It Sounded Like A Good Idea
By 
Ignoring employment laws and regulations can be costly, don’t make mistakes.
Lee and his wife Verna learned the hard way how costly ignoring employment laws and regulations can be. Don’t make the same mistake.
As a business owner, you must operate within the confines of an increasingly regulated employee environment. This includes dealing with myriad complex laws and regulations, including unemployment, age discrimination, sexual harassment, immigration reform and control, EEOC, OSHA, ADA, FMLA, FLSA, Title VII, I-9 regulations, right to privacy and worker’s compensation, just to name a few.
In the latest Litigation Trends Survey, labor and employment matters are the most frequent source of lawsuits for business owners. Perhaps the time has come for all companies to perform a bit of preventative maintenance by conducting a Human Resources Compliance Review. As an old commercial so accurately pointed out, “You can pay them now, or pay them a lot more later.”
Scenario One:
Lee and his wife Verna started LV Plumbing Contractors nine years ago. Their first employee was Shirley who was hired as the office manager/bookkeeper to keep their finances straight using QuickBooks accounting software. Shirley’s primary duties were to maintain the financial records in the accounting software and to prepare the payroll. She reported directly to Verna. It was agreed that Shirley would be paid a salary of $400 per week. As LV Plumbing Contactors prospered and grew over the years, additional plumbers were hired.
Due to the ever increasing number of new projects LV Plumbing Contractors was awarded, many of the plumbers were able to realize significant amounts of overtime. In an effort to contain costs, keep margins in line and position the company for future growth, Lee promoted three of his plumbers to supervisors and put them on salary. Though the management of the projects, the scheduling of the workers and the overall responsibilities were still Lee’s, it seemed smart to keep the labor costs in line so he could still be competitive regarding bids. Of course, Shirley was diligent in her efforts, and even though she had to work 10 to 12 hours per day, she never complained. Verna would occasionally give Shirley a cash bonus to thank her for the extra work.
At times, Shirley would mention that she worked certain weekends to ensure the accounting was current. Verna would then reward her with extra time off. Shirley’s life had been changing in the last few years. Increased personal commitments forced her to cut down to 40 hours per week and occasionally she would miss work entirely even though her vacation time had been exhausted. Verna, in an effort to be fair, would dock Shirley’s pay for the hours she would miss on a daily basis. Shirley was unhappy with this practice and mentioned it to a friend who suggested she should report this to the state’s wage and hour board. She did, and the board investigated. Not only did the board review Shirley’s job classification and payment history, but the job classifications of the three supervisors were also reviewed (at Shirley’s suggestion).
The majority of wage and hour audits come as a result of a disgruntled employee.
When the representative from the wage and hour board interviewed Shirley, he/she may have asked the following: Have you ever worked through your lunches or breaks? Have you ever worked overtime without getting paid time-and-a-half? Have you ever worked weekends and not been paid? Have your co-workers ever done the same things, and how many of them are there? Potential clients often respond, “Sure..that kind of stuff happened all the time.” All of a sudden, you have the making of a wage and hour investigation.
If an employer has violated the wage and hour provisions of the Fair Labor Standards Act (FLSA), then the governing authority will have the right to audit two years of payroll records or three if the employer acted willfully, which is an easy threshold to meet. Though punitive damages are not involved, civil penalties could be assessed for repeated or willful overtime violations to the tune of $1,000 per transgression plus liquidated damages for unpaid wages.
Since time is always scarce, at the very least, review those employee job descriptions (another subject for later discussion) that fall under the ambiguous administrative exemption category. Pay special attention to the exemption status of low-level supervisory employees—such as working supervisors — and of clerical employees – such as exempt administrative assistants—as those are the places auditors will most likely focus their efforts and they are where many employee claims originate.
Job descriptions and exempt vs. nonexempt classifications are not the sexier topics of business management. However, learning these issues the hard way can be costly. If government audits do not scare you enough, keep in mind that paying individual overtime, when it is due, is much easier on your company budget than threeyear, lump-sum back pay plus penalties.
Scenario Two:
Magic Landscape, Inc. faces $225,000 in penalties for wrongly classifying its workers as independent contractors.
Ron Williams began his landscaping business while still in high school. Over the past six years, Magic Landscape has grown to a $3.5 million business servicing both commercial and residential customers. Initially, Ron only hired employees; however, with the increasing demand for workers and the administrative nightmares associated with the hiring process, Ron began using independent contractors to staff his projects. Not only was he able to avoid the paperwork associated with W-2’s and I-9’s, but he was also able to save on the various state and federal taxes and insurances. Of course, Ron’s landscaping foremen, all employees, were able to oversee the contractors’ work to ensure the scheduling and quality of the work was in line with Magic Landscape’s corporate goals. James, one of the independent contractors, had been arriving late and his quality of work was not up to the company’s standards. James was informed that his services were no longer needed. Of course, James immediately went to the unemployment office and Magic Landscape was headed towards a financial disaster.
The misclassification of independent contractors is not a problem simply during tax season. State unemployment compensation and workers’ compensation offices are increasingly acting year-round as the eyes and ears of the Internal Revenue Service. When an independent contractor is laid off, the likely scenario is that he or she will seek unemployment compensation. When the agency informs the worker that unemployment compensation will be denied because he or she is not an employee, the worker usually starts a battle. Typical penalties range from 70 percent to 75 percent for every dollar you pay an independent contractor. The employer can be subject to various liabilities including the independent contractor’s income tax liability, the full amount of FICA, federal and state unemployment and interest and penalties. In addition to the back taxes, interest and penalties, criminal and civil penalties may be issued.
by James Gibson
Ignoring employment laws and regulations can be costly, don’t make mistakes.
Lee and his wife Verna learned the hard way how costly ignoring employment laws and regulations can be. Don’t make the same mistake.
As a business owner, you must operate within the confines of an increasingly regulated employee environment. This includes dealing with myriad complex laws and regulations, including unemployment, age discrimination, sexual harassment, immigration reform and control, EEOC, OSHA, ADA, FMLA, FLSA, Title VII, I-9 regulations, right to privacy and worker’s compensation, just to name a few.
In the latest Litigation Trends Survey, labor and employment matters are the most frequent source of lawsuits for business owners. Perhaps the time has come for all companies to perform a bit of preventative maintenance by conducting a Human Resources Compliance Review. As an old commercial so accurately pointed out, “You can pay them now, or pay them a lot more later.”
Scenario One:
Lee and his wife Verna started LV Plumbing Contractors nine years ago. Their first employee was Shirley who was hired as the office manager/bookkeeper to keep their finances straight using QuickBooks accounting software. Shirley’s primary duties were to maintain the financial records in the accounting software and to prepare the payroll. She reported directly to Verna. It was agreed that Shirley would be paid a salary of $400 per week. As LV Plumbing Contactors prospered and grew over the years, additional plumbers were hired.
Due to the ever increasing number of new projects LV Plumbing Contractors was awarded, many of the plumbers were able to realize significant amounts of overtime. In an effort to contain costs, keep margins in line and position the company for future growth, Lee promoted three of his plumbers to supervisors and put them on salary. Though the management of the projects, the scheduling of the workers and the overall responsibilities were still Lee’s, it seemed smart to keep the labor costs in line so he could still be competitive regarding bids. Of course, Shirley was diligent in her efforts, and even though she had to work 10 to 12 hours per day, she never complained. Verna would occasionally give Shirley a cash bonus to thank her for the extra work.
At times, Shirley would mention that she worked certain weekends to ensure the accounting was current. Verna would then reward her with extra time off. Shirley’s life had been changing in the last few years. Increased personal commitments forced her to cut down to 40 hours per week and occasionally she would miss work entirely even though her vacation time had been exhausted. Verna, in an effort to be fair, would dock Shirley’s pay for the hours she would miss on a daily basis. Shirley was unhappy with this practice and mentioned it to a friend who suggested she should report this to the state’s wage and hour board. She did, and the board investigated. Not only did the board review Shirley’s job classification and payment history, but the job classifications of the three supervisors were also reviewed (at Shirley’s suggestion).
The majority of wage and hour audits come as a result of a disgruntled employee.
When the representative from the wage and hour board interviewed Shirley, he/she may have asked the following: Have you ever worked through your lunches or breaks? Have you ever worked overtime without getting paid time-and-a-half? Have you ever worked weekends and not been paid? Have your co-workers ever done the same things, and how many of them are there? Potential clients often respond, “Sure..that kind of stuff happened all the time.” All of a sudden, you have the making of a wage and hour investigation.
If an employer has violated the wage and hour provisions of the Fair Labor Standards Act (FLSA), then the governing authority will have the right to audit two years of payroll records or three if the employer acted willfully, which is an easy threshold to meet. Though punitive damages are not involved, civil penalties could be assessed for repeated or willful overtime violations to the tune of $1,000 per transgression plus liquidated damages for unpaid wages.
Since time is always scarce, at the very least, review those employee job descriptions (another subject for later discussion) that fall under the ambiguous administrative exemption category. Pay special attention to the exemption status of low-level supervisory employees—such as working supervisors — and of clerical employees – such as exempt administrative assistants—as those are the places auditors will most likely focus their efforts and they are where many employee claims originate.
Job descriptions and exempt vs. nonexempt classifications are not the sexier topics of business management. However, learning these issues the hard way can be costly. If government audits do not scare you enough, keep in mind that paying individual overtime, when it is due, is much easier on your company budget than threeyear, lump-sum back pay plus penalties.
Scenario Two:
Magic Landscape, Inc. faces $225,000 in penalties for wrongly classifying its workers as independent contractors.
Ron Williams began his landscaping business while still in high school. Over the past six years, Magic Landscape has grown to a $3.5 million business servicing both commercial and residential customers. Initially, Ron only hired employees; however, with the increasing demand for workers and the administrative nightmares associated with the hiring process, Ron began using independent contractors to staff his projects. Not only was he able to avoid the paperwork associated with W-2’s and I-9’s, but he was also able to save on the various state and federal taxes and insurances. Of course, Ron’s landscaping foremen, all employees, were able to oversee the contractors’ work to ensure the scheduling and quality of the work was in line with Magic Landscape’s corporate goals. James, one of the independent contractors, had been arriving late and his quality of work was not up to the company’s standards. James was informed that his services were no longer needed. Of course, James immediately went to the unemployment office and Magic Landscape was headed towards a financial disaster.
The misclassification of independent contractors is not a problem simply during tax season. State unemployment compensation and workers’ compensation offices are increasingly acting year-round as the eyes and ears of the Internal Revenue Service. When an independent contractor is laid off, the likely scenario is that he or she will seek unemployment compensation. When the agency informs the worker that unemployment compensation will be denied because he or she is not an employee, the worker usually starts a battle. Typical penalties range from 70 percent to 75 percent for every dollar you pay an independent contractor. The employer can be subject to various liabilities including the independent contractor’s income tax liability, the full amount of FICA, federal and state unemployment and interest and penalties. In addition to the back taxes, interest and penalties, criminal and civil penalties may be issued.
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