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Major changes to the minimum salary requirements for exempt employees originally scheduled to take effect on December 1, 2016, are now on hold as the result of a ruling by a U.S. District Court judge in Texas.

As discussed in our November 7, 2016 blog post, the new rules would significantly increase the minimum salary requirements for the executive, professional and administrative employee exemptions (from $455/week to $913/week) and the minimum compensation for the highly compensated employee exemption (from $100,000/year to $134,004/year).

Twenty states joined together to challenge the new rules. On November 22, 2016, Judge Amos L. Mazzant III of the Eastern District of Texas issued a preliminary injunction blocking the new rules from taking effect. Since it is only a preliminary injunction, the judge can change his ruling after further proceedings, but that is seen as unlikely. The Obama Administration can appeal the ruling to the Fifth Circuit Court of Appeals, if it chooses to do so, but no decision has been announced.

The ruling means employers do not have to make any changes to current salary levels, at least until the courts make a final decision. Most employers already planned for the new rules, so it will be interesting to see how employees react when employers rescind their announced changes. We also don’t know the Trump Administration’s position on the proposed changes, so stay tuned.

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On December 1, 2016, big changes are coming to the minimum salary requirements for exempt employees.  The U.S. Department of Labor is significantly raising the minimum salary that an employee must receive to qualify as exempt from overtime.

Employees who qualify for the professional, executive or administrative exemption will see their minimum salary rise from its current level of $455/week ($23,660/year) to $913/week ($47,476/year).  Employees who qualify for the highly compensated exemption will see their minimum compensation rise from its current level of $100,000/year to $134,004/year.

There is no phase in or grace period for the increased salary requirements.  The changes take effect immediately on December 1, so employers must be certain their salaries comply with the new rules on that date.  The consequences for not complying can be severe.  Not only will the employee be entitled to overtime for all hours worked beyond forty hours in a workweek, but the exemption may be permanently lost.

Keep in mind that in addition to the salary test, an employee must also satisfy the “duties test” to qualify as exempt from overtime.  In general terms, the employee must spend the majority of his or her time performing nonmanual, higher level duties of a professional, executive or administrative nature.  The Department is not changing the requirements of the duties test, but it makes sense for employers to take this opportunity to review the duties of employees who might qualify, to assure they satisfy the duties test.

Determining whether an employee qualifies as exempt can be very challenging.  You cannot rely on job titles or job descriptions, but must analyze the circumstances of each employee’s work.  It is not unusual to have two employees with the same job title and job description, but only one who qualifies as exempt because of differences in what they actually do on the job every day.

The penalties for misclassifying an employee as exempt and failing to pay overtime are harsh.  Of course, the employee will be entitled to back pay for the unpaid overtime.  In addition, under federal law the employee is entitled to penalty wages of double the amount of unpaid overtime and up to 30 days’ additional wages under Oregon law, plus interest in both cases.  State and federal regulators may also impose stiff civil fines for each violation.

Give us a call if you have any questions or concerns and we will work with you to assure you are in compliance.

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Emerge Law Group is excited to offer the free Employment Law Compliance for Cannabis Employers class on September 28, 2016 in Portland from 9:30 a.m. to 3:00 p.m., with free lunch provided.

Our experts will guide you through the fundamentals that every employer must follow to fully comply with the mountains of Oregon and federal employment laws, including:

  • Employees vs. independent contractors
  • Exempt vs. nonexempt employees
  • Marijuana worker’s permits
  • Forms I-9, W-2, W-4, W-9, 1099, etc.
  • Salary, hourly and piece rate compensation
  • Workweeks, paydays, final paychecks and other payroll fundamentals
  • Workers’ compensation and OHSA compliance
  • Must-have employment policies
  • And much, much more!

You will also have an opportunity to ask the questions that matter most to you. Register online today.

More details can be found here.

Space is limited, so early registration is recommended. We look forward to seeing you!

REGISTER ONLINE at http://emergeclassregistration.eventbrite.com.

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Part 2: The High VERY HIGH Cost of Misclassifying an Employee as an Independent Contractor.

Misclassifying an employee as an independent contractor can be a very expensive mistake for a business.  Once the issue is on the table, the vultures start circling and you are in for a very unpleasant and costly ride.

The misclassification is typically discovered when something bad happens to the worker.   Often, the worker suffers an on-the-job injury and looks for workers’ compensation coverage and the Workers’ Compensation Division (WCD) determines the worker is really your employee.  Or the worker can’t find work and files for unemployment and the Oregon Employment Department (OED) determines the worker is really your employee.  Or the worker feels harassed or feels mistreated by you for some other reason and files a complaint with the Bureau of Labor and Industries (BOLI) or the Equal Employment Opportunity Commission (EEOC) and the agency determines the worker is really your employee.

Sometimes, but less frequently, the misclassification is discovered during a routine wage and hour audit, workers’ compensation audit or tax audit.  The investigator reviews your records and finds fewer employees on the books than expected or notices significant non-payroll payments to individuals for services performed.  Red flags go up and the investigator digs deeper to be sure you are paying all of the taxes or premiums you should be paying.

Regardless of the reason the misclassification is discovered, be prepared to have your business turned inside out and to open your wallet.

For example, if the worker is injured on the job and doesn’t have insurance to cover medical bills or lost wages, he and the attorney he consults, will look for a way to get coverage and you are the deep pocket they will turn to.  This once happy “independent contractor” will file a workers’ compensation claim and if you misclassified the worker, you are on the hook…and it’s a big hook.

If the WCD accepts the claim and determines that you are a “noncomplying employer,” i.e., the worker is an employee and should have been covered by your workers’ compensation insurance policy, bad and expensive things happen.  Most significantly, you lose the protection from lawsuits that a complying employer receives. The injured worker (or his estate, should the worker die from work injuries) can sue you for his or her injuries, medical bills not covered by the WCD, lost income, emotional distress and even punitive damages.  If as an employee, the worker would receive employee benefits, the worker can sue you for paid vacation, health insurance, paid sick leave and any other benefits you failed to provide.

The WCD will go after you for any medical bills WCD pays for the worker and will impose a substantial civil fine.  And don’t think your company can get rid of this problem by going out of business or filing for bankruptcy; the liability is also yours personally (as may some of the tax-related liabilities discussed below).

Your problems don’t end with the thousands of dollars you’ll pay the employee or the WCD civil fine.  BOLI and the DOL may come knocking at your door to check if you’ve misclassified other workers, and if you have, whether you owe them back wages for minimum wage violation or overtime violations, which can also produce additional damages of double or triple the wages owed.  BOLI and the DOL can also impose hefty civil fines.

You know who comes next: the tax man.  The EOD Tax Section, the Oregon Department of Revenue (DOR) and Internal Revenue Service (IRS) want the payroll taxes you failed to deduct from the employee’s compensation, such as income taxes, social security taxes, Medicare taxes, unemployment taxes, transit taxes, etc.  You’ll also be hit with significant penalties and interest, and, in some cases, may even be required to pay the employee’s share of certain taxes.

Through all of this, you will pay your own lawyers, accountants and other professionals thousands of dollars.  Of course, the misclassified worker will also get a lawyer.  If you misclassified other workers, the lawyer is likely to gain some of them as new clients, as well.  To pour salt on your wounds, many of the claims a misclassified employee can bring against you provide that you must pay the misclassified worker’s attorneys’ fees if he prevails (but you have to pay your own attorneys’ fees whether you win or lose!).

The bottom line is that most workers should be treated as employees, particularly if the facts make it difficult to say with any certainty that the worker is an independent contractor.  The tens or even hundreds of thousands of dollars you’ll pay for misclassifying an employee as an independent contractor pales in comparison to the cost of workers’ compensation insurance, payroll taxes and the other costs of simply treating the worker as an employee from the very beginning.

Misclassifying an employee is a costly mistake that you can easily avoid by doing your homework on the front end of the relationship.  If you’re thinking of hiring an independent contractor and there’s any doubt, talk to your lawyer before plunging into the independent contractor minefield.

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Part 1: Independent Contractor or Employee?

You might think determining whether a worker should be treated as an independent contractor or an employee is a fairly simple task. While that may be true for the obvious independent contractor, such as an established business that provides services to the public (think Jane’s Plumbing or Benito’s Electrical Contractors with their own employees, shops and vans), it’s much harder to determine when you’re hiring an individual worker.

Unfortunately, there is no simple test or checklist you can use to decide whether a worker is an independent contractor or an employee. Every situation must be analyzed on its unique facts, and even then it is often a difficult judgment call. This difficulty is compounded by the fact that the standards vary between different Oregon laws, as well as between state and federal law. For example, a worker who qualifies as an independent contractor for Oregon tax purposes may not qualify as an independent contractor under Oregon’s Workers’ Compensation Law.

In general terms, the key issue is whether the worker is “customarily engaged in an independently established business.” The agencies and courts weigh many factors, such as those listed here, to decide the answer, but no single factor is necessarily conclusive:

  • Does the worker maintain his own business location separate from the hiring party’s work site?
  • Does the worker bear the risk of loss relating to her own business, such as guaranteeing her work and fixing her mistakes at no additional cost, or performing work for a fixed price and eating the extra cost if the job takes longer or requires more supplies than anticipated?
  • Has the worker made a significant investment is his business for such things as tools of his trade, a business vehicle, office equipment, office space, work space, insurance, permits and licenses or other investments typical of a real business?
  • Does the worker provide her services to more than a single customer?
  • Does the worker advertise his services or otherwise solicit business from the general public or within his industry?
  • Does the worker file business tax returns?
  • Does the worker have the authority to hire and fire employees that provide his business’ services?
  • Does the worker decide when, where and how he will perform the services, with little or no direction from the business that hires him?

You may think you are safe if you and the worker agree to treat the worker as an independent contractor. The setup sounds great for both parties. You don’t have to worry about all the tax headaches and administrative obligations and costs that come with having an employee, such as payroll taxes, workers’ compensation insurance, tracking hours, providing benefits, etc. You get a bill from the worker and you pay it, nice and easy. The worker likes the arrangement, too, because there are no deductions from her compensation, she controls how to report her income and she likes the independence of not being an employee.

As a lawyer, when I question an employer’s decision to treat a worker as an independent contractor, I often hear, “This worker begged me to pay him as an independent contractor. It’s easier for me, too, so why not? As long as we’re both happy, what’s the difference? No one will know anyway.”

Well, the difference is that if the relationship sours and an administrative agency or court is called upon to review the arrangement, what you and the worker call your arrangement carries very little weight, if any at all. The agency or court will look right past what you call the relationship and decide for itself whether the worker is an employee or independent contractor.

Additionally, and most importantly, you and not the worker, bears the bulk of the financial liability for misclassifying an employee as an independent contractor, regardless of whether the worker was a willing participant. In Part 2 of this post, “The high VERY HIGH Cost of Misclassifying an Employee as an Independent Contractor,” you will learn about the financial storm that a mistaken classification can rain down on you.

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