities” test.[2] This test evaluates and weighs various factors in an attempt to answer the question whether the worker is economically dependent upon the employer or is truly in business for him or herself:

  •    1. Is the work performed an integral part of the employer’s business?
    •    2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
      •    3. How does the worker’s relative investment compare to the employer’s investment?
        •    4. Does the work performed require special skill and initiative?
          •    5. Is the relationship between the worker and the employer permanent or indefinite?
  •    6. What is the nature and degree of the employer’s control?
  •  

The DOL and Courts have made it very clear that applying the economic realities test, most workers are employees. True independent contractors are the exception, not the rule.

Enforcement Efforts Have Increased in Response to Lawsuits and DOL Complaints

The DOL has entered into memoranda of understanding with the Internal Revenue Service, as well as with 26 states, including New York, to facilitate information sharing and cooperate on enforcement efforts. In New York, both the Attorney General’s Labor Bureau and the New York State Department of Labor are sharing data and coordinating efforts with the U.S. DOL, and according to the DOL, these efforts are paying off: in fiscal year 2014, it recovered more than $79 million in back wages for more than 109,000 employees who were misclassified and, therefore, improperly compensated.

As a result, employers could see an investigation initiated by any number of agencies, State or Federal. If an employer has properly maintained records and documented the legal basis for classifying any workers as independent contractors, such investigations or audits can be relatively painless. If it has not, however, just the investigation alone can be extraordinarily costly to the business.

For this reason, employers should regularly consult with legal counsel to evaluate their employee and independent contractor relationships, to review documentation efforts, to modify contracts as necessary to keep up with changing law, and to otherwise engage in compliance reviews.

For more information, employees and employers can contact us here



[1] Note: Not all “employees” are entitled to overtime pay or minimum wage. This article does not address the difference between those who are entitled to such benefits (known as “non-exempt” employees) and those who are not (known as “exempt” employees). If you have questions about how these distinctions apply to your employees or to yourself, one of our attorneys can help you conduct that analysis.

[2] While the New York State DOL’s test has some variances, it is substantially similar to the Federal test.

Workers Right to Unionize Gets Boost From National Labor Relations Board

Yogi Patel - Tuesday, September 08, 2015

 

Intro

The National Labor Relations Board (“NLRB”) recently issued a major decision making headlines everywhere that both advocates and opponents say greatly expands workers’ right to unionize. The decision, Browning-Ferris Indus., restated the standard for determining whether a joint-employer relationship exists where more than one entity exercises some degree of control over workers. In a joint-employer relationship, employees have more than one employer and can exercise their rights against both employers. Because workers only have the right to collectively bargain (unionize) with their employer, by expanding the definition of a joint-employer relationship, the NLRB expanded the rights of employees to unionize. Given the recent decision and other pending actions before the Board, there is much speculation as to the scope of the impact the Browning-Ferris restated rule will have.

What Exactly is a Joint-Employer Relationship?

In a joint-employer relationship, two or more entities that have a business relationship each exercise a certain degree of control over a set of employees such that they should each be considered their employer. A common example of a joint-employment relationship is where a temporary placement agency provides employers to an employer; under such circumstances, both the agency and the business where the employees are placed would be considered employers. Determining whether or not a joint-employer relationship exists does not rely one a single concrete definition, but rather requires analyzing several factors relating to the control and supervision of employees. Overall, the general idea is that while two business entities that are involved with one another may be separate, when they share or codetermine matters governing the essential terms and conditions of employment, they should both be considered employers. What the NLRB did in Browning-Ferris was alter the factors used in the joint-employer analysis such that they expanded the relationship’s definition.

So What Exactly Happened in Browning-Ferris?

Browning-Ferris Industries was the operator of a recycling plant. BFI maintained their own employees who were responsible for operating forklifts and other machinery within the plant, but they hired a separate company, Leadpoint, to provide workers to operate conveyor belts within the plant that sorted recycled materials. The Leadpoint workers also performed other tasks, such as cleaning the facility. Eventually, the union that represented the BFI workers tried to represent the Leadpoint workers as well. Since employers may only unionize against their employer, this raised the issue as to whether or not BFI should be considered the Leadpoint employees’ employer as well, thus creating a joint-employer relationship.

 

In its decision, the Board explained that the rapid growth of the employment placement services industry required that it revisit its previous standard for assessing whether or not a joint-employer relationship exists. The Board emphasized that it has the obligation to apply the law to the “complexities of industrial life,” and to adapt the law “to the changing patterns of industrial life,” and that given the record numbers of workers employed through temporary agencies and other placement services, the Board was compelled to restate the joint-employer standard to address its shortcomings.

Under the previous rule, a company like BFI who was not the primary employer would only be considered a joint employer if it exercised “direct and immediate” control over certain working conditions if the employees. Under the “new” rule, which advocates claim already existed prior to the 1980s, the Board will determine that two or more entities are joint employers if they:

are both employers within the meaning of the common law, and if they share or codetermine those matters governing the essential terms and conditions of employment. In evaluating the allocation and exercise of control in the workplace, we will consider the various ways in which joint employers may “share” control over terms and conditions of employment or “codetermine” them, as the Board and the courts have done in the past.


The Board retained an “inclusive” approach to defining the essential terms and conditions of employment, which contain, hiring, firing, discipline, supervision, direction, setting wages and hours, dictating the number of workers, controlling scheduling, seniority, and overtime, assigning work, and determining the manner and method of work performance. However, the Board expressly held that it would no longer require an entity to actually directly exercise control over workers to be considered a joint employer, but rather that the essential determination would be based upon whether the entity had the right to exercise such control, directly or indirectly. To put it more plainly, an entity that has the right to indirectly control the essential terms and conditions of employment of certain workers should be considered their joint employer.

In the Browning-Ferris case, Leadpoint had its own supervisors at the plant, managed its employees schedules, evaluated its employees’ work, had its own HR, made all hiring decisions, made discipline and determination decisions, and set pay rates. However, Leadpoint’s control was limited and/or influenced by BFI in that BFI set the job qualifications and criteria, required drug and skills tests, insisted on some discharges, set an indirect cap on pay by limiting the amount it would reimburse Leadpoint, and set the hours or operation of the plant and shift times. The Board found that because of the control BFI held over the Leadpoint employees, whether direct or indirect, authorized or not, BFI was a joint-employer under the restated rule.


Why This is Such a Big Deal

One of the biggest areas of business that pundits are speculating the Browning-Ferris decision will have the greatest impact is over the franchise-franchisee relationship. Prior to Browning-Ferris, a franchisor, such as McDonald’s, would not be considered the employer of each franchise’s employees because McDonald’s the corporation did not exercise direct and immediate control over the working conditions of the employees. Under the new rule, most analysts assert that McDonald’s would be considered the joint-employer of all of its franchises’ employees, thus granting the employees the right to collectively bargain with McDonald’s itself. Previously, franchise employees had no such right, and if they tried to form a union, it was perfectly legal for the parent corporation, such as McDonald’s, to have the franchise such down.


Generally, analysts see the Board’s ruling as an opening for employees across many industries to attempt to unionize where it was previously forbidden, which would expand the rights of workers everywhere to collectively bargain. Naturally, advocates see this ruling as a welcome expansion of workers’ rights and opponents argue that the ruling will be disastrous for business and destroy the franchise model altogether.


Conclusion

Perhaps the most poignant argument the Board put forth in defending its decision attacked the disparity that arises when an entity can retain a certain degree of control over workers without workers having any rights against the entity: “It is not the goal of joint-employer law to guarantee the freedom of employers to insulate themselves from their legal responsibility to workers, while maintaining control of the workplace.” Given the rise of employment placement agencies by businesses, the Board was concerned that far too many employees would be left powerless against entities that profited from their labor and exercised control over them, which, it argues, the National Labor Relations Act was put in place to prevent. While time will tell what the true impact of the decision will have, especially given that it will almost certainly be approved, the Board did sent a clear message to employers that it would no longer tolerate business who seek to reap the benefits of labor it controls without any corresponding obligations.


This article is not intended to be nor should it be construed as legal advice. As with any legal inquiry, both employees and employers should seek the advice of council before taking any action pursuant to the information discussed above.


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