On January 9, 2023, the United States Department of Labor issued a new final rule regarding the proper classification of workers as independent contractors under the Fair Labor Standards Act. While the rule is technically new, it is, in substance, a recitation of the applicable law regarding the proper classification of workers set forth by the Supreme Court.

Prior to recent rule making, caselaw guided the determination of whether a worker was an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). In United States v. Silk, the United States Supreme Court outlined the factors relevant to the determination: degree of control, opportunities for profit or loss, investment in facilities, permanency of relations and skill required in the claimed independent operation. The Silk court noted that “no one factor is controlling.” Just about every court, federal or state, applies the same or similar standard to determine the issue under the FLSA or state statutes regarding minimum wage and overtime pay.

The new rule and the case law arose under the FLSA, but workers have challenged the classification in other contexts as well. In addition to the fact that independent contractors are not protected by the FLSA and state statutes that impose overtime and minimum wage protections, they lack other protections as well. They are not entitled to employee benefits such as health care, or to unemployment compensation under most state laws. They are generally not covered by workers compensation policies. Employers do not have to pay the employer portion of federal and state taxes for independent contractors. Many employers sought to lower the cost to employ workers by improperly classifying them as independent contractors. In these contexts, courts, regulators and state and federal agencies generally apply a test similar to that set forth in United States v. Silk. The Internal Revenue Services has its own twenty-three factor test, but the factors are similar to the Silk factors.

Employers face expensive consequences for classifying an employee improperly. A finding by a court that an employer improperly classified an employee as an independent contractor can result in liability under the FLSA and state minimum wage and overtime laws; the Employee Retirement Income Security Act; federal and state tax laws; and, unemployment compensation laws. Each of these statutes includes penalties and attorney’s fees provisions in favor of the employee. Tax, unemployment and workers compensation authorities may require an audit of all workers to ensure compliance. In the event an employer has failed to pay employee taxes or contribute to unemployment or workers compensation funds, the employer will be subject to penalties for those violations. If the employer has misclassified an entire class of worker, this could multiply the consequences.

In 2021, the Department of Labor issued a Final Rule (the “2021 Rule”) to implement regulations interpreting the factors set forth in United States v. Silk. The 2021 Rule attempted to assign weight on certain of the six factors, despite the consistent language of the case law that no one factor is controlling. That rule stated that the worker’s “economic dependence” on the employer was the “ultimate inquiry”. Out of the six factors cited in United States v. Silk and its progeny, the 2021 Rule stated that the “nature and degree of control over the work” was the most important factor, reciting that the remaining factors “are less probative and, in some cases, may not be probative at all.” This resulted in a more employer-friendly interpretation of the regulation.

However, the truth is that these types of regulations are merely interpretations of the FLSA, and the court will be the last word on interpretation of the statute. The same is true of similar state statutes.

The new rule mirrors the language of the case law. It recites that the ultimate inquiry is the worker’s “economic dependence.” It then identifies that the six factors “should guide an assessment of the economic realities of the working relationship and the question of economic dependence.” The rule requires, as does the applicable case law, that this is a “totality of the circumstances” analysis, and the weight to give each factor will depend on the facts of each particular case.

The rule then recites the six factors, and provides guidance in how to apply those factors, including examples for each factor. In this way, this rule does put its thumb on the scale in favor of a finding that the worker is an employee. For example, the rule recites that the analysis of whether or not there is an “opportunity for profit or loss” depends on the worker’s “managerial skill”. The rule recites that the ability to work more hours or take more jobs when the worker is paid a fixed rate per hour does not indicate that the worker is properly classified as an independent contractor.

The new rule does not dramatically change the analysis any more than the 2021 Rule did. The courts will still be the last word on classification under the FLSA. The new rule is consistent with federal and state caselaw on the topic. In the end, it is the courts that will make those determinations, and the case law provides the best analysis of whether an employer has properly classified an employee. Further, the rule applies only to the FLSA. Some states, such as California, have stricter independent contractor rules. The IRS has its own rules. The regulation’s guidance is helpful, but there is no change as to how to analyze the issue of a classification of the worker: employers will need to analyze the particular worker under the applicable state and federal case law and regulatory guidance and make a decision that factors in the expensive consequences of getting it wrong.

Patricia Collins is a Partner and Employment Law Chair with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on employment, commercial litigation and health care law. Patricia Collins can be contacted at 215.230.7500 ext. 126.

Reprinted from the October 18th edition of The Legal Intelligencer. (c) 2023 ALM Media Properties. Further duplication without permission is prohibited.

On January 5, 2023, the Federal Trade Commission (“FTC”) issued a proposed final rule that would result in a ban of non-compete agreements, and would require employers to rescind existing non-compete agreements. The public comment period for the rule terminated on April 19, 2023, but the FTC has acted aggressively to ban non-competes in the meantime. The FTC has filed complaints against companies that use non-compete agreements, resulting in consent orders that accomplish the recission of hundreds of existing non-compete agreements. The United States Department of Labor, the National Labor Relations Board and even the courts have also taken steps to deter the use of non-compete agreements.

Reprinted from the April 20th edition of The Legal Intelligencer. (c) 2023 ALM Media Properties. Further duplication without permission is prohibited.

In Sharp v. S&S Activewear, LLC, the United States Court of Appeals for the Ninth Circuit tackled the difficult issue of when a generally toxic workplace becomes a hostile environment under Title VII. 42 U.S.C. § 2000e-2(a)(1). The Ninth Circuit’s conclusion that employees’ allegations regarding playing offensive music in the workplace were sufficient to state a claim for a hostile work environment under Title VII relied on recent Supreme Court precedent, in Bostock v. Clayton County, 140 S. Ct. 1731 (2020); and Oncale v. Sundowner Offshore Servs, 523 U.S. 75 (1998).

Reprinted from the April 20th edition of The Legal Intelligencer. (c) 2023 ALM Media Properties. Further duplication without permission is prohibited.

On March 23, 2022, the Pennsylvania Human Relations Commission (“PHRC”) proposed new regulations to expand the definition of certain protected classes. The Amendments will create new Pennsylvania Code Sections at 16 Pa. Code §§ 41.201 – 41.207, and would expand the terms “sex”; “religious creed” and “race” for purposes of the Pennsylvania Humans Relations Act (“PHRA”) and the Pennsylvania Fair Educational Opportunities Act (“PFEOA”). The regulations were approved on December 8, 2022. The regulations are not yet in effect, but will become effective 60 days after publication in the Pennsylvania Bulletin.

The PHRA prohibits discrimination in employment because of race, color, religious creed, ancestry, age, sex, national origin or non-job related handicap or disability. 43 Pa. Stat. § 955(a). The regulations relating to the PHRA previously provided definitions only for the terms “pregnancy” and “disability due to pregnancy or childbirth”. 16 Pa. Code 41.101. The definition of the other protected classes was left to the PHRC’s guidance and cases interpreting the statute.

The amendments to Title 16 of the Pennsylvania Code would add a new subchapter, entitled “Protected Classes”, for the purpose of ensuring that all unlawful discriminatory practices proscribed by the PHRA and PFEOA are “interpreted and applied consistently”, and that all complaints filed with the PHRC “are investigated consistent with the rules outlined herein.” The regulations calls for liberal construction to accomplish the purpose of the PHRA and PFEOA.

Reprinted from the February 10th edition of The Legal Intelligencer. (c) 2022 ALM Media Properties. Further duplication without permission is prohibited.

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed rules imposing a broad restriction on non-competition agreements (“Proposed Rule”). The Proposed Rule would require employers to rescind existing non-compete agreements, and would preempt conflicting state laws. The ban marks a dramatic change not only in the law, but in the relationship between employers and their key employees.

The Proposed Rule defines “non-compete clauses” as follows: any agreement that prevents a worker from seeking or attempting to seek employment with any employer; or, any agreement that is a de facto non-compete clause. A de facto noncompete clause has the “effect of prohibiting the worker from seeking or accepting employment.” The Proposed Rule provides examples of a de facto non-compete clause: a non-disclosure agreement drafted so broadly that it effectively precludes the employee from working in their chosen field; or a contractual term that requires the employee to pay the employer or a third party its training costs if employment terminates within a specified time period, but only where the payment is not reasonably related to the actual costs incurred by the employer.
The Proposed Rule mandates that it is a prohibited unfair method of competition to enter into or “attempt to enter into” a noncompete clause with an employee, or to maintain an existing non-compete agreement, or to represent to an employee that they are subject to a noncompete without a good faith basis to believe they are.

Reprinted with permission from the October 14th edition of The Legal Intelligencer. (c) 2022 ALM Media Properties. Further duplication without permission is prohibited.

Employers eager to recapture the costs of hiring foreign citizens often use damages or repayment provisions in employment agreements. A recent case in the Southern District of New York illustrates a challenge to that strategy. The Southern District’s recent decision in Baldia v. RN Express Staffing Registry LLC to allow a complaint under the federal Trafficking Victims Protection Act (“TVPA”) to proceed, is part of a growing trend in using the TVPA to challenge such agreements.

The plaintiff in the Baldia case, Marie Alexandrine Baldia, is a citizen of the Philippines. RN Express Staffing recruited her from the Philippines and hired her as a registered nurse supervisor after sponsoring her visa to work in the United States. Baldia signed an Employment Agreement for a three-year term, that included a liquidated damages provision. Specifically, the Employment Agreement required that in the event Baldia left the employ of RN Express Staffing, “without cause”, before the end of the three-year term, she would need to repay the costs of “recruiting, training and placement”. The Employment Agreement recited that the “Company Recruitment Costs” totaled $33,320, and that the number would be reduced after her first full year of employment.

Reprinted with permission from the June 23rd edition of The Legal Intelligencer. (c) 2021 ALM Media Properties. Further duplication without permission is prohibited.

The United States Supreme Court narrowed the application of the Federal Arbitration Act (“FAA”) in its June 6, 2022 opinion in Southwest Airlines Co. v. Saxon, 596 U.S. ____ (2002). The case, along with the earlier case New Prime Inc. v. Oliveiri, 556 U.S. ____ (2019) , represents the narrowest narrowing of the Supreme Court’s broad holding in Epic Systems Corp. v. Lewis, 284 U.S. ____ (2018). In Southwest Airlines v. Saxon, the court answered the narrow question of whether an employee employed as a “ramp supervisor” fell within the Federal Arbitration Act’s exemption of “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce”, concluding that the workers did fall within the exemption. The case does not presage a trend towards narrowing the application of the Federal Arbitration Act, and instead demonstrates that the Court intends to encourage honoring arbitration agreements by insisting on a textual and precedential approach to the FAA.

Saxon was employed as a ramp supervisor at Southwest Airlines at Chicago Midway International Airport. At the beginning of her employment, she signed an employment agreement agreeing to arbitrate wage disputes individually. As a ramp supervisor, Saxon’s job was to train and supervise teams of ramp agents. Ramp agents are employees who physically load and unload baggage, airmail and freight. Occasionally, ramp supervisors assist ramp agents in loading and unloading cargo. Saxon filed a putative class action of ramp supervisors against Southwest, alleging violations of the Fair Labor Standards Act (“FLSA”). Southwest moved to dismiss, citing Saxon’s employment agreement which required arbitration pursuant to the FAA. Saxon argued that the ramp supervisors were exempt from the FAA pursuant to the exemption for “workers engaged in foreign or interstate commerce.” The United States District Court for the Northern District of Illinois dismissed the case, agreeing that the exemption did not apply. The United States Court of Appeals for the Seventh Circuit reversed, finding that the loading of cargo to be transported interstate is “itself commerce.” The Seventh Circuit’s holding conflicted with an earlier decision of the United States Court of Appeals of the Fifth Circuit. The Supreme Court granted certiorari and found that Saxon belong to a “class of workers engaged in foreign or interstate commerce”, and was exempt from arbitration.

Reprinted with permission from the April 14th edition of The Legal Intelligencer. (c) 2021 ALM Media Properties. Further duplication without permission is prohibited.

42 U.S. § 2000e, et seq. (“Title VII”) imposes caps on damages that limit the recovery for plaintiffs in employment discrimination cases. The plaintiffs in Yarbrough, et al v. Glow Networks (United States District Court for the Eastern District of Texas, 4:19-cv-00905) employed an interesting theory to avoid those caps, and the strategy paid off. On February 18, 2022, a Texas jury returned a verdict of $70 Million Dollars for ten race discrimination and retaliation plaintiffs, who asserted claims pursuant to 42 U.S.C. § 1981 (“Section 1981”). The Yarbrough Plaintiffs asserted no claims under Title VII.

The Yarbrough Plaintiffs alleged discrimination in the workplace at Glow Networks. They alleged that Glow Networks treated Africans and African-Americans differently than other employees and subjected them to a hostile environment in several ways. For example, they alleged that Glow Networks monitored their workspaces in a manner that they did not monitor other employees; that they were written up and reprimanded for conduct that Glow Networks ignored in other employees; and, that they did not receive promotions despite recommendations from their managers, and that the promotions went to non-Africans and non-African Americans. The Yarbrough Plaintiffs included white managers of the African and African American employees who reported the alleged discrimination to management. The African and African American plaintiffs also asserted retaliation. Some of the employees were terminated, and others resigned, alleging a constructive discharge. Plaintiffs alleged one count of violation of Section 1981. The case was tried by a jury from February 7, 2022 through February 18, 2022, when the jury returned a verdict. For each of the ten plaintiffs, the jury awarded $2 Million in past pain and suffering damages; $1 Million in future pain and suffering; and $4 Million in punitive damages, resulting in a $70 Million verdict. On April 6, 2022, Glow Networks stated in a Response to plaintiffs’ Motion to Enter Judgment that it intends to file post-trial motions for judgment as a matter of law and for a new trial.

Courts generally analyze claims under Section 1981 and Title VII in the same manner, using the burden-shifting framework set out in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). Castleberry v. STI Group, 863 F.2d 259, 263 (3d Cir. 2017). While both statutes prohibit discrimination on the basis of race, Section 1981 contains no damages cap. The most a plaintiff can recover in “non-economic” compensatory and punitive damages in a Title VII is $300,000.00. 42 U.S.C. § 1981a(b). The complaint in the Yarbrough case does not allege Glow Networks’ number of employees, but assuming the maximum would apply, the damages in the case would have been limited to $3 Million, instead of the $70 Million alleged. This difference alone requires race discrimination plaintiffs to consider asserting claims under Section 1981.

A recent decision by the Pennsylvania Supreme Court underscores the fact that although an employer may be in compliance with the federal Fair Labor Standards Act (“FLSA”), it may at the same time be in violation of the Pennsylvania Minimum Wage Act (“PMWA”).

The case, In Re: Amazon.Com, Inc. et al. v. Amazon.com, Inc., Amazon.com.DEDC, LLC, and Integrity Staffing Solutions, Inc. (43 EAP 2019), involved a class action brought by two employees who worked at an Amazon warehouse in Pennsylvania and sought to be compensated for time spent at the premises waiting to undergo and undergoing mandatory security screening.

As discussed below, a federal district court had dismissed the employees’ claims under the FLSA and the PMWA, but the federal Sixth Circuit Court of Appeals certified the case to the Pennsylvania Supreme Court to address the questions as to whether the PMWA applied to the employees’ claims and whether there is a de minimus exception to the PMWA.

Reprinted with permission from the June 21st edition of The Legal Intelligencer. (c) 2021 ALM Media Properties. Further duplication without permission is prohibited.

Since its enactment in 1986, employers have used the federal Computer Fraud and Abuse Act, 19 U.S.C. §1030 (“CFAA”) to vindicate violations of the employer’s workplace policies regarding use of computers, email accounts, and other electronic information by departing employees. The CFAA inevitably appeared as a claim in an employer’s complaint to address such conduct as downloading information from work computers and email accounts, or wiping devices and removing valuable information. The CFAA potentially provided relief where the information taken might not meet the definition of a “trade secret” in the federal Defend Trade Secrets Act (18 U.S.C. §1986), or Pennsylvania’s Uniform Trade Secrets Protection Act (12 P.S. § 5302). Further, and perhaps providing leverage for employers, the CFAA provided a criminal remedy for such violations. In Van Buren v. United States, 592 U.S. ___ (June 3, 2021), the United States Supreme Court may have eliminated that claim for wronged employers.

The CFAA prohibits intentionally accessing a computer with or without authorization or exceeding authorized access of a computer. The Act defines “exceeding authorized access” as accessing a computer with authorization and using that access to obtain information in the computer to which the individual is not otherwise entitled. The CFAA imposes criminal liability for violations of these prohibitions. It also imposes civil liability through a private cause of action if there is “damage,” meaning, an impairment to the integrity or availability of data, a program, a system or information.

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