CONSEQUENCES OF TREATING EMPLOYESS AS INDEPENDENT CONTRACTORS

There are numerous reasons employers often prefer to treat certain works as Independent Contractors, rather than employees.  To begin with, there is no obligation to ensure that an Independent Contractor is earning Minimum Wage for the time they spend performing work for the employer.  As a result, there is no need to pay overtime to an Independent Contractor who spends more than 40 hours a week conducting the work they contracted to do.  Similarly, there is no obligation to pay payroll taxes, workers’ compensation insurance, or to withhold the worker’s income tax.  Employers also do not have to abide by the Family Emergency Medical Leave Act, or concern themselves with any statutory obligations to offer health insurance to Independent Contractors.  Simply, it is easier and cheaper to treat workers as Independent Contractors than Employees.

As simple as it may seem in the short term, treating Employees as Independent Contractors can be extremely costly in the long run.  Any employer who routinely utilizes the same workers to perform the same job functions on a daily basis runs the risk of being found in violation of the Fair Labor Standards Act (FLSA) and in violation of State Wage and Hour requirements. 

Investigations by the Wage and Hours board normally start with a complaint from a disgruntled former employee, but if the investigation reveals violations pertaining to that employee, the investigation can be expanded to include all workers for up to 3, 5, or 7 years.  Employers found to have violated the Wage & Hour regulations may suffer fines in addition to having to pay back Unemployment and Workers Compensation payments.  They may also have to pay restitution to employees who are found to have been underpaid.  It is not uncommon for mid-sized companies (15-35 employees) to rack up $75-$100,000 in fines and assessments in Wage & Hour cases.

FLSA cases can be even more costly to employers.  These cases normally start with one or two disgruntled employees, but are often filed as collective cases including “all similarly situated” parties.  As the case matures, more and more Plaintiffs are often added.  If it is determined that the plaintiffs were treated as employees, and not paid minimum wage, the employer may have to pay up to 2 times the amount of wages that should have been paid over several years for each employee (or former employee) included in the suit, plus attorney fees.  These damages frequently add up to hundreds of thousands in damages.

Additionally, since FSLA cases target damages to the workers and Wage & Hour complaints target damages to the State for unpaid taxes and fees, the initiation of one case will often spark the filing of the other.  In the end, the easy, cheaper way to deal with compensating workers can very easily end up destroying your business. 

There are, however, ways to limit some of the risk your business may be at for its past violations of these to statutes and insulate your business from future violations.  These methods include modifying the employment contracts you are currently using and some small alterations in your current operating procedures.  To evaluate your company’s risk and ways to lessen those risks and comply with these statutes you should consult with an attorney familiar with these Employment Law issues.

Entertaiiners and Wait Staff/ Employees not Independent Contractors

The misclassification of employees as independent contractors occurs frequently, regardless of industry, and unfortunately, carries with it significant penalties.   Treating a worker as an independent contractor improperly will not only cost the employer damages for unpaid overtime, but can include damages for unpaid unemployment taxes, workers compensation premiums, payroll taxes, and employee benefits.

Recent federal cases in Texas, D.C., Atlanta, and elsewhere across the country have changed the way workers historically treated as Independent Contractors should be classified under the FLSA (Fair Labor Standards Act), and handing out major penalties to businesses for failing to pay minimum wage and overtime to mis-categorized workers. 

In determining whether workers are employees or independent contractors, the Courts rely on the "economic reality" test, which contains the following factors: (1) the degree of control exercised by the employer over the workers; (2) the workers' opportunity for profit or loss and their investment in the business; (3) the degree of skill and independent initiative required to perform the work; and (4) the permanence or duration of the working relationship; and (5) the extent to which the work is an integral part of the employer's business.

Based on this litmus test, setting schedules and enforcing work place rules shows an exercise of control consistent to that of an employee; the ability to earn tips does not equate to profiting from a capital investment; skill is not seen in the performance of activities to which there is no objective standard; high turnover rates is not the same as the temporary engagement of services; and the more your business needs the worker for the daily operation of the business, the more likely they are an employee.

There are several groups or classes of employees that are particularly prone to mis-classification as independent contractors.  The most prevalent groups that we have dealt with include wait staff and entertainers.  These workers are often compensated either sole by tips or on a job by job basis, and have varying degrees of limitations placed on their ability to work for other employers.

Regardless of how lucrative a bartender or waiter’s tip income may be, they will always be categorized as an employee and entitled to minimum wage and protection under FLSA.  Bartenders and other wait staff are usually required to follow a schedule or shift when working, with breaks regulated by the employer, which equates to an exercise of control over the work of the employee (Category 1 under the Economic Reality test).  These workers’ opportunity for profit is based entirely on the success of the employer; the workers don’t control the advertising, pricing, or costs of goods sold for the provision of the services which their work complements. (Category 2). Pouring drinks or serving plates requires very little skill, and even less entrepreneurial initiative. (Category 3).  Catering and other similar business that use service staff could not operate without those workers, so those workers are considered an integral part of the employer’s business. (Category 5).  A caterer who pays servers $50 plus tips to work an event will violate the FLSA if the $50 pay rate does not equate to minimum wage based on the hours required to work.  Those hours include set up and clean-up time.  The amount actually earned in tips is irrelevant.  The short term or irregularity in the frequency of the employment (Category 4) in this scenario, standing on its own, will probably not be enough to justify treating the worker as an independent contractor.

Don’t Put Off ‘Till Tomorrow, What You May Be Arrested For Today

In addition to counseling and representing clients in Entertainment and Copyright matters, I also frequently represent clients in Criminal matters.  Recently I’ve been getting a lot of questions concerning the “Statute of Limitations” from clients who have learned that there is an old, outstanding warrant for them related to their particular indiscretions of youth.  The question becomes, “Can they still prosecute me for something I’ve done years ago?”

What most people refer to as “The Statute of Limitations” in a criminal case is actually a statute that controls how long the state has to begin a Criminal Proceeding.  That time will vary depending on the seriousness of the case, and whether or not the Defendant has ever been arrested for the allegation.  For Ordinance Violations and Traffic Offenses, the time limit is one year after the alleged offense.  For 2^nd and 1^st Degree Misdemeanors, the time frame is 2 years from the alleged date of offense.  For 3^rd Degree and 2^nd Degree Felonies, the time frame is generally 3 years from the alleged date of offense; and for 1^st Degree Felonies the time frame is generally 4 years.  Felonies classified as Capital Offenses have no time limit.

If a warrant is issued for your arrest, following some sort of investigation, and you have not been arrested for the offense, that warrant must be served on you inside the “Statute of Limitations” regardless of how long after the alleged offense the warrant was issued.  For example, if you are to be charged with Battery, as a 1^st Degree Misdemeanor, and you are not arrested at the time of the offense or during the investigation, the warrant must be served on you inside two years.  There is case law supporting the extension of that time in cases where the Defendant may be actively avoiding service; but in those instances, the State must show that it made a Diligent Search for the Defendant in an effort to serve the warrant.  Simply going to the last known residence once or even twice is not enough. 

If you have never been arrested for the offense, and you were not served with the warrant inside the “Statute of Limitations” your case can probably be dismissed.  To do so, you should contact a Criminal Attorney familiar with these concepts and have him or her fully examine your case and circumstances.

If you are arrested for an offense during the course of the investigation, you are presumed to have been put on notice that you are subject to prosecution.  Therefore, the State is not required to provide you with actual notice of the formal filing of charges in order to initiate the criminal proceeding.  In this instance, to satisfy “The Statute of Limitations”, all the State must do is file formal charges inside the allotted time.  For a 1^st Degree Misdemeanor, that time is 2 years.  

The key to understanding this concept is to remember that law enforcement does not charge defendants, the State Attorney does.  If law enforcement arrests you for an alleged Simple Battery and you go to jail and post bond, or you are issued a Notice to Appear,  you have an obligation to monitor your case.  If after investigation the State Attorney decides to file charges for Aggravated Battery (a 2^nd Degree Felony), they are free to do so, provided that they file those charges inside 3 years of the offense.   Since you were arrested, you are aware of the potential for prosecution, so the State does not have to actually serve the warrant for the proceedings to have been properly initiated…the warrant will be good until it is served, and once served the prosecution can continue. 

Again, in this instance (you were arrested and formal charges filed later, but inside your Statute of Limitations) you should contact and retain a Criminal Attorney familiar with these concepts as there may be other statutory and factual based defenses that you can employ.

In either event, regardless of whether you have been properly noticed of the intent to prosecute, while the warrant goes un-served, the warrant itself is still “good”, and you still have an obligation to respond to the warrant (i.e.: turn yourself in).  Law enforcement will exercise the warrant (arrest you) if they discover a warrant has been issued for your arrest…regardless of how old it is.  Even if it is too late for the State to prosecute you, the warrant for your arrest is still enforceable.  If you coordinate with a Criminal Attorney familiar with these issues, you may be able to control how and when the warrant will be executed.   In some circumstance, your attorney may be able to arrange to have you turn yourself into the Court at the same time that he makes his argument to Dismiss the case, which could leave you never seeing the inside of a jail cell.  Alternatively, if law enforcement exercises the warrant against you, you may spend weeks or months in custody while trying to hire an attorney and scheduling your Motion to Dismiss.

The bottom line is if you discover there is a warrant for your arrest, don’t ignore it…contact an attorney and deal with it.  Otherwise, the warrant won’t go away without your arrest.

Copyright Infringement -- The Cost of File Sharing

It’s one thing to have “a little Captain in you”, but it’s another to be outted as a booty pirate.  Porn companies are cracking down on internet pirating of copyright protected content.  For the past year or two several production companies have been targeting people who use file sharing programs like Bit Torrent to download porn.  The companies have reportedly recovered millions of dollars from over 100,000 individuals who thought they were getting free porn.

Bit Torrent and other file sharing program users make video files available to other members, and are then able to search for other files that they want, that may be available by other members.   Then they can download the file to their own computer.  This sounds like cyber utopia.  After all, didn’t our parents and teachers always emphasis the importance of sharing?  The problem is, that sharing movie and music files is considered Copyright Infringement – it can lead to massive law suits and even criminal liability.  The movie and music industry considers it a major cause for falling revenues from record and dvd sales – and they are not happy. 

Unlike file sharing technology of old, the new technology does not transfer an entire file from one computer to another.  Instead, it takes pieces of the target file from several computers (some times thousands), called a swarm, and then reassembles the file on your computer.  This helps protect the providers of the software from copyright infringement suits, but it creates a situation where every individual who provides a piece of the file may be liable for distributing copyright protected material.  Porn production companies have found a way to identify all of the IP addresses that make up a swarm during a down load, and are proceeding to file copyright infringement suits against everyone in the swarm.  How would you like to be publicly named in a lawsuit for illegally copying “Chucky Teen Butt Fuckers 69” (hopefully a made up name)?

Once the IP addresses making up a swarm are identified, the production companies then get a subpoena forcing the Internet Service Provider to supply the names and addresses of the IP addresses.  Recently, this is where the courts have been giving some resistance to these suits.  Since a swarm may be made up of thousands of IP addresses, the law suits are typically filed as “Porn Productions v. John Does 1-3,000”, and the production company then seeks subpoenas for all 3000 IP addresses.  The Federal Courts many of these cases have been filed in have recently been resistant to issuing subpoenas for 3000 people at a time, when it is quite possible that many of the John Does may not even reside in the geographical jurisdiction of that court.  Supporters of the technology are hailing these recent developments as a triumph against the law suits, but they fail to realize that these rulings will end up cost the pirates more in legal fees and damages in the long run.

When the Courts allow the suits to include an entire swarm, the producers are able to identify all the members of the swarm with inside one case, with one motion.  They then contact each defendant and give them the opportunity to settle the case quickly and quietly (normally $1-2,000 each).   Copyright Infringement often allows statutory damages of up to $150,000 for each file you copy or allow someone to copy.  “Statutory Damages” allow the plaintiff to collect the money without proving the value of the file you stole, and without proving how much the theft hurt them…they just have to prove that you copied the file or allowed someone else to copy the file.  If production companies have to file multiple suits to go after a single swarm, it will cost them more.  If it costs more to prosecute the case, they will want larger settlements.   

Those $1000 settlements can easily turn into five and ten thousand dollar settlements, and the cases will still settled.   Being named as a defendant in these suits can be embarrassing…do you want the local newspaper to know what porn gets you off?  Fighting these cases normally requires surrendering your computer to be examined for other infringing files – do you want the courts seeing your entire porn collection?  That barn yard scene you just had to see will probably end up in criminal charges….(and just hope you don’t have any vintage Tracy Lords flicks).   And don’t forget the attorney fees!  Negotiating a $1000 to $2000 settlement can often cost a couple thousand dollars in your own attorney fees.  To try to fight one of these cases will easily run into the $10,000 dollar range.   The porn industry is not going to just keep bending over and taking it from copyright pirates.  The suits will continue…the issue becomes how much each infringer will pay when caught.

These mass suits have come under fire because they offer settlements so easily, offering to drop the prosecution for as little as a thousand dollars.  The criticism is that settling for such small amounts does not really discourage future piracy…it just generates money.  With 3000 people in a swarm, if a third settle for $1000, the production recovers $1,000,000, regardless of the quality of the production.  In contrast, the music industry filed fewer suits, but went after large Court ordered judgments.  Remember the college student who lost an infringement suit to the tune of $365,000?  That sent a message.  Do the supporters of the technology really want thousands of six figure judgments and the mass publicity to that goes with those types of suits?  To the average person, I think $1,000 per file leaves enough of an impression on copyright infringers.

The point is…sharing files is copyright infringement.  Porn companies are going after on line pirates.  If you insist on getting your porn for free, you are likely to pay in the end.