Compliance tips on benefits, immigration, wage and hour and classification
By Eric H. Rumbaugh
Businesses engaging contingent talent must navigate a maze of federal and state employment laws. Compliance with rules regarding administration of benefits plans, immigration, wage and hour practices, and independent contractor arrangements can be daunting. This article discusses selected topics in each of these areas of the law and explains steps companies can take to stay compliant.
Certain employee benefit plans come with tax advantages for employers and employees alike. To qualify for the tax advantages, though, the plans must benefit a certain minimum percentage of "non-highly compensated" employees. The goal of the rule is to make sure that businesses that receive tax breaks for offering a benefit plan offer a plan that benefits more than just their top earners. In 2011, the federal government considers “highly compensated” employees to be those earning $110,000 or more annually. The IRS ensures that employers comply with this rule by requiring employers to perform “nondiscrimination tests” to calculate the percentage of the lower wage earners receiving benefits.
With respect to certain retirement and health plans, the plan will pass the test if 70 percent of the employer’s non-highly compensated employees benefit under the plan. If the employer fails this test, there are other, more complicated tests it can use to assess its compliance with IRS rules, such as comparing the benefits-to-compensation ratio for non-highly compensated employees to that of highly compensated employees.
A central issue in determining plan compliance is who counts as an “employee” in the first place. This question leads employers into a minefield: only employees may participate in tax-favored benefits plans, but wrongfully excluding employees could result in failed nondiscrimination tests, IRS actions, and lawsuits from unhappy workers.
The IRS test to determine employee status focuses on the employer’s right to control an individual’s work. Important factors include the employer’s ability to command the worker’s time and place of work, and to require training with experienced workers.
Finally, the revenue code adds that “leased employees” -- those who provide services to the recipient organization for at least a year on a substantially full-time basis -- must be treated as employees for certain purposes (including ensuring the plan satisfies the nondiscrimination test described in the preceding paragraph).
In other words, while a company does not have to offer benefits to its contingent workers, for the purposes of qualifying for tax breaks on benefits packages, those contingents still may need to be counted when determining those ratios.
Companies that use contingent workers and independent contractors should consider to whom they extend benefits and to whom they do not. Failed nondiscrimination tests can result in a benefit plan losing its tax-favored status or other monetary penalties. Microsoft, for example, paid millions of dollars to settle claims by “freelance” programmers who argued the computer giant misclassified them as independent contractors and denied them benefits.
An employer needs to make sure that it knows who is an “employee” under the revenue code, and it should audit its plan to ensure the plan benefits enough non-highly compensated employees.
Determining who is an “employee” is also a key issue in immigration. In January 2010, U.S. Citizenship and Immigration Services (USCIS) issued a memorandum regarding the employer-employee relationship that could drastically change employers’ ability to obtain temporary visas for foreign nationals working in professional positions.
Companies can apply for temporary visas for foreign workers in “specialty occupations” by submitting H-1B petitions on their behalf. “Specialty occupations” require “theoretical application of a highly specialized body of knowledge” and a bachelor’s degree (or its equivalent). Common examples of “specialty occupations” include information technology, law, medicine, architecture, and engineering.
The memo’s examples of noncompliance provide a clear -- and troubling -- picture of what USCIS requires in contingent talent situations. In one example, the employer is a computer consulting business that places an employee at another company to manage its payroll. Because the employer does not supervise the employee, manage his or her daily tasks, or even operate in the same business as the third-party company, USCIS advises that there is an insufficient employment relationship to allow the consulting business to file an H-1B petition on behalf of the worker.
With this memo, USCIS is broadcasting to staffing providers that they will not be able to sponsor workers in “specialty occupations” for temporary visas unless they can document a strong employer-employee relationship. Complicating matters further, since the memo, USCIS has not strictly enforced it in some cases, but has in others.
Companies can collaborate with their staffing provider when seeking to bring in overseas talent. Employers that manage their own contingent workforce should make sure they can explain how they direct those employees’ work, such as by documenting who the employee reports to, when the employee will work, and how much the employee will get paid.
Wage and Hour
An individual can have “employee” status in relation to more than one employer. The Fair Labor Standards Act, the federal law governing minimum wage and overtime, allows for joint employment of a worker and mandates that all joint employers comply with the FLSA. This means that all joint employers must keep wage and hour records, and all joint employers will be liable for deficiencies in minimum wage and overtime payments.
The FLSA defines “employee” more broadly than any other federal labor law. If an employer “suffers or permits” an individual to work, then that individual has “employee” status under the FLSA.
To interpret this broad language, courts look at the “economic realities” of the working relationship, including whether the employer directs the employee’s work; the employee’s opportunity for profit and loss; the amount of the employee’s investment in the business; and the permanency of the relationship. No single factor is dispositive, and courts can look beyond the ones listed. It is clear, though, that more workers have “employee” status than “independent contractor” status under the FLSA.
If two employers satisfy the economic realities test for the same employee, they are not necessarily joint employers. If they act independent of one another regarding that employee, they are not joint employers. But if their employment arrangements are “not completely disassociated” from one another, then they are.
Each party in the staffing provider/client relationship is responsible for compliance with the FLSA’s minimum wage, overtime, and recordkeeping requirements. One employer, however, can take a credit if the other has paid the employee for his work -- joint employment does not mean the employee gets paid twice.
While many companies have agreements that stipulate wage and hour terms with their staffing providers, they should ensure that the provider maintains FLSA-compliant records. These records should include basic identifying data for the worker, such as name, address, wage rate, and hours worked. The providers must also preserve payroll records for three years and wage computation records (like time cards and wage rate tables) for two years.
Employee Classification and Contractor Status
As CWS 30 has reported often in recent months, federal and state governments are taking a closer look at how businesses classify their workers. Compliance is essential now as much as ever because the costs of misclassification can be great.
The IRS scrutinizes employee classification because it affects the reliability of tax revenue collection. The U.S. Department of Labor, on the other hand, sees employee misclassification as an indicator of illegal labor practices. Furthermore, President Obama’s 2011 budget allocates money for additional DOL enforcement personnel, and provides the states with incentives to ramp up their enforcement, too.
Fortunately, employers can take steps to ensure they properly classify employees. Employers should examine which workers they currently classify as independent contractors, and determine whether they really fit that classification. Different federal laws have different tests to determine who is an “employee”, and individual states have their own rules as well.
When employers audit their employee classifications, they need to ensure they comply with all applicable state and federal laws. If employers find that they have misclassified workers, then they should seek counsel on how to properly classify them and on how to deal with any past non-compliance issues. Employers should also examine and update their classification determination processes to make sure they will remain compliant in the future.
Employers must make their way through a web of labor and employment laws that regulate employee benefits plans, immigration, wage and hour practices, and employee classification. An audit of current practices will go a long way in helping employers stay compliant, but for areas in flux, such as immigration, they should seek the advice of counsel to help them navigate new and changing rules.
[credit]Eric H. Rumbaugh is a partner with the law firm of Michael Best & Friedrich LLP, headquartered in Milwaukee (www.michaelbest.com). He represents employers in labor, employment and employment benefit law matters.