“When I was in Maryland we had a different word for that. We didn’t call it misclassification, we called it workplace fraud,” Perez said in an interview on C-SPAN’s “Newsmakers” series.
Companies that define people who work exclusively for them, and are under their control, as independent contractors rather than employees are “cheating” the system, U.S. Secretary of Labor Thomas Perez said in an interview Sunday.
Those comments came just days after the Labor Department’s Wage and Hour division issued guidance to employers to clarify how to distinguish between classifying someone as an employee or independent contractor.
“When I was in Maryland (as the state’s secretary of labor) we had a different word for that. We didn’t call it misclassification, we called it workplace fraud because you’re cheating the worker, you’re creating an un-level playing field for other businesses who play by the rules, and you’re cheating the tax collectors,” Perez said on C-SPAN’s “Newsmakers” series. “And that hollows out wages. One way to make sure people get paid the wages they deserve is to enforce the laws on the books and make sure we call people who act like employees, quack like employees, that we call them employees and pay them as such.”
The employment relationship has evolved in many industries during the past 30 years as companies outsource more activities to third parties. The independent contractor model is common in the trucking industry, including until 2011 at FedEx Ground, the domestic package delivery subsidiary of FedEx Corp.
It is especially prevalent in the port haulage sector where non-asset based logistics companies hire drivers who are responsible for owning, maintaining, insuring and operating their trucks. The drivers are ostensibly freelancers who can move their services around to different trucking companies. In reality, however, drayage drivers typically work full time for one firm that dictates when and where to show up for work, issues all dispatch assignments, regulates and monitors their behavior, and often deducts expenses from settlement checks for the driver’s lease of the truck, fuel, insurance, parking and other services offered by the company.
Many services emanating from the digital economy, such as ride-hailing apps Uber and Lyft, depend on the use of individuals with their own assets, cars in those cases, to carry out the transaction. Those individuals are then paid a portion of the user’s fee, meaning that the company simply acts as a matchmaker for the consumer and the service provider through its technology platform.
But workers’ rights advocates and government agencies contend that employees are often intentionally misclassified to shift the burden to workers of benefits such as health insurance, worker’s compensation, unemployment insurance, family and medical leave, social security contributions and minimum wages. The practices also results in losses to governments in the form of lower tax revenues, as well as to state unemployment insurance and workers compensation funds.
“If you are operating a package company and you call your workers employees because they work exclusively for you – they wear your uniform – and you’re competing for a contract and your competitor takes their workers that they totally control and they call them an independent contractor, then they can lowball you on the bid. That’s an unfair playing field,” Perez said.
In 2010, the Obama administration made misclassification of employees as independent contractors an enforcement priority, part of an agenda aimed at addressing income inequality that includes efforts to raise the minimum wage and a proposed regulation to raise the salary threshold for those eligible for overtime compensation.
The Labor Department has established agreements with 23 states – the latest was with the Kentucky Labor Cabinet last week – to share information and coordinate enforcement actions aimed at misclassification.
In fiscal year 2014, ended Sept. 30, Labor Department investigations resulted in the return of more than $79 million in back wages for more than 109,000 workers in industries such as janitorial, temporary help, food service, day care, hospitality and garment making. Since 2009, the department has recovered $1.3 billion in back wages.
Perez rejected the argument that enforcing fair labor standards will hinder the economy and that government regulation hasn’t evolved with the changing ways of doing business.
Innovation and regulation are not mutually exclusive opposites, he insisted. “I see innovators across this economy who understand that when you take care of your workers it’s good for your workers, it’s good for your bottom line and it’s good for your customers. So this notion that we either have to have an independent contractor driving you or else we can’t create a business model is simply incorrect,” the Labor Secretary said.
It’s a false choice, for example, to say that a company like Uber should be able to violate the Americans With Disability Act and not serve someone in a wheelchair, he added. “I think that’s utterly inconsistent with our values as a nation.”
The Labor Department last week issued guidance that analyzes how the Fair Labor Standards Act definition of “employ” determines whether workers are employees or independent contractors under the law and how the courts have applied “economic reality” factors in determining if a worker is actually an employee.
The goal of the economic realities test is to determine whether a worker is economically dependent on the employer or is really in business for him or herself. The Labor Department said most people are, in fact, employees, and the primary determining factor is their level of economic dependence on the company.
Court-approved factors for determining worker independence include whether the worker makes investments in the business, has a managerial role that could result in profits or losses, and has a permanent relationship with the company, and the degree of control exerted by the company over one’s schedule, tasks, and adherence to its rules.
In June, the California Labor Commissioner sided with an Uber driver who won the right to be treated as an employee. Uber was ordered to reimburse the driver more than $4,000 in expenses and other costs incurred over a two-month period. The ruling does not apply beyond the single driver, but could be used as the basis for class-action lawsuits that have been, or could be, filed.
One way Uber exerts control over its drivers is a clause in the work contract that says drivers’ cars must be a model approved by the company and that they cannot be more than 10 years old.
Last week, FedEx Ground lost an appeal in federal court of a Kansas ruling that the express carrier violated state wage laws by classifying more than 500 drivers as independent contractors. Several weeks ago, the company agreed to settle a similar driver misclassification case in California for a reported $228 million.
In its decision, the 7th Circuit Court of Appeals agreed that FedEx Ground drivers were employees under state law. The Kansas case applies to workers from 1998 to 2007. FedEx four years ago began treating FedEx Ground drivers as employees as a result of several other cases that went against it.
Companies from other sectors like Instacart, which will pick up your groceries for you and delivery them to your door, have also started to classify some of their workers as employees.
Labor Secretary Perez: Companies that misclassify workers are ‘cheating’ the system
