By Wendy J. Baker - Oregon Employment Attorney
All employers - and particularly health care providers - should be taking a close look right now at how they classify and pay their employees.
The 2011 federal budget proposed by the Obama Administration contains a request for $25 million in funding for the U.S. Department of Labor ("DOL") to conduct a "misclassification initiative." If approved, the program would allow the DOL to hire additional investigators dedicated to finding workers incorrectly classified as independent contractors and to look for employers who improperly classify employees as exempt to avoid paying overtime.
Misclassification of workers as independent contractors instead of employees results in the failure to properly pay FICA taxes, failure to withhold income taxes, and a host of other legal problems under federal and state law. For instance, independent contractors are not covered by workers' compensation insurance or the unemployment compensation system, and they are not eligible to participate in employee benefit plans for retirement and insurance. If the misclassification is challenged in a government audit or private lawsuit, it can result in massive liability for taxes, penalties, interest and other damages.
In addition, the U.S. Internal Revenue Service ("IRS") is undertaking a national "research initiative" focusing on improving employment tax compliance and increasing tax collection. As part of the initiative, the IRS is training agents to audit 6,000 randomly selected companies over the next three years. These agents were trained in February and March, and cases were expected to be assigned to them immediately. In addition to looking into the misclassification of independent contractors, the IRS audits will also examine employee benefits issues, including non-cash fringe benefits such as expense reimbursement arrangements, corporate credit cards, personal use of automobiles and planes, and executive compensation issues such as equity grants and nonqualified deferred compensation.
Of special note to health care providers is a recent DOL determination that 4,000 nurses in Missouri were not paid for mealtimes during which they worked. DOL investigators found that nurses at seven SSM Health Care facilities were owed $1.7 million in back overtime pay because the company's timekeeping system automatically deducted time for meal periods whether or not the employees were fully relieved of their duties.
Other common wage and hour violations occurring in hospitals and medical offices include:
- Failure to properly pay employees for off-premises work, including time spent answering phone calls and emails
- Failure to ensure payroll software, after customization, complies with state and federal wage/hour laws:
- Failure to include incentive pay, bonuses and shift differential in calculating overtime;
- Improper classification and/or deductions for exempt employees
Also of concern is the fact that the 9th Circuit Court of Appeals, whose decisions are binding on Oregon and all West Coast states, decided earlier this year that managers can be personally liable for unpaid wages under federal law. In the case at hand, the employer filed for bankruptcy and was unable to pay terminated employees their final wages, vacation and holiday pay. The employees sought relief against several top managers for the unpaid compensation. The court affirmed that managers could be held personally liable (under federal law) for the unpaid compensation if the managers had sufficient "control over the nature and structure of the employment relationship."
Generally, to meet this standard, the manager must be of the rank of chief operating officer or chief executive officer, or have a "significant ownership interest with operational control of significant aspects of the corporation's day-to-day functions." Those functions include the power to hire and fire employees; the power to determine salaries; and the responsibility to maintain employment records, for example.
To ensure compliance with federal wage and hour laws, health care employers must do more than review their compensation policies and payroll procedures. Many violations are the direct result of failures in policy administration and the day-to-day practices of managers and noncompliant employees. If you are unsure about these compliance issues, it would be wise to have an employment attorney review the way you classify employees. If you are out of compliance, you will be able to put things back on track before the DOL and IRS come knocking. If the employer can show that it is making a good-faith effort to remedy any mistakes, the DOL will typically be amenable to a settlement compromise.
