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Interns, Consultants and Employees
- 1. Interns, Consultants, and Employees: The Costs of Misclassification Drexel Entrepreneurial Law Clinic Steve Rosard, Director Garrett Graff Jason Kuntz Joel Ruffini Lauren Strebel
- 2. Thank You to Our Sponsors
- 3. Panelists • Caroline Austin, Duane Morris • Mike Wietrzychowski, Schnader • Reena Parambath, Earle Mack School of Law
- 4. Agenda • Definition of employees • The costs associated with employees • Two exemptions o Interns o Independent Contractors (AKA Consultants) • Penalties of misclassification • Discussion
- 5. Fair Labor Standards Act • FLSA defines the term “employ” very broadly. “Employ” is defined to include “to suffer or permit to work.” 29 U.S.C §203(g). • Covered and non-exempt individuals must be compensated under the law for the services they perform for a company.
- 6. There is no rigid rule…
- 7. Employees are Expensive Minimum Wage Overtime Health Benefits Workers Compensation Unemployment Insurance • Employer’s share of taxes • Etc. • • • • •
- 8. Available exemptions from employee status • Qualify as an Intern • Qualify as an Independent Contractor
- 9. The Fox Searchlight Case
- 10. Consider this… • Timmy wants to be a fashion designer • Notoriously difficult industry to enter • Applies for many positions, most of which are unpaid • Takes a position with a clothing design start-up
- 11. The Position 1. Start-up claims they are offering Timmy a way to build his name in the industry 2. Timmy comes to work, is allowed to be creative and make his own designs. He is provided with ample material to do so. 3. Timmy does meaningful work, is highly involved in the design and production of clothes that are sold on the start-ups website 4. If the designs that Timmy creates gain traction and 30 units are sold on the website, then the start-up promises to hire Timmy as a permanent designer
- 12. What do you think? Pay Timmy? Unpaid Intern?
- 14. Fact Sheet #71 1. Similar to vocational training or an educational environment 2. The internship experience is for the benefit of the intern 3. The intern does not displace regular employees, but works under close supervision of existing staff 4. The employer derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded 5. No job guarantee 6. It’s understood that no wages will be earned
- 15. 1. Is the Internship Similar to an Educational Environment? • Structured around an academic experience o Especially if affiliated with an academic institution • Training or useful knowledge is offered • Internship provides the individual with skills that can be used in multiple employment settings
- 16. 2. Who is the Primary Beneficiary of the Activity? EMPLOYER EMPLOYEE
- 17. 3. Does Worker Displace a Regular Employee? Remedial Tasks Skill-building Tasks Drafting cover letters Answering phones Making deliveries Making photocopies Running errands Organizing filing cabinets • Assembling office furniture • Shadowing • Creating new projects • Researching the industry • Making personal connections • • • • • •
- 18. 4. Does the Employer Receive Immediate Advantage from the Work Performed? • May take employer more time to review intern’s work than if they did it themself. • Impedes the employer’s operations • Job shadowing • “close and constant supervision” • Perform no or minimal value work
- 19. 5. No Promised Jobs • Internship of fixed duration, established prior to the outset to the internship • Generally, should not be used as “trial period” for full-time position
- 20. 6. No Entitlement To Wages • Reimbursement of out-of-pocket expenses may be allowed (e.g. transportation costs) • Employer and intern both understand intern is not entitled to wages from employer during internship
- 21. Takeaways • The six-factor test is the test • All factors must be met • Employment references, job-specific new skills, and professional connections are not enough • If a paid employee would have to perform the intern duties, it is not an internship.
- 22. What is Timmy’s Classification? 1. Line on the resume; foot in door 2. Independence and creativity allowed 3. Meaningful work, not clerical tasks 4. Potential for full-time job PANEL?!
- 23. Panel Discussion of Fact Sheet #71 1. Similar to vocational training or an educational environment 2. The internship experience is for the benefit of the intern 3. The intern does not displace regular employees, but works under close supervision of existing staff 4. The employer derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded 5. No job guarantee 6. It’s understood that no wages will be earned
- 24. What now? When you have to pay, do it the right way
- 25. The Developer •Sam is hired to build a website or product for NewCo. •Sam signs a non-compete. •Sam is told to come to work at NewCo’s incubator space. •Sam is told to come to meetings so that he can keep up with the company happenings. •NewCo pays for a copy of WebsiteBuilderPro® for Sam to use
- 26. What do you think? • Employee? • Consultant?
- 27. The Key: Control • Company has the right to control the worker. • Behavioral Control • Financial Control • Relationship of Parties
- 28. Behavioral Control Employee • Works on premises of employer. • Uses tools of employer. • Receives training. • Reports to the company daily. • Receives instructions. • Evaluation system. Consultant • Sets own hours. • Decides how to accomplish a project.
- 29. Financial Control Employee • Paid based on time. • Reimburses expenses of worker. Consultant Paid flat fee. No reimbursement. Ability to profit/loss. Significant investment in tools. • Able to put services on the market, seek other business opportunities. • • • •
- 30. Relationship of Parties Employee • Typically hired for an indefinite period. • Provides key activities to a business that the business is likely to want to control or direct. Consultant • Typically hired for a project or specific period. • Has a written contract outlining responsibilities indicative of a consultant relationship.
- 31. The Developer •Sam is hired to build a website or product for NewCo. •Sam signs a non-compete. •Sam is told to come to work at NewCo’s incubator space. •Sam is told to come to meetings so that he can keep up with the company happenings. •NewCo pays for a copy of WebsiteBuilderPro® for Sam to use
- 32. Penalties for Misclassification • Federal, state, and/or local law may prescribe personal liability for $ owed to a misclassified worker • Back taxes, back wages, overtime, unemployment…
- 33. Penalties in PA Criminal Civil • Fire or discriminate against whistleblower? • Payment of missing wages • Costs & attorney’s fees • Liquidated damages o $500 - $1000 fine o 10 – 90 days incarceration • Pay less than prescribed rate? o $75 - $300 fine o 10 – 60 days incarceration
- 34. Penalties in PA EACH WEEK + EACH EMPLOYEE = SEPARATE OFFENSE
- 35. Penalties in NY Criminal • Misdemeanor (first offense) o $500 - $2000 fine o Up to one year incarceration • Felony (second offense within six years) o $500 - $20,000 o Up to one year + one day incarceration Civil • Payment of missing wages • Prejudgment interest + attorney’s fees • 100% liquidated damages
- 37. Thank you to our sponsors
Notes de l'éditeur
- LAURENThis presentation will provide an overview on the importance of classifying workers properly and the consequences of misidentification. We will talk about the differences between interns, consultants and employees under the law and how your companies can comply with government enforcement. But FIRST: I’d like to thank our sponsors…
- Drexel University’sBaiada Institute for EntrepreneurshipSchnaderDuane MorrisAnd the Quorum. NEXT: I’d like to introduce our panelists…
- Panelists, if you don’t mind providing the audience with a brief bio about yourself, and explain your expertise as it relates to the topic of interns, consultants, and employees. Thank you panelistsNEXT: Agenda
- LAURENFirst we’re going to talk briefly about the definition of employees and the costs associated with them. Then we’ll go into the two big segments of the presentation, one on interns, and one on independent contractors. After those topics, we will talk about the penalties of misclassification. Last, we’ll open it up for discussion on these topics. So, quick question: Who has taken an unpaid position for a company, either for work experience or as a resume booster?Who has engaged unpaid labor to build your company?Good, then pay attention. NEXT: Garrett - FLSA
- GARRETTYou might be asking “why are we here?” The Fair Labor Standards Act is the rule/law which governs the use and classification of labor under the federal government labor regulations. As is defined here, the term “employ” defined broadly, includes “to suffer or permit to work.”Now, what does this mean for each of you. Essentially, the biggest takeaway from the FLSA is that individuals who are covered and notexempt from the FLSA must be compensated. Otherwise, you may be putting yourself and your company at risk.However, as we continue through this presentation, we will discuss various regulations, standards and interpretative guidelines which define “employee” and how that may apply to any labor you utilize.I should also note that not every person who performs work for his or her own benefit is the employee of another person. However, the default conclusion through the FLSA’s broad language is that of employees.
- GARRETTHowever, all that to say that there is no rigid rule on application and interpretation of the FLSA. Each state treats and interprets the FLSA and the definition of employee with its own nuances.For example, New York is more stringent and will encompass more workers as employees. Other states have been less proactive and less stringent about interpreting the FLSA. Across the board, the DOL and IRS are attempting to enhance their regulation and enforcement of labor misclassification, including the relatively new DOL Misclassification Initiative, which attempts to streamline communication regarding education and enforcement of labor misclassifications.Again, the default under the FLSA is that the worker is an employee, and the burden is on you as the employers to show otherwise. What this means for you is that employers, even in start-ups, should be conscientious about their labor classification and what potential risks and liabilities are involved in having said labor.
- GARRETTSince employees are the default classification, it is important to note that employees are expensive.The classification of employee means you must pay minimum wage, possible overtime pay, employment taxes, unemployment and workers’ compensation. You must also withhold federal and state income taxes. These are costs that a start-up needs to consider when determining whether or not to hire help. However, this does not at all mean that you never pay your workers to avoid these costs.However, simply choosing not to pay people for work does not meet you’re in the clear. Noncompliance may result in audits. You may think this is expensive, but wait until you get your lawyer’s bill for having them defend you against an audit and investigation.
- GARRETTThe alternatives for qualifying as an employee are qualifying as an intern or an independent contractor. These are the two exemptions we will discuss throughout this presentation. There are guidelines set forth for each classification which must be satisfied for compliance, as we will discuss in more detail. The key is to design each position to meet these requirements. First, we’re going to discuss “interns” and the factors that the Department of Labor sets forth.NEXT: LAUREN – Fox Searchlight Case
- LAURENHas anyone in the audience heard of the Fox Searchlight case? Eric Glatt and Alexander Footman, production interns on “Black Swan,” sued Fox Searchlight in September 2011. In the suit, Mr. Glatt and Mr. Footman said they did basic chores, usually undertaken by paid employees. The Interns took lunch orders, answered phones, arranged other employees’ travel plans, tracked purchase orders, took out the trash and assembled office furniture. At the end of the day, even though the unpaid interns received a resume line, job references, and an understanding of how the production facilities work, those benefits were held to be incidental to working in the office just as any other employee. The judge said unpaid internships should be allowed only in very limited circumstances. In doing so, he followed criteria that will be discussed here today.As this presentation will teach you, at the end of the day, your biggest legal risk comes from the disgruntled voices of interns that may reach the various government labor agencies. Read more at http://under30ceo.com/a-startups-legal-guide-to-summer-interns/#jJIiZzB7KcZabBI1.99So now that we know it is important to properly classify workers, let’s discuss how you can comply with the FLSA and corresponding state regulations. We’ll start with discussing the category of interns. Let’s begin w/ a hypoNEXT: Hypo! Timmy!
- LAURENAudience, meet Timmy. Timmy wants to be a fashion designer. If you didn’t know, the fashion industry is a notoriously difficult industry to break into. As any ambitious person would do, Timmy decides to apply for positions to get his foot in the door. As he soon finds out, most of them are unpaid. However, realizing the importance of gaining experience in the industry, Timmy accepts a position with a start-up that is developing a new clothing line. NEXT: The Position
- LAURENNEXT: Poll the audience
- LAURENAudience, what do you think? Who thinks Timmy needs to be paid under the law? NEXT SLIDE -- Who thinks Timmy’s hot?
- GARRETTThe Department of Labor has compiled six factors in order to qualify as a “trainee”, which are listed on this slide. In order to comply with the Fair Labor Standards Act, a valid internship or training program MUST satisfy all six factors according to the Department of Labor. This is an all or nothing test; every criteria has to be met.
- GARRETTThe first criteria is whether the internship is similar to an educational environment or not. Of course, the DOL interpretations favors programs which provide educational benefit to the worker and/or correlate to the worker’s educational program. To meet this criteria, if the individual is performing work for credit, that’s one way the program could satisfy Factor #1. Other examples are opportunities for feedback and coaching as well as providing the individual widely applicable skills that are useful in other employment settings outside of one particular employer. In general, the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience.
- GARRETTThe second factor is who primarily benefits from the individual’s activity? The key for this factor is that the individual comes out of the internship with tools and skills he or she can use in other jobs. On the other hand, if an intern is engaged in the operations of the employer or is performing work that an employee would otherwise be doing, then the fact that they may be receiving some benefit in the form of a new skill or improved work habit will not exclude them from the FLSA’s regulations because the employer is benefiting. Especially considering the status of the economy and the job market, many of those seeking jobs may need that line on the resume. BUT, a line on the resume is NOT enough. A regular employee also would receive a line item on their resume, so a resume line item is not compelling in order to satisfy the DOL’s guidelines. Factors which weigh in favor of the company as the primary beneficiary, and thus, classification are that the intern learns skills only applicable to that employer’s operations as well as the company being dependent on the intern’s work products.
- LAURENThis question is centered around the type of work the individual performs at the position. Does he perform remedial tasks? Or does he perform skill-building tasks? Whereas the criteria Garrett just discussed focuses on who gains the benefit of the individual’s work, this criteria focuses on that activity and who would typically perform it. Again, if an employer uses interns as substitutes for regular workers, those individuals are not “interns” under the FLSA and would instead be either employees or perhaps independent contractors, and should be paid for the work performed.NEXT: EE receive Immediate Advantage
- LAURENThe employer receives no immediate advantage from the activities of the individual and, on occasion, his operations may even be impeded. This criteria is interesting, because it suggests that the worker should perform no or minimal value work. The idea behind this criteria is that the employer should really take the time to teach the intern new skills by providing close supervision. NEXT: No promised jobs.
- LAURENIt is possible to hire interns subsequently as employees – however, the internship should not be premised on such a promiseNEXT: No entitlement to wages
- LAURENThe employer and the intern understand that the interns is not entitled to wages for the time spent at the company. NEXT: Garrett - Takeaways
- GARRETTSome of the important takeaways of the DOL’s Fact Sheet #71 is that all 6 factors MUST be met according to the Department of Labor. As you might find relevant to many in the entrepreneurial eco-system, employment references and resume line items are not enough to “sanitize” using unpaid labor. And lastly, if you would otherwise be using a paid employee to perform the duties performed by the intern, the intern cannot be classified as unpaid labor.Now, after having looked at each of the six factors individually, it seems like this DOL test is quite stringent and virtually impossible to meet, right? If we read Fact Sheet #71 verbatim, only shadowing type of internships would pass this test. However, we must also think about each jurisdiction and its courts actually interpret these guidelines. So remember Timmy?
- GARRETTStart-up claims they are offering Timmy a way to build his name in the industryTimmy comes to work, is allowed to be creative and make his own designs with material provided by the employerTimmy does meaningful work, is highly involved in the design and production of clothes that are sold on the start-ups websiteIf the designs that Timmy creates gain traction and 30 units are sold on the website, then the start-up promises to hire Timmy as a permanent designerTaking each of the six factors we just discussed as they apply to Timmy, who thinks Timmy should be paid now?
- DISCUSSION – BOTHWhat do you think about Timmy’s internship? How can a start-up structure its internship to comply with the educational requirement? (Professor Parambath)Factor 2 – is a line on a resume enough to be considered the benefit of the intern? It seems as though for a start-up to meet all of the requirements, it could only have interns shadow and watch what they do? Practically, what does that mean? Can an employer ever derive no immediate advantage? (Caroline)
- Well that was an informative discussion. So we’re moving on to part two, to discuss independent contrators. So to reiterate, everyone’s an employee by default, it’s up to an employer to show whether a worker is an employer or not. You tried to put your worker as an intern, but failed the test. Now you have to choose, employee or independent contractor.
- So take this situation for example. You need a website developed, you need it now. This position entails more skill and work than an intern can provide for you.
- So what does everyone think? Is Sam an Employee? Or is Sam more like a Consultant?
- The answer to whether Sam in an Employee or a Consultant depends upon the control the employer has over the worker.This is based largely on the facts of the situation. There are 3 major categories of factors that weigh into the analysis. These are Behavioral control, financial control, and what the parties agree to have their relationship look like.
- Instructions – such as when and where to do work, what tools to use, what workers to hire to assist them, where to purchase supplies and services, what order to follow when performing work.
- Employees are usually Paid based on time – usually linked to hours, weekly, monthly, etc. An Independent contractor on the other hand is paid
- Panel, what do you think about Sam’s internship?How can NewCo make Sam a consultant rather than an employee? Are there legal considerations for what FMV is for IC?What are the benefits of being an IC/employee that we didn’t discuss. When should a startup choose IC, when choose employee?If an agreement wasn’t made at the beginning of the relationship, should a company formalize the relationship?
- We’ve said it a couple time, but it’s worth repeating. The states will assume that a worker is an employee and it is up to the employer to prove otherwise. The DOL and the individual states have formulated penalties for improper classification of employees. This liability is personal to the employer, not the company. You cannot rely on the limited liability of the entity to protect you from your obligations. The liability will include everything from back wages, to workers compensation, to overtime pay. Employers – if you discriminate b/c someone will testify against you for min wage act $500 – 1,000 fineJail time?!Requirements for conviction - ? Back taxes include social security, federal and state income tax withholding. Just a heads up, the DOL is trending toward stricter regulations. Since the economy has tanked, the various federal and state agencies are looking anywhere to get money that is slipping through their fingers. The DOL has signed memorandum of understanding with the IRS and 15 states including New York, Maryland, Connecticut and Massachusetts, with the specific and mutual goals of \enhancing enforcement by conducting joint investigations.New York recently signed this initiative on November 18, 2013. Some states are taking misclassification very seriously, including California which has a $5,000 – $15,000 penalty per worker misclassified. http://www.hrcsuite.com/profitability/independantcontractorsQUESTION – Joel is researching – is an IP assignment for an invalid internship valid? Is there consideration? http://www.dol.gov/whd/workers/misclassification/#stateDetails
- There is a moral/ethical argument for proper treatment of workers. But states recognize that this may not provide a compelling enough motivation or that economic realities limit an otherwise ethical employer from following the letter of the law.It is worth repeating that state laws start from the presumption that a worker is an “employee” subject to min. wage, overtime, etc.In our region, PA’s penalties are typical, and may be on the “lighter” side compared to other states.[Describe various penalties prescribed by PA laws/regs]
- On their face, PA’s penalties may seem like a reasonable gamble based on the costs that can be avoided by improper classification. However, each week in which an employee is underpaid triggers a separate offense.
- NY penalties follow a similar framework as PA but with harsher results.[Describe NY labor law penalties]Like PA, each week of underpayment results in a separate offense.Trend towards regulation.
- Ask ‘what is market’ for equity for workers – where is the threshold that they are still treated as members.The worker can be a member of the LLC – equity. Utilize educational externships – ask local universities if they have programs[Properly contract with consultants; continually review relationships – jpk][properly use intern/consultant relationships to identify candidates for employee status – jpk][considerations: costs, skills, loyalty, risk of misclassification,… - jpk]Treat workers fairlyKnow your state laws
- Again, a huge thank you to our panelists and to our sponsors.