Hiring Interns

The current economic situation in this country has led to an increase in the use of unpaid internships by companies, especially unpaid internships for young people who have been hit particularly hard by unemployment.  However, employers need to be extra careful in this regard since the U.S. Department of Labor (“DOL”) recently announced that it is cracking down on what it claims is the excessive and improper use of unpaid interns by companies for free labor.  Specifically, the DOL recently proclaimed that “[i]f you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law.”

For an unpaid internship to be lawful under the Fair Labor Standards Act (“FLSA”), the intern must be classified as a “trainee” rather than an employee.  The DOL has developed the below six factors to evaluate whether a worker is a trainee or an employee for purposes of the FLSA:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to what would be given in a vocational school or academic educational instruction;
2. The training is for the benefit of the trainees;
3. The trainees do not displace regular employees, but work under their close observation;
4. The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded;
5. The trainees are not necessarily entitled to a job at the conclusion of the training period; and
6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

If all the above factors are satisfied, the worker will be deemed a “trainee,” not an employee, and the worker can lawfully be unpaid under the FLSA.  Put another way, unless all the above factors are met, the worker will be classified as an employee entitled to, among other things, minimum wage and overtime.  A misclassification of a worker as a “trainee” could also obligate the company to pay workers’ compensation and unemployment insurance benefits, as well as subject the company to federal and state discrimination laws, tax liability, fines and significant legal bills.

In light of the foregoing, employers must carefully tailor any existing or future unpaid internship programs to make sure that they comply with the above factors in order to avoid liability.  Should you have any questions about this issue, please contact E. Jason Tremblay at Arnstein & Lehr LLP.

Employment Contact being signed by the employee

The legal landscape regarding the use of independent contractors has dramatically changed over the past several years.  For decades, employers’ use of independent contractors was not only rarely challenged, but it was also a way they could save significantly on labor and other costs associated with hiring employees.  In this tough economy, employers may be tempted to use the services of independent contractors instead of employees in order to reduce their bottom-line costs.  However, now more than ever, employers need to be extra careful in this area since both state and federal agencies are cracking down on what they believe is the widespread and improper use of independent contractors.

By way of example, the U.S. Department of Labor (DOL) has recently made the misclassification of workers one of its top priorities.  President Obama’s proposed 2011 budget for the DOL includes an additional $25 Million for what he characterizes as the “Misclassification Initiative.”  In this regard, it is expected that the DOL will hire an additional 100 enforcement personnel to investigate claims of misclassifying workers as independent contractors.

The Internal Revenue Service is also taking the misclassification of employees seriously.  The U.S. Government Accountability Office (GAO) recently concluded that employee misclassification is a “significant problem” because it reduces tax revenues flowing to the federal government.  In fact, the GAO estimates that over $7 Billion in payroll taxes will be lost over the next ten years.  Needless to say, the IRS does not take this loss in revenue lightly and has notified the public that, commencing in 2010, it will increase its employer tax audits with the specific purpose of determining whether employers are misclassifying workers as independent contractors.

States around the country have also seen this as a significant issue.  Illinois, New York, Maryland, Colorado and Delaware, to name a few, have either increased penalties for improperly classifying workers as independent contractors or have passed laws specifically designed to penalize employers for misclassifying workers.  There has even been legislation pending in Congress, which was sponsored a former Illinois Senator named Barack Obama, called the Independent Contractors Proper Classification Act, that would restrict an employer’s ability to classify a worker as an independent contractor.  Specifically, it would grant workers the right to petition the Secretary of Treasury for a determination of their status as employees or independent contractors and obligate employers to provide notice to workers of their right to seek a determination.  Simply put, the issue of misclassifying workers is not going away anytime soon.

Unfortunately for employers, there is no single test to ascertain whether a worker should be classified as an employee or an independent contractor.  And, to make matters worse, different state and federal agencies utilize different tests and standards in this regard.  However, common scenarios that raise red flags to governmental agencies are:

• Individuals classified as independent contractors who perform the same kind of work or duties that employees also perform for the business;
• Individuals classified as independent contractors who perform work that  is essential to the services or work of the business;
• Arrangement where the independent contractor either dedicates all his or her time to the business or is restricted from performing services for other businesses;
• Individuals designated as independent contractors who perform work for which other businesses in the same industry use employees.

In light of the foregoing, all employers must properly evaluate whether any current workers are appropriately classified as independent contractors and, if necessary, change the classification to comply with current federal and state law.  For a more detailed discussion of the benefits, risks and other issues related to the use of independent contractors, please contact E. Jason Tremblay and/or request a copy of the Employment Law Toolkit that he recently authored.