Texas Employment Law Update : Texas Employment Lawyer & Attorney : Russell D. Cawyer : Kelly Hart & Hallman Law Firm : Dallas TX Labor Updates

As a light dusting of snows falls on much of North and West Texas, I thought it was a good time to review the rules regarding deductions from exempt employee salaries for weather-related absences.  Employees qualifying for the white collar exemptions (e.g., professional, administrative and executive exemptions) are generally entitled to receive their entire salary for any workweek where they perform work, regardless of the amount of work performed during the week (like most things, there are some exemptions not addressed here). 

When an employer closes its business for less than a full week due to weather-related conditions such as snow, the employer must pay the exempt employee the full salary for the week.  In this case, while the employer must pay the exempt employee the full salary for the workweek, nothing prohibits the employer from deducting that period of time from the exempt employee's PTO or vacation bank --so long as the employer's written policies do not prohibit it from doing so.  If an exempt employee has exhausted all available PTO or vacation, the employer should still pay the full salary for the workweek under this situation.

Conversely, where the workplace is open for business and the exempt employee elects not to report to work for a full day because road conditions are treacherous, the employer may reduce the exempt employee's salary for the workweek for the period of full day absences caused by weather.  An absence under these circumstances constitutes an absence for personal reasons.  An employer could also pay the employee and deduct the time from the employee's PTO or vacation balance.  An employer should not, however, deduct from the exempt employee's salary a partial day deduction (e.g., where the employee reports late for work due to road conditions).  Treating exempt employees' pay for absences occasioned by weather-related absences is important because failing to do so may jeopardize the employees' eligibility for exempt status.

DOL Opinion letters here and here.

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Companies using independent contractors to perform work normally performed by employees beware; state and federal governmental taxing authorities are challenging those classifications in an effort to increase tax revenue on wages that are not properly reported.  According to a recent article by the Associated Press, "the Internal Revenue Service and 37 states are cracking down on companies that try to trim payroll costs by illegally classifying workers as independent contractors rather than as full employees." 

In September 2009, the IRS announced that it would (beginning in February 2010) audit at least 6,000 randomly-selected companies to investigate employment tax compliance.  Among other things, one of the areas targeted is worker misclassification as independent contractors. Companies may misclassify workers for a variety of reasons.  Companies have greater tax withholding obligations and employment tax liabilities with respect to employees.  Moreover, independent contractors are not entitled to overtime compensation, unemployment insurance and other employee benefits.  It is estimated that classification as an employee rather than independent contractor may add up to 30 percent to the labor cost of the worker.  The Government Accountability Office estimates that employee misclassification results in an estimated underpayment of $2.72 billion in social security, unemployment insurance and income taxes by companies annually.  

The 2011 federal budget proposes up to $3.8 trillion in spending measures to eliminate legal incentives for employers to misclassify employees, such as using budgeted funds to investigate, prosecute and penalize employers misclassifying employees as independent contractors and provide states with competitive grants to boost enforcement initiatives targeting misclassification.  There is also legislation introduced in Congress, the Taxpayer Responsibility, Accountability and Consistency Act of 2009, designed to make it more difficult to classify workers as independent contractors and to increase penalties for such misclassification. 

Secretary of Labor Hilda Solis also announced that her Department will hire more than 90 new wage and hour investigators and enforcement personnel to target worker misclassification.  According to Secretary Solis:

When employees are misclassified as 'independent contractors,' they are deprived of benefits and protections to which they are legally entitled. For example, independent contractors do not receive overtime and are ineligible to receive unemployment benefits. The FY 2011 budget includes an additional $25 million for a Misclassification Initiative to target misclassification with 100 additional enforcement personnel and competitive grants to boost states' incentives and capacity to address this problem.

With heightened Executive and Legislative enforcement efforts, companies using independent contractors should be sure their relationships have been vetted and are in strict compliance with the labor and tax laws.  The Departments of Labor and Treasury will surely be watching and scrutinizing those relationships.

Other Related Links:

Bill Would Make it Harder to Qualify Workers as Independent Contractors

Proper Classification of Workers as Employees or Independent Contractors May Reduce Litigation Exposure

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There has been a significant amount of litigation against employers over the compensability of work time for putting on and taking off safety-related clothing and equipment prior to the start of a shift but necessary for the work to be performed.  For example, Pilgrim's Pride Corporation recently agreed to pay $1 million in back wages to settle a donning and doffing case with the U.S. Department of Labor.  

The U.S. Court of Appeals for the Fifth Circuit (the federal appellate court hearing appeals from Texas, Mississippi and Louisiana) recently affirmed a trial court judgment in favor of McWane, Inc. (a cast iron pipe and fitting manufacturer) in a Fair Labor Standards Act collective action filed on behalf of 2,100 employees. The lawsuit sought unpaid wages for time spend putting on and taking off safety gear before and after employees' scheduled shift (i.e., hard hats, steel-toed boots, safety glasses and ear plugs). This is commonly referred to as donning and doffing pay. 

Employees at McWane worked at ten different plants. Three of the plants had collective bargaining agreements (CBA) that expressly excluded donning and doffing time from compensable time. The remaining seven plants had CBAs that were silent on the issue of donning and doffing pay. Employees were paid based on “line time,” which measures shift working time as starting when the first item hits the processing line and ends when the last item leaves the processing line. None of the plants had ever paid (in over 40 years) employees for pre-shift donning and doffing time and the issue had never been previously discussed at union meetings or during contact negotiations (and union officials and employees admitted that they never knew pre- and post-shift changing time was potentially compensable under the FLSA). 

The Fair Labor Standards Act generally requires that employees receive overtime pay for all hours worked in excess of 40 hours per week at one and one-half times the regular rate of pay. An exception exists for time spent changing clothes if it has been excluded by custom or practice under a bona fide collective-bargaining agreement. The McWane employees argued that donning and doffing was subject to exclusion as time worked only when it has been affirmatively bargained away in the labor contract, and therefore no waiver existed in this case because the union representatives did not have knowledge of the right to compensation for this changing time nor any knowledge of or agreement to a policy of nonpayment for that time.

The Fifth Circuit rejected these arguments and sided with other courts of appeals to hold that “even where negotiations never included the issue of non-compensation for changing time, a policy of non-compensation for changing time that has been in effect for a prolonged period of time, and that was in effect at the time the CBA was executed, satisfies the [FLSA’s] requirement of ‘ a custom or practice under a bona fide’ CBA.” The Court further held that burden of establishing the absence of a custom or practice under a CBA is on the plaintiff employees and is not an affirmative defense on which the employer bears the burden of proof.

Access the opinion here: Allen v. McWane, Inc., No. 08-41037 (5th Cir. 2010)

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Last night CBS launched its new series "Undercover Boss" following the Super Bowl.  The premise of the semi-reality series is the president of a large company goes undercover as a rank-and-file employee to work for the company and get a bottom-to-top look at how the company operates.  [Spoiler Alert --Don't read further if you have the show DVR'd to watch later].  Last night's episode exemplified a situation where appropriate and legal policies formulated at the corporate level sometimes get contorted or twisted at the tactical level.

In last night's episode the President and COO of Waste Management (Larry O'Donnell) went to work undercover as a new employee in various operations of his company over the course of a week.  At a recycling plant operated by Waste Management, the company apparently had a policy requiring employees to take exactly a thirty minute meal period.  It was unclear from the show whether the policy was required by state law, but an employee had to clock-out for exactly thirty minutes.  If the employee clocked in a minute late, local management, docked the employee for 2 minutes of pay.  Presumably, if the employee clocked in 5 minutes late, she would be docked 10 minutes of pay.  In any event, it is unlikely that Waste Management's Human Resources or Legal Departments encouraged or condoned the application of the policy in this manner given the potential that such docking of work time (depending on the state and whether the total time docked is de minimus) could result in a wage and hour violation . 

The lesson employment lawyers and human resources personnel can take away from "Undercover Boss" is that there is often a difference in how a policy is designed to work and how it actually works in practice.   When investigating a potential legal claim to answer a complaint or draft a statement of position to the EEOC, it is often important to talk to the people who are actually responsible for implementing company policies to determine how they really operate in the field rather than relying on middle or senior management who may only know how the policies are supposed to work.  Failing to do so can cause employers to make misrepresentations to governmental agencies or courts and can lead to accusations that the employer either doesn't know what is going on in the workforce or to claims that the stated reasons for taking some action against an employee are pretextual or false. 

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I've written several posts on the potential pitfalls that may befall a company that mistakenly classifies workers as independent contractors.  You can see those posts here and here.  A recent bill introduced in Congress would make it even more difficult to classify workers as independent contractors and would require companies to file more information with the IRS when independent contractor status is claimed.

In summary, the Taxpayer Responsibility, Accountability and Consistency Act of 2009 would:

• Increase the penalties applicable for the filing of a tax return with inaccurate information;
• Provide that a company would only have a reasonable basis for classifying the worker as an independent contractor, for purposes of the safe harbor provision, when the company has classified no other worker holding a substantially similar position as an employee since December 1977; acts based on a written determination addressing the employment status of the individual or an individual holding a substantially similar position; or concluded an examination of whether the individual (or an individual holding a substantially similar position) should be treated as an employee.
• Allow individuals the right to petition the Secretary of Treasury for a determination of their independent contractor status.

The Act, if passed, would apply to all payments that occurred beginning one year after passage.

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Recently I wrote about the risks posed by misclassifying employees as independent contractors.   In an unpublished opinion, the U.S. Court of Appeals for the Fifth Circuit (the federal appellate court that hears appeals from Texas) reversed a summary judgment awarded in favor of a company that had classified two cable splicers who performed post-Katrina telecommunications repair work for an AT&T contractor as independent contractors.  In reversing the judgment for the company, the Court remanded the case to the trial court for a determination of the damages the "employees" are entitled to recover.  A copy of the opinion can be accessed here.

Two cable splicers brought an action under the Fair Labor Standards Act seeking unpaid overtime that they were not paid due to their classification as independent contractors rather than employees.  The individuals worked for the Driftwood Electrical Contractors for 11 months following Huricane Katrina.  Theyworked twelve days on and one day off.  Twelve-hour days were the norm.  They were paid a fixed hourly wage for their work.  Each day they reported to the BellSouth location to receive their assignments unless they had not completed their jobs from the prior work day. They were given prints describing the type of work needed and were instructed by BellSouth supervisors to follow certain general specifications.  Neither cable splicer was trained by BellSouth or Driftwood and the splicers controlled the details of how they performed their assignment.  During this 11 month period, the splicers worked exclusively for the Driftwood Electrical.

To emphasize how fact intensive the independent contractor/employee analysis is, consider the following:  the cable splicers provided their own trucks, testing equipment, connection equipment, insulation equipment and hand tools totaling $16,000 and $50,000 in value.  They were also responsible for their own vehicle liability insurance and employment taxes.  The company, on the other hand, provided workers' compensation insurance and liability insurance for the cable splicers' work.

It appears that the most significant aspect in the Court's determination that the individuals were employees rather than individual contractors was the fact that they worked exclusively for the company for 11 months rather than in a temporary, project-by-project, on-again-off-again relationship.  Consequently, the Court concluded that as a matter of economic reality, the cable splicers were economically dependent on the company they worked for and were not in business for themselves.  Therefore, they were employees rather than independent contractors and were entitled to be paid overtime for their work.   

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Employers have long been challenged by a variety of wage and hour litigation such as misclassification cases and off-the-clock overtime cases.  One of the latest trends in wage and hour litigation is attacking a company's classification of its workers as independent contractors instead of employees.  Because independent contractors are not entitled to certain aspects of benefits provided to employees, misclassification can result in liability in several forms., including:

• Potential tax exposure from federal and state taxing authorities (i.e., unemployment tax, FICA, FUTA);
• Claims that misclassified contractors should be entitled to participate in employer benefit plans covering employees (e.g., stock option plans, health and benefit plans);
• Claims that misclassified contractors are entitled to overtime compensation.

In Texas, the test for determining independent contractor status is a multifactor analysis that centers around the economic realty of the relationship.  The focus is on whether the worker is, as a matter of economic reality, dependent on the alleged employer in business for himself.   This inquiry includes whether the employer has the right to control the progress, details, and methods of operations of the work.  A nonexclusive list of factors that are usually considered in this analysis include: 

• the degree of control exercised by the alleged employer;
• the extent of the relative investments of the work and the alleged employer;
• the degree to which the worker's opportunity for profit or loss is determined by the alleged employer;
• the skill and initiative required in performing the job;
• the permanency of the relationship.

No one factor is determinative. If a court or taxing authority determines that the independent contractor was misclassified, the employer may be responsible for failing to provide the benefits the employee would have otherwise enjoyed had he been properly classified as an employee (e.g., participation in certain employee benefit plans and unpaid overtime).  Depending on the size of the workforce and the work it engages in, these sums can be significant.  Consequently, companies making extensive use of independent contractors should review these relationships carefully to ensure that the workers are properly classified and incorporate changes in the relationships that enhance the ability to defend that classification.

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Employees frequently stay connected with work through company issued smart phones.  Smart phones, like the iPhone, Blackberry, and Treo, allow employees to have access to their work e-mails, calenders and contacts --in addition to making and receiving calls.  In my practice, a smart phone is incredibly useful in staying in touch with my client's needs when I'm in court or out  of the office.  However, with every advance in technology, come employment law challenges.

As recently reported in the WSJ.com, several lawsuits have been filed seeking damages for unpaid work time spent reading and responding to e-mails and customer complaints outside of regular business hours.  For example,T-Mobile USA Inc. was sued in July 2009 by three current and former employees for unpaid working time claiming they were required to use their T-Mobile issued phones to read and respond to message outside of working hours. (View the Complaint here).  In March 2009, CB Richard Ellis Group, Inc. was sued by a maintenance worker for unpaid work time after hours that included reading and responding to e-mails on his company-issued smart phone.  (View the Complaint here). 

Jon Hyman at the Ohio Employer's Law Blog argues that even if employees use smart phones for isolated and sporadic short-term reading and responding to business e-mails, that time is not necessarily compensable time.   Hyman argues that:

Most messages can be read in a matter of seconds or, at most, a few short minutes.  The Fair Labor Standards Act calls such time de minimus, and does not required compensation for it.  "Insubstantial or insignificant periods of time beyond the scheduled working hours, which cannot as a practical administrative matter be precisely recorded for payroll purposes, may be disregarded."

Hyman's point is a good one; however, can this time be precisely recorded for payroll purposes?  Redwood Technologies, for example, has a smart phone application (Momentum) that allows the user to capture time spent reading and responding to e-mails and time spent on the telephone.  It allows the user to allocate that time to different client accounts.  Although this same technology could be used by employers to capture the time nonexempt, hourly employees spend reading and responding to e-mails.  This may not resolve the administrative impracticality of determining which e-mails are personal or business related, I suppose that there are applications out there which would allow an employer to capture this time if it was so inclined. 

While is remains to be seen whether the time spent reviewing and responding to e-mails outside of normal business hours will be recoverable in an FLSA lawsuit, some commentators have suggested implementing polices to either pay employees for this time or to prohibit (by policy) employees from using company issued smart phones outside of working hours.  The following is a menu of options employers may consider in deciding how to deal with the issue of providing company issued smart phones to nonexempt, hourly employees. 

• Do not provide nonexempt, hourly employees with company issued phones capable of reading or responding to e-mail (i.e., smart phones). 
• Purchase a technology solution that captures the amount of time the user spends reading and responding to e-mail and pay nonexempt employees for that time.
• If the employer does not intend to pay for this off-hours review of e-mails, it should clearly set out its expectations that employees should not read and review those messages outside regular work hours.  For example, implement policies that prohibit employees from reading and responding to e-mails outside of regular working hours; require employees to leave company issued smart-phones at work; require employees to program the smart phones to turn themselves off during non-working hours. 
• Limit the employees that are provided with company issued cellphones to those who have a legitimate business need to be routinely contacted outside of business hours and limit that outside contact for matters where it is necessary.
• Pay employees who submit time for the nonbusiness hours review of e-mail and then discipline the employee for violating the employer's policy prohibiting business use of company cellphones outside working hours (if the employer has implemented such a policy).

If the lawsuits referenced above conclude with successful results for the employees (or in class certification), employers can expect to see many more of these kinds of cases filed. 

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The U.S. Department of Labor recently issued guidance via answers to some Frequently Asked Questions regarding work furloughs.  The FAQs can be found here.  I've previously written on employer use of furloughs.  You can read that post here.

Richard Tuschman at the Florida Employment and Immigration Law Blog also has a good post on furloughs that explains some of the potential legal pitfalls furloughs can cause.  You can find his post here.

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In many states, an employee's accrued, but unused vacation time must be paid on termination of employment.  However, under longstanding Texas law, an employee is not entitled to be paid for accrued, but unused vacation, on termination of employment unless the employee has a written agreement with the employee to do so or employer has a specific written policy that it requires vacation be paid on termination.  

The Texas Payday Act defines "wages", in relevant part as "vacation pay, holiday pay, sick leave pay, parental leave pay, or severance pay owed to an employee under a written agreement with the employer or under a written policy of an employer."  Therefore, vacation pay (and holiday, sick or parental leave pay for that matter) that is not paid under a written agreement or policy of the employer that provides that unused vacation is paid on termination does not constitute wages under Texas law and is not required to be paid on termination.

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On July 24, 2009, the federal minimum wage will increase to $7.25 per hour.  All Texas employers covered by the Fair Labor Standards Act --i.e., employers engaged in any industry affecting commerce, must pay at least the new minimum wage beginning on July 24, 2009.

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With the increased number of layoffs and reductions in force, many Texas employers are paying out large amounts of severance payments and wages in lieu of notice. Employers making these payments must not forget to comply with any court orders they have received regarding the deductions or garnishments from employee wages on these payments. A Texas employer that has received a spousal or child support order from a court must be sure to deduct the amount set forth in the order from any severance payments or wages paid in lieu of notice.

For example, if a child support order requires the employer to deduct $150 per month from the employee’s wages and the employer promises to make a 6 month severance payment to the employee, the employer must deduct $900 from the severance payment to comply with the court order. Since this wage deduction is made pursuant to a court order, no written authorization from the employee is necessary.

For more information on compliance with spousal and child support orders in the context of severance payments, see the Texas Attorney General website.

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As we approach local elections, it is good to remember that Texas law may require an employer to provide an employee with paid time off to vote.  The Texas Election Code makes it a Class C misdemeanor for an employer to refuse to allow an employee to be absent from work on election day for purpose of attending the polls to vote.

An employer is not, however, required to allow time off to vote if the polls are open on election day for voting for two consecutive hours outside of the employee's working hours.  For example, if you have an employee that regularly works 8:30 a.m. to 5:30 p.m. with a one-hour lunch break, an employer may have to give that employee time off from work on election day to attend to the polls and vote. In Texas, the election polls are generally open from 7:00 a.m. until 7:00 p.m. 

Because the term "penalty" means a loss or reduction in wages, an employer should provide paid time off for the employee to attend the polls to vote if the polls are not open on election day for at least two consecutive hours outside the employee's working hours.

An employer can avoid this interruption and the payment for otherwise nonworking time by rescheduling work schedules on election day so that employees have two consecutive hours off while the polls are open (e.g., reschedule the employee to work 8:00 a.m. to 5:00 p.m. on election day). 

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Most wage and hour lawsuits in Texas focus on an employer's alleged misclassification of an employee as exempt from overtime.  However, a recent jury verdict from a federal court in Houston teaches that even in a highly unregulated wage and hour state like Texas, there are other wage and hour provisions employers must comply with and that can lead to expensive and protracted litigation.

The Lawsuit

On March 25, a federal jury in Houston, Texas awarded 55 employees $270,000 plus interest and attorneys fees.  The employees in this collection action were current and former waiters and waitresses working for the Chili's food chain who were required to contribute a percentage of their tips into the restaurant tip pool.  That tip pool allocated one percent of the total pool to "food expediters."    Food expediters are employees that set up trays of food and condiments that servers take out to customers.  The expeditors could be paid a salary or paid a higher hourly wage than the Texas waiters who are paid $2.13 per hour.  This dispute centered primarily around whether food expeditors were tipped employees under the Fair Labor Standards Act and whether the Chili's tip pool requiring the tipping of expeditors was voluntary.

Tipped Employees and Tip Pooling Arrangements

Tipped employees are employees that customarily and regularly receive at least $30 a month in tips.  Tip pools requiring tipped employees to contribute a portion of their wages to a tip pool that is shared with other normally-tipped employees (e.g., bartenders and bus boys) are legal as long as a tipped employee is not required to contribute more than 15 percent of his or her wages to the pool and the pool is not shared with non-tipped employees.  Tip pooling with non-tipped employees must be completely voluntary and each tipped employee must determine for himself whether and how much to contribute to the pool.  If the tip pool includes non-tipped employees and is not voluntary it is an unlawful deduction from wages.

The Verdict

In the lawsuit, the employees alleged that Chili's mandatory tip pooling arrangement that included typically non-tipped employees (i.e., the expediters) was an illegal deduction from wages.   A Houston jury agreed and awarded the servers the damages that resulted from these alleged illegal deductions.  And while the employees will only obtain an average of approximately $4,900 each from a final judgment, the significant cost to the employer will be in the court awarded attorney's fees that have not yet been determined and will likely be high six figures or more.  According to Dave Faries at the Dallas Observer's Food Blog (City of Ate), Chili's parent company has announced that it will appeal the jury verdict.

Because the defendant in this case was a national restaurant chain I expect the verdict will prompt more lawsuits against restaurant chains challenging their tip pooling arrangements.

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Following a GAO report that concluded that the Department of Labor inadequately investigated complaints from low-wage and minimum wage workers who claimed that their employers failed to pay the federal minimum wage, required overtime, and failed to pay employees their last paycheck the DOL has reacted. 

This week, Secretary of Labor Hilda Solis  announced that the DOL Wage and Hour Division would increase the number of investigators at its field offices by 150 to refocus the department on its enforcement responsibilities.  Since Texas has three field offices of the forty-five nationwide, on a prorata basis, Texas could see a net increase of ten investigators.

Additionally, Secretary Solis announced the intent to hire 100 new investigators to enforce the compliance of contractors receiving assistance under the American Recovery and Reinvestment Act. This renewed emphasis on enforcement efforts and an increased number of investigators will undoubtedly result in more frequent and active DOL investigations.  Texas employers should ensure that their classifications of employees as exempt are accurate and that their pay practices comply with the Fair Labor Standards Act to avoid being targeted by a more active DOL.

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