Tressie McKeon writes:

If business owners are not concerned about the make-up of their workforce, they should be. In recent years, the number of lawsuits concerning misclassification of employees has risen exponentially. This is because companies routinely call members of their workforce independent contractors (“IC”) when in reality they are employees.

Internal Revenue Service (IRS) Tax AuditorIf an audit by the Texas Workforce Commission (“TWC”) shows a business has incorrectly classified employees as independent contractors, and therefore failed to properly report wages and taxes, the company could be reported to the Internal Revenue Service (“IRS”). The company could then be liable for back taxes and interest, not to mention a possible IRS audit. And, the IRS audit would likely reveal the company was not eligible to receive the federal tax credit the company claimed with respect to the wages paid out to the contract labor in question.

According to the TWC’s website, a number of scenarios could bring about a TWC audit. It could arise from an unemployment claim, a competitor or former agent making a claim that the company incorrectly classifies workers, a random audit, or the TWC may “target a specific industry.”

The TWC uses similar guidelines to those set out by the IRS regarding the classification of workers. IRS Publication 15-A outlines the IRS test to determine whether a worker is an employee or independent contractor. According to the IRS, there are three main criteria that classify a worker. These criteria boil down to: 1) the type of relationship that exists between the parties; 2) the amount of control the worker retains over how they do their jobs; and 3) how they handle the financial aspects of performing their work.

Here are some of the things to consider when determining whether a worker would be classified as an employee or an independent contractor:

The nature of the relationship with the workforce

Is there a written contract describing the relationship with our workers? Even a contract that clearly states workers are independent contractors may not be enough. The nature of the relationship could work trump the language in the contract.

Are benefits like insurance and a 401K provided? These are employee type benefits

What about the permanency of the work relationship? Do the workers have a specific project or time-frame delineated in their contracts? If not, their relationship with the company could continue indefinitely and this permanency is indicative of an employer-employee relationship.

The amount of control the company exerts over its workers

This is where many small business owners run afoul of the IRS and TWC guidelines. Most companies exercise extensive oversight regarding how its workers do their jobs. Do the workers have a set schedule? Independent contractors do not have schedules as they work for themselves. Does the company provide training to the workers? This should not be necessary for contract labor. Independent contractors generally use their own methods to achieve the company’s desired results. Has the company laid out a definitive set of policies and procedures on how to perform their duties? If so, this is clearly an excessive amount of control over an IC, and this alone would likely lead the TWC and the IRS to classify the company’s workers as independent contractors rather than employees.

The amount of control our workers have over the financial aspects of their work

Independent contractors generally incur un-reimbursed business expenses during the course of their contract. These kinds of expenses include rent for office space, travel expenses, and marketing expenses. Does the company cover any or all of these expenses? Do the workers have any significant financial outlay in the performance of their work? Does the company provides the office space, phone, business cards, desk, Internet, leads or marketing materials? This kind of equipment and support is generally provided to employees and not to independent contractors. Does the company restrict the workers’ ability to market their services on the open market? Traditionally, a contractor is free to market their services however they see fit.

How the company pays its work force

Is the worker paid by the hour or for a finished product or service? Does the worker submit invoices or expenses? Does the worker receive any advances or draws? And finally, does the company withhold taxes and issue a 1099? While not insurmountable, any one of these could reclassify a worker.

In summary, in Texas, a worker is presumed to be an employee. However, if the classification is challenged by the TWC, the IRS, or in the courts, it is up to the company to prove the independent contractor classification is correct.


Tressie E. McKeon is an associate in the firm’s Litigation Department and head of its Aviation practice, resident in its Dallas office.

It seems that a lot is going on in DC these days. In what may have been lost in all the other activity, yesterday the Department of Labor issued a Request for Information seeking notice and comment before issuing revised proposed regulations regarding the minimum salary level required to  meet the three most common exemptions under the overtime provisions of the Fair Labor Standards Act.  Who cares, right?  Mind-numbing administrative procedures, right?  Maybe.

A little background is probably necessary.  Back before Russia, fake news, alternative facts, and leaks, the DOL under President Obama issued new regulations that raised the minimum salary level for the executive, professional, and administrative exemption to the FLSA’s overtime requirements from $455 per week to $913 per week.  The rule was supposed to go into effect on December 1, 2016, and would have resulted in millions of more workers becoming eligible for overtime.  Employers spent a lot of time in 2016 getting ready for the new rule by making changes to the workforce to make sure that workers were properly classified under the new rules.

Then there was a lawsuit.  And from that lawsuit came an injunction against the new rule going into effect.  And that injunction resulted in an appeal.  And that appeal is still pending.  But here is where things get interesting.  Candidate Trump became President Trump, and Trump’s DOL took another look the new salary limit.  Trump’s DOL told the United States Court of Appeals for the Fifth Circuit that the DOL was no longer pursuing the $913 salary level that was set by Obama’s DOL.  To be sure, Trump’s DOL still wanted the authority to set a salary level, but it just was not interested in the salary level set by the previous administration.

Yesterday’s notice by DOL is the first step in the process to decide if there should be an increase in the salary limits for the overtime exemptions under the FLSA.

What does all of this mean?  First, the DOL is not going to pursue the new rule that was to have gone into effect on December 1, 2016.  With no one left to fight the appeal, any confusion regarding how the injunction would impact the workforce and the potential retroactive application of the Obama DOL rule if the appeals court overturned the injunction no longer seems in play.  Second, it will be several months (or years) before the DOL decides whether to issue a new rule regarding the salary level for the executive, professional and administrative exemptions under the FLSA.

Thank you Fox Rothschild LLP’s Steven Ludwig for forwarding this to me.

Yes, there are other developments going on with the Trump Administration that have nothing to do with Russia, Twitter, and fake news.

Today the Department of Labor withdrew its 2015 and 2016 informal guidance on joint employment and independent contractors.  Why is this important, you ask?  Because during President Obama’s eight years in office, the DOL and its state counterparts upped the efforts to investigate and identify companies that were improperly classifying individuals as independent contractors.  The increased enforcement efforts led to the DOL taking a more expansive view of joint employment, and a higher standard for employers to meet to establish independent contractors.  These enforcement efforts culminated in the DOL’s 2015 and 2016 informal guidance on joint employment and independent contractors.  Under the Obama Administration’s independent contractor test, the key inquiry was whether the independent contractor was economically independent.  For joint employment, the Obama Administration’s DOL investigators looked at whether one employer exercised indirect control over the individual.  Today’s rescission of the Obama Administration’s tests returns the DOL to pre-Obama standards.  Thus, the DOL is reinstating the direct control test for joint employment (as opposed to the more expansive indirect control standard) and  right of control test for independent contractors (instead of the more liberal economic independence test).

Bottom Line:  The DOL still will investigate the classification of workers as independent contractors, and whether one employer can be held liable for another employer’s violations.   However, with today’s rollback to pre-Obama tests for joint employment and independent contractors, it may be easier to classify individuals as independent contractors, and it will be more difficult to hold one employer liable for the employment law violations of another employer.

 

 

The Texas Supreme Court has rejected the theory of defamation by compelled self-publication.  Say what? you ask?  Compelled self-publication occurs most often in the employment context, where a terminated employee is compelled to inform subsequent potential employers why the employee was terminated from the employee’s last job.  As the theory goes, if an employer gives untrue defamatory reasons for terminating an employee, it should recognize that such conduct creates an unreasonable risk that the defamatory matter will be communicated to prospective employers.  By rejecting the theory, the Texas Supreme Court was concerned about creating an actionable tort any time an employee disagrees with the employer’s reason for firing the employee.   By refusing to recognize a tort based on compelled self-publication, the Texas Supreme Court reemphasized Texas’s long-standing tradition of employment at-will.

We invite you to read Part 1 and Part 2 in a series of posts by Fox partner Dori K. Stibolt, regarding the new trend in ADA Title III litigation involving web access for the visually impaired.

Many of these cases have focused on travel, hospitality and financial services companies.  However, here in Texas, there has been a micro trend of these web site accessibility cases naming dentists and physicians.

I get questions all the time about the enforceability of noncompetes in Texas.  I have to respond in the most-irritating lawyer-like way possible: I say that the enforceability of any particular noncompete all depends on the language of the noncompete and the facts of the case.  That response predictably results in a long period of silence.

There is ample Texas case law enforcing noncompetes against former employees to prevent former employees from competing.  In these cases the employers successfully have demonstrated that there is a threat to the employers’ business interests through the disclosure of confidential information or damage to company good will.  There also is a lot of seemingly irreconcilable Texas case law where the courts have refused to enforce noncompetes to prevent former employees from competing where the employers offered proof that former employees had confidential information and were in a position to use the confidential information to the employers’ detriment.

Legally speaking, Texas has a statute that allows an employer to enforce a noncompete when what would otherwise be a restraint on trade is necessary to protect a legitimate interest of the employer.  In Texas, a legitimate interest of the employer could be (1) preventing the disclosure of confidential or proprietary information; or (2) protecting company good will.  Contrary to what a lot of people believe, the enforceability of a noncompete is not dependent on the employer paying the employee compensation that is tied to the noncompete, and is independent from the reason that the employee’s relationship with the employer ended.

In my practical experience I have found that judges in general do not like noncompetes.  They do not like the idea of putting a person out of work, unless the facts particularly justify the extraordinary step of entering a injunction.  You can get a sense of the courts’ uneasiness with noncompetes in the Dallas Court of Appeals recent decision affirming a trial court’s denial of the employer’s request for a temporary injunction in BM Medical Management Service, LLC v. Turner.

Turner had a one-year noncompete that prohibited him from working in a competing business, soliciting BM Medical’s clients, recruiting or hiring BM Medical’s employees, or disclosing BM Medical’s confidential information.  BM Medical fired Turner, and a month later he went to work for a competitor.  Despite having access to BM Medical’s client list of over 1600 customers, the trial court denied BM Medical’s request for a temporary injunction to prevent Turner from soliciting BM Medical’s clients.  The court found that BM Medical failed to prove that Turner “possessed, used or disclosed any confidential information and if failed to prove that Turner was soliciting its clients.”  One BM Medical client did follow Turner to his new employer, but the Dallas Court of Appeals noted that this single client was a “good friend of Turner’s whom Turner had known before he went to work for BM Medical.”

Notably, BM Medical only sought to prevent Turner from contacting BM Medical’s clients (and not enforcement of the outright ban on any competition), and from disclosing BM Medical’s confidential information. But even limiting its request for relief was not enough to satisfy the court.  Presumably the result would have been different if BM Medical had established that Turner actually solicited BM Medical’s clients, or if BM Medical had shown that the information that Turner had was particularly sensitive to BM Medical’s business interests.

Based on the court’s conclusion, I get the impression that neither the trial court nor the court of appeals thought that Turner was a threat to BM Medical’s business interests.  So if you want to enforce a noncompete in Texas, here are some important considerations to maximize your chances of having the judge agree with you:

  • Spell out for the judge the actual threat that the former employee poses to the business interests of the employer.  The degree to which an employer wants to restrict a former employee from competing is directly related to the actual threat that the former employee poses to the business’s legitimate business interests. For example, a sales employee who is terminated for poor performance probably does not pose an actual threat to the employer’s existing sales.
  • Explain to the judge what relief you need to address the actual threat posed by the former employee.  The restrictions that the employer seeks to enforce against a former employee must be tied closely to the actual threat to the employer’s legitimate business interests.  An employer’s desire to restrain all competition is not a legitimate business interest, and an outright ban on all competition everywhere rarely is closely tied to the actual threat posed by the former employee to the employer’s legitimate business interests.
  • Judges do not like noncompetes.  When asking for temporary relief, give the judge way to overcome this dislike of noncompetes by asking for the bare minimum of what you need to address the actual threat.  If you can ask for relief that allows the former employee to continue to work, even better.  As an example, courts seem more willing to restrict a former employee from soliciting actual clients with whom the former employee had contact as a result of the employer, but not so willing to restrict a former employee from soliciting any and all of the company’s customers regardless of whether the former employee knew about the customers.

And if you ask me if noncompetes are enforceable in Texas, I will probably say “It depends…”

 

Over the weekend the Washington Post reported that France has enacted a new law that allows employees to ignore work emails outside typical working hours.   According to the Washington Post, the purpose behind the new French law is to reduce the impact of the stress of work on people’s personal time.  While the new French law received a lot of attention over the weekend, how to handle after hours emails is not a new issue.

In the United States employees are either exempt or nonexempt.  Nonexempt employees are entitled to overtime and minimum wage for all hours worked.  The Wall Street Journal reported here back in 2015 that there have been several lawsuits across the United States over whether nonexempt employees under the Fair Labor Standards Act who are answering emails or texts after working hours are entitled to compensation under the FLSA, including overtime in the appropriate circumstances.  Under the FLSA, compensable time is any time that the employee is “permitted” to work by the employer.  This means that if a nonexempt employee is answering emails after hours and the employer does nothing to stop it, then the nonexempt employee is working and entitled to compensation.  According to the Department of Labor, “time spent doing work not requested by the employer, but still allowed, is generally hours worked, since the employer knows or has reason to believe that the employees are continuing to work and the employer is benefiting from the work being done.”

The implications of allowing nonexempt employees to answer emails or texts after hours is that the employees have the right to expect to receive compensation for “all hours worked” at the applicable minimum wage, and to have the time spent answering emails or texts after hours included in the weekly total to determine whether the employees are entitled to overtime.  The practical problems for the employer with allowing employees to answer emails or texts after hours is that the time spent by employees is difficult to document and monitor.

As for all the exempt employees under the FLSA, these employees still may have to answer after hours emails and texts, or face whatever consequences may arise from not answering after hours emails or texts.  But even exempt employees may benefit from the DOL’s position on after hours emails when it comes to calculating compensation and deducting full days missed for personal reasons.  As a general rule, if an exempt employee performs any work during the workweek, he or she must be paid the full weekly salary amount.  Under the DOL’s position, an exempt employee answering emails could transform unpaid leave into paid leave.

France’s approach is to give the employees the right to ignore after hours emails.  In the United States nonexempt employees might be able to demand payment for the time spent answering after hours emails, and exempt employees might be able to claim that they were working to avoid a full day deduction.

If employers do not want to get caught up into whether answering after hours emails and texts constitutes work, they should implement very clear rules prohibiting employees from answering after hours emails and texts, and then strictly enforce those rules to avoid “permitting” nonexempt employees to work after hours.

 

Texas case law is clear.  Employment is at will, terminable at any time by either party, with or without cause, absent an express agreement to the contrary.  Fed. Exp. Corp. v. Dutschmann, 846 S.W.2d 282, 283 (Tex. 1993).  This means that unless there is an agreement limiting an employer’s right to terminate, an employer in Texas can fire an employee for good reason, bad reason, or no reason at all, provided that the employer is not violating a specific statutory or common law exception to the at-will employment doctrine.  The statutory exceptions are the federal statutes and state law equivalents that protect against discrimination and retaliation.  In Texas, there is only one common law exception, and it is that an employer cannot fire an employee because the employee refuses to engage in an illegal act.

But what about handbooks and offer letters?  The Dallas Court of Appeals issued an opinion this week discussing the interplay between the employment at-will doctrine and contradictory statements in the employer’s handbook and disability policies.  The opinion makes it clear that if an employer has a handbook, the employer needs to make sure that the handbook contains a disclaimer that negates any implication that a personnel-procedures manual places any restrictions on the employment-at-will relationship.

If you are interested in maintaining the employment at-will relationship, and you have a set of employment policies and procedures, then it makes sense to bundle them up into a single handbook, bound with a disclaimer that nothing in the handbook alters or restricts the employment at-will doctrine.  If you already have a handbook, then you need to review the handbook to make sure that the handbook contains the same disclaimer.  Finally, when you draft an offer letter or memorandum of employment, you need to include language in the letter or memorandum that nothing in the letter or memorandum is intended to modify the employment at-will relationship.

 

I have been writing on this blog about how Dallas County juries have shifted over the years from pro-defense to pro-plaintiff, or at least to a point where most prospective jurors in Dallas County don’t necessarily consider lawsuits a bad thing.  In the era of tort reform, this attitude among prospective jurors in Dallas County is very interesting.  My previous posts are here, here, and here.

But why do we care about juries anyway?  There are the constitutional reasons, and the traditions in our legal system that are tied inextricably to the jury trial process.  There are the defenders of the jury trial as the last line of defense against oppression.  And these are good reasons to care about the juries.

But my focus on why juries matter is more practical.  In Texas, juries matter because once a jury renders a verdict it is extraordinarily rare for the jury’s verdict to be overturned.  It happens, but not very often.  This is because legal and factual sufficiency challenges to a jury verdict are judged against very high standards.

The Dallas Court of Appeals just released a decision in Adams v. Bellas affirming a jury verdict where the court went through the standards for legal and factual sufficiency challenges to a jury verdict.

To overturn a jury verdict on legal sufficiency grounds, the court must first credit any evidence favoring the jury verdict if reasonable jurors could disregard contrary evidence if reasonable jurors could not.  If more than a scintilla of evidence supports the jury’s verdict, then the court has to uphold the verdict.  There is no weighing of the evidence on one side or the other.  The court simply looks at whether there is some evidence that would “enable reasonable and fair-minded people to reach the verdict under review.”

To overturn a jury verdict on factual sufficiency grounds, the jury’s verdict must be against the great weigh and preponderance of the evidence.  This means that the jury verdict will be set aside “only if it is so contrary to the overwhelming weigh of the evidence as to be clearly wrong and manifestly unjust.”

Taken together, the high standards for legal and factual sufficiency protect the philosophical value that we place on the role of the jury in our legal system. We have assigned the jury the role of weighing the evidence and resolving any conflicts or inconsistencies in the evidence.  We then shield the jury’s verdict from second-guessing by creating high standards for overturning the jury’s verdict.

So why do juries matter?  Because under our system, once the jury delivers its verdict it is procedurally and practically very difficult to overturn the verdict.  Oh, and also for all those constitutional reasons and tightly-held traditions long associated with our legal system.

Late last month a federal judge in Texas issued a nationwide injunction against implementation of the Obama Administration’s new overtime rules under the Fair Labor Standards Act.  The new rules were supposed to go into effect on December 1, 2016, and would have resulted in substantially more employees becoming eligible for overtime under the FLSA.  Recently the United States Court of Appeals for the Fifth Circuit declined to interfere with the trial court’s injunction.

I previously wrote about the new rules here.  The new rules would have raised the salary threshold for the professional, administrative, and executive exemptions from $455 per week to $913 per week ($47,476 annually).  The new threshold would have been indexed so that it likely would have gone up every three years.  In my prior post, I speculated that the Texas federal judge would not enter an injunction.  I got that part wrong.

For six months I have been working with clients to evaluate how best to approach the new overtime rules.  The problem was that some positions at some workplaces have been entrenched for years. Some decided to redefine job positions with new responsibilities.  Others decided to accept the new rules and prepare for paying employees by the hour who previously were paid a weekly salary.  Some were unsure of how to proceed.  Even with the injunction in place, there is uncertainty about what will happen next.

The injunction does not invalidate the Obama Administration’s overtime rules.  It merely puts a hold on the implementation of the new overtime rules until the court reaches a final decision on the legality of the new rules.  The court has requested briefing on the issue and could render a final decision as early as January 2017.  If the court concludes that the Obama Administration acted appropriately in formulating the new overtime rules, then the effective date of the new overtime rules could roll back to December 1, 2016.  Yikes.  This would result in reclassification of employees as exempt or nonexempt, and make the classification retroactive to December 1, 2016.  Employees reclassified as nonexempt could be entitled to overtime dating back to December 1, 2016. Double yikes.

And also in January, the new administration takes over and Congress is back in session.  With Republicans occupying the White House and having the majority the House of Representatives and the Senate, Congress or the new administration could step in to make changes to the new overtime rules.  Given the rhetoric of the election season, I don’t know where the new overtime rules are on the Republicans’ list of things to undo from Obama’s Administration.

So we will watch and see if the Texas federal judge issues a final ruling. Or whether the new administration and Congress steps in to act. Stay tuned…