New York Employment Lawyer Blog

FAQ: I own a small business and recently discovered that I had misclassified some of my workers and was not paying them accurate minimum wages and overtime pay. Can I be held personally liable to these employees for their unpaid compensation?

You ask an excellent question that our Wage and Hour Attorneys are often asked by the heads of many of our family owned businesses as well as small to large sized companies. The Judge in the New York Southern District Court recently ruled in Torres et al. v. Gristedes Operating Corp., et al., that Mr. Catsimatidis, the president and CEO, of a grocery chain was personally and individually liable to his employees for unpaid wages. Depending on your factual circumstances, you are at risk of being personally liable for your employees' unpaid compensation. Our Wage and Hour Attorneys have helped many companies properly classify their employees to avoid any potential personal liability.

The class action lawsuit alleged that Mr. Catsimatidis, Gristede's owner, misclassified hundreds of hourly workers as managers to avoid paying them overtime. The lawsuit originally began in 2004 and was settled in June of 2009 resulting in a $3.5 million settlement structured with a lump sum payment of $425,000 followed by installments. The settlement plan fell apart when Gristede's ran into financial trouble and missed its scheduled payments. Thereafter, the workers filed a motion for summary judgment seeking Mr. Catsimatidis personally liable for the payments.

Judge Paul A. Crotty found that under the Fair Labor Standards Act ("FLSA"), the owner, Mr. Catsimatidis was an employer under the law and thus jointly and severally liable for the millions due in overtime pay to the grocery workers.

In reaching its conclusion, the Court found that there was "no aspect of Gristede's operations from top to bottom and side to side which is beyond Mr. Catsimatidis' reach. There is no area of Gristede's which is not subject to his control, whether he chooses to exercise it." Mr. Catsimatidis' own affidavit showed that he was the sole owner, president and CEO of Gristede's and its parent company, which he owned for 20 years, and that he had the right to open, close and reopen stores. He also had the authority to set prices, pick out décor for the stores, and control the store's signs and advertising.

Although Mr. Catsimatidis argued that he should not be held liable merely because of his title, the Court found that he hired management, reviewed financial documents, worked in the corporate office, dealt with the company's day to day operations. The Court pointed out that even though he may have delegated certain power to others, Mr. Catsimatidis had the power to delegate. Thus, given all the circumstances and Mr. Catsimatidis' ownership and authority, he was an employer under the FSLA.

Torres v. Gristedes teaches an expensive lesson to all business owners, officers, directors, and executives who are under the illusion that they cannot be personally liable for their employees' unpaid compensation. If you have sufficient control and authority of your business, you are at risk for potential personal liability if your company is not financially strong enough to protect you. It is crucial that you classify your workers and pay them in accordance with state and federal law. Call our Wage and Hour Attorneys at Villanueva & Sanchala at (800) 893-9645 to help ensure that you are compliant with wage and hour laws to avoid any future potential personal liability.

Continue reading "Personal Liability for Unpaid Wages Caused by Misclassification of Independent Contractors " »

The IRS just announced its Voluntary Classification Settlement Program ("VCSP") which will allow employers to reclassify their workers for federal tax purposes and only face a reduced penalty along with audit protection. This new tax relief program offers a great tax incentive for companies who want to reclassify their independent contractors as employees. Our law firm has represented many companies accused of misclassifying its workers and believes that this new IRS program could benefit many companies who face a misclassification investigation.

Many companies engage in misclassification of workers as independent contractors to avoid paying payroll taxes as well as workers' compensation. If audited by the IRS or the Department of Labor ("DOL"), these businesses not only face back taxes, but penalties and interest which can be economically devastating.

This program is open to you if you are a taxpaying employer and you employ independent contractors or other workers and want to begin classifying them as employees. In order to begin classify your workers as employees, you must meet the following conditions:

1) You must have filed all the required 1099 forms for the workers for the preceding 3 calendar years ending before the date you file Form 8952; and
2) You cannot currently be under audit by the IRS or by the Department of Labor for misclassification of these workers.

By voluntarily agreeing to prospectively classify your workers as employees, you would benefit from the following:

1) Pay only 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, as determined under the IRS' reduced rates;
2) Not be liable for any interest and penalties on the amount; and
3) Not be subject to an employment tax audit with respect to worker classification of the workers that are being reclassified pursuant to the VCSP for prior years.

The VCSP is a great incentive to employers who are misclassifying their workers as independent contractors to reclassify them as employees. Not only does the program offer a great economic incentive but helps you to avoid any potential future lawsuits or liabilities you may incur for misclassification in the event you are sued or investigated by the DOL. For example, if you paid $1,000,000 to workers that fall under the VCSP in 2010, and then you submit an application for the VCSP to begin treating your workers as employees beginning 01/01/12, the IRS would determine your tax liability for the year ended 2010. If the resulting employment taxes are on the $1,000,000 are $106,800, then under the VCSP, you would only pay 10% or $10,680 in taxes.

Although this is a great program, evaluate your workers and make sure that your workers really should be classified as employees before you enter into this program. Once you go to the IRS, you might end up paying unnecessary payroll taxes. Consult with an attorney to examine which of your workers should be treated as employees before you enter into the VCSP.

In order to apply for the VCSP, you must fill out Form 8952 at least 60 days from the date that you want to begin treating your workers as employees. With your application, be sure to provided a contact or a representative for Power of Attorney. Our Misclassification Attorneys at Villanueva & Sanchala are already in the process of helping many companies with this program. Call us at (800) 893-9645 to discuss how your company might benefit from entering this program.

Disclaimer: 

Thank you for visiting our Blog. This blog provides general information and thoughts about various employment law issues primarily in the New York Tri-State area and occasionally in other areas. You are welcome to read the posts. However, do not construe any content on this blog as legal advice or the creation of an attorney-client relationship. Again, we provide the content only for informational purposes. You should not make decisions based information on our blog since the application of the law depends on the facts and each situation may be different. In addition, the law in most jurisdictions is different and changes constantly and we make no representations that any information on our blog has been updated. The Blog should not be used as a substitute for competent legal advice from an experienced employment law attorney in your state or jurisdiction.

The U.S. Department of Labor ("DOL") signed a memorandum of understanding this week with the Internal Revenue Service ("IRS") in an effort to end misclassification of employees. Leaders from 7 states also signed memorandums of understanding with the DOL's Wage and Hour Division. The states who will be working with the DOL include Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Four other states, including New York, Hawaii, Illinois and Montana are also expected to sign memorandums of understanding. Our firm has helped many companies evaluate and correctly classify their workers in accordance with state and federal guidelines to avoid fines, penalties and taxes.

The memorandums of understanding will allow the Labor Department to share information and coordinate law enforcement with the IRS and the 11 states to ensure that employers follow state and federal labor laws. By working together, the Labor Department will be able to target companies that misclassify employees as independent contractors in order to avoid paying minimum wage and overtime pay. Businesses also misclassify employees in order to avoid paying workers compensation, unemployment insurance and federal taxes.

With the DOL, the IRS and the states sharing information, the state and federal government will be able to inflict multiple fines and penalties on companies engaged in violating state and federal employment laws. Patricia Smith, an attorney at the DOL, stated that there's "more of an incentive to be in compliance because the cost of what we consider to be illegal activity has increased." For example, in the past, if a company was found guilty of not making unemployment insurance payments, it would incur a fine from just the state agency. Now, it would be hit with not just state fines, but also federal fines and penalties as well as any tax violations.

Aggressive enforcement and cracking down on labor law violations has been a major priority for Labor Secretary Hilda Solis since she took over the Labor Department in 2009. The DOL collected about $4 million in back wages in 2010 on behalf of about 6,500 misclassified employees. This amount was a 400 percent increase from the amount collected in 2008. Solis has also made it a point to go after the industries who are known for misclassification of employees, such as the restaurant, hotel, health care, and day care industries.

Misclassification of workers is a huge problem in many industries, which not only robs workers of their rightful wages but amounts to theft from the government and all taxpayers across the country. A 2009 report from the Government Accountability Office showed that misclassification of workers cost the government $2.72 billion in 2006. The report also found that about 30% of employers misclassify their employees as independent contractors to avoid paying overtime and minimum wage.

If your company employs independent contractors, make sure you are in compliance with state and federal labor and employment laws. The government's new initiative can have severe financial consequences if you are found to be in violation of any labor laws.
Call our Labor and Employment Attorneys at Villanueva & Sanchala at (800) 893-9645 to help you evaluate your company to ensure that your employees are classified correctly.

Continue reading "More Bad News For Companies Who Misclassify Workers: Federal (IRS) and State Governments Labor, Including New York, Share Information to Target Employee Misclassification Seeking Penalties" »

Our Misclassification Attorneys have noticed that this is becoming an increasingly common practice as more and more companies are illegally misclassifying employees as independent contractors to avoid paying payroll taxes and providing individuals with employee benefits. Approximately 15 states, including New York and Connecticut (H.B. 5204), and the federal government are cracking down on unscrupulous employers. Being misclassified has significant disadvantages to individuals because they may not be eligible for unemployment insurance benefits, minimum wage, overtime, worker's compensation, protection under the anti-discrimination laws or receive employee benefits such as paid vacation and holiday pay. Thankfully, simply because your employer calls you an independent contractor or consultant and/or issues you a 1099 does not make you one even if you signed an independent contractor agreement. Our Misclassification attorneys have represented many employees with the New York State Department of Labor, United States Department of Labor and the IRS (SS-8) to obtain the correct classification determinations and obtain monetary damages on behalf of our clients. You could be entitled to overtime pay, unpaid wages, compensation for employee benefits (e.g., value of lost vacation pay, health insurance coverage, etc.) and other damages (improper prior tax consequences).

In order to correctly evaluate whether an individual should be classified as an independent contractor or an employee, the following is a partial list of factors that courts consider: the level of the direction and control over the worker by the Company; the amount of independent discretion and autonomy available to the worker; the worker's schedule and location of work; who provides the tools to perform the work (e.g., laptop computer, blackberry, etc.); whether the worker can and does work for other companies simultaneously; whether the parties have an agreement; and whether working relationship was for a set period of time or indefinite.

If you believe that you have been misclassified as an independent contractor or consultant, contact our office at (800) 893-9645 to speak with one of our Employment Law Attorneys for a confidential consultation. Meet our Lead Employment Lawyer.

Our Misclassification of Employees Attorneys have been following a recent case wherein United Health Care agreed to pay over one million dollars in back wages and penalties for misclassifying employees as exempt instead of non-exempt and overtime eligible under the Fair Labor Standards Act (FLSA). Almost 500 employees will receive $934,000 in back wages and United Health Care will pay an additional $104,280 in civil monetary penalties. United Health Care did something many employers mistakenly do - it incorrectly classified employees so they were ineligible to receive overtime. Proper classification of employees under the FLSA is critical because improper classifications can raise class action implications. Importantly, generally an employer's intent is not a factor in a misclassification lawsuit when considering exempt versus non-exempt status. Accordingly, an employer may have very good intentions but its error in classifying employees regarding exempt status under the arcane language of FLSA can raise potential six figure liability. It is of paramount importance for employers to seek the guidance of a qualified Employment Attorney before classifying employees.

Below are two common mistakes made by employers under the FLSA:

1. Calling an employee a "manager" and automatically determining the employee is an "executive" and thus ineligible for overtime payment for hours worked in excess of forty in a work week. In order for the executive exemption to apply, the employee must be paid on a salary basis at a rate of at least $455 per week and meet each of the following tests: i) the employee's primary duty is managing the business or a customarily recognized department or subdivision; ii) customarily and regularly direct the work of two or more other full-time employees or the equivalent; and iii) have the power to hire or fire, or make decisions regarding hiring, firing, promotions or other employment decisions. This is not a simple standard to meet. Most often, "managers" will not meet this heavy burden.

2. Refusing to pay an employee for overtime for hours worked that were not approved in advance. If an employee works in excess of forty hours in a work week and qualifies for overtime payment, employers are required to pay time and one-half the regular rate for the weekly hours that exceed forty. Many employers may complain about paying unapproved overtime. In such cases, it may be prudent for the employer to pay the employee and then consider reviewing its employment practices to make sure it is a violation to work overtime without prior approval. If the employee violates the company policy, the employee may then be subject to discipline. Employers have to careful when disciplining an employee in these circumstances to avoid a potential retaliation claim under the FLSA.

If you have any questions about your rights or obligations under the FLSA or a misclassification issue, contact our New York Misclassification of Employees Lawyers at (800) 893-9645.

Continue reading "Misclassification of Employees Results in Million Dollar Payments by United Health Care, the Nation's Largest Health Insurance Carrier Employer" »

Our Contractor/Employee Misclassification Employment Lawyers have been closely following the New York State Department of Labor's efforts to crackdown on misclassification of employees as independent contractors. Recently, New York enacted legislation entitled, "New York State Construction Industry Fair Play Act." which states that a construction worker is presumed to be an employee and not an independent contractor unless very specific criteria are met. This law is not expected to be good news for companies who are not compliant with worker classifications; however, it should enable more workers collect employee benefits such as paid vacation, health insurance, contribution towards payroll taxes and reduce the burden on companies that are compliant. Misclassification can have serious consequences, often with complex intermingled issues, for companies that could be subject to multiple and simultaneous investigations from several departments within the New York State Department of Labor, the New York State Workers Compensation Board, the IRS and a class-action lawsuit by misclassified workers. Federal Express Ground and World Wrestling Entertainment (WWE) are two well known companies who have faced misclassification issues recently. Our New York Employee Misclassification Lawyers and Attorneys have represented many businesses and individuals regarding employee misclassification issues. Contact one of our New York Employment Lawyers at (800) 893-9645 to confidentially discuss your question or issue.

Under the Act, a construction worker will be considered an employee unless the worker is a separate business entity or the following three criteria are met: (1) the worker is free from control and direction in performing his or her duties; (2) the services performed are outside the usual course of the company's business; and (3) the worker is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue. Only if all three criteria are present, the worker could be treated as an independent contractor. This is a high standard for most companies to meet.

Proper classification of workers as 1099 Independent Contractors can be a significant advantage to companies. Companies can take advantage of many benefits if they correctly classify workers as independent contractors. For example, companies do not have to pay employer portion of payroll taxes (i.e., FICA and FUTA), and offer employee benefits, which can be substantial, to independent contractors. However, although the use of consultants and independent contractors is on the rise, our experience has shown that many companies intentionally or negligently improperly misclassify workers. Many companies incorrectly have workers sign an independent contractor agreement, which is often poorly drafted and downloaded online from a free site, and then believe that they can treat the workers as independent contractors. This is a dangerous practice and not legally tenable. Proper classification requires careful legal analysis. It is best for a company to consider its worker classification practices before it is audited by the Department of Labor or IRS. Our Employment Law Attorneys have helped companies properly classify workers and helped employees collect benefits when they have been improperly misclassified.

In addition to the potential of a class action lawsuit, the penalties against a non-compliant company are significant. Companies, including some shareholders, who willfully violate the New York State Construction Industry Fair Play Act may be subject to civil and criminal penalties. The Act expressly prohibits companies from retaliating against workers who complain about their misclassification status. Furthermore, employers are required to a posting a Notice in workplace specific to the Act. Contact our New York Employee Misclassification Attorneys to confidentially discuss your misclassification issues at (800) 893-9645.

Whether a person is an employee or an independent contractor will depend on the facts of each case. A company's misclassification can have a significant monetary and tax impact on individuals. Misclassifying employees as independent contractors ("IC") is on the rise in virtually every of sector of the economy from home health care, construction, delivery services, information technology, internet and telecommunications, marketing specialists, copywriters, physicians, and analysts, just to name a few. The US Department of Labor has reported that 10% to 30% of all employers misclassify their employees as ICs in a cost-cutting move. In fact, the federal government estimates that it is losing over three billion dollars each year in federal income and employment tax revenue from this misclassification.

Generally speaking, an individual is an independent contractor if the employer has the "right to control or direct only the result of the work and the not the means and methods of accomplishing the result." In determining the degree of control, the courts and federal agencies examine the following factors:

• Do you have an employment contract? How long will your assignment last?

• Does the Company control or have the right to control what you do and how you perform your duties?

• Are the business aspects of your duties controlled by the Company? For example -- how are you paid, do you bring your own tools to work, do you bring your own computer, are your business expenses reimbursed.

• Is the work being performed as a regular part of the company's business?

• Do you require a special skill to perform the duties?

• Are you provided with employee benefits, such require a as a pension plan, vacation and/or sick pay, health plan, insurance, stock options, etc?


In addition, the New York State Labor Law lists criterion in determining whether an individual is an Independent Contractor ("IC") or an employee. The following are some factors indicating an individual is an IC: having an established business, conducting your own separate advertising, maintaining a listing in the commercial pages of the telephone directory, using business cards, carrying separate liability insurance, maintaining a place of business, paying one's own expenses, setting or negotiating own pay rate, and being free to hire assistants.

The New York State Labor Law provides that even if your Company claims you are an IC, you could be entitled to unemployment insurance benefits if you are legally found to be an employee. For example, merely filling out a 1099 form or signing a statement claiming to be an IC will not make you an IC if your role qualifies as an employee. Like your right to overtime, you cannot legally waive or sign away this right.

Given the current economic atmosphere, employers are extremely motivated to classify workers as IC's instead of employees for several reasons. By using classifying individuals as ICs, employers seek to avoid making payments for overtime, minimum wage, payroll taxes, social security, disability or unemployment insurance. Companies also seem to avoid reimbursing workers for business expenses or providing workers compensation insurance. By classifying a worker as an IC, employers try to avoid compliance with most labor and employment laws such as giving ICs the right to form a union and bargain collectively.

Although it is easier to classify a worker as an IC by giving them an IRS Form 1099 instead of a W-2 and making all the required payments, the consequences of misclassifying are quite harsh and can be devastating to most businesses. An employer caught for misclassifying may be liable for years of unpaid federal, state, local income tax withholdings, Social Security and Medicare contributions, unpaid workers compensation and unemployment insurance premiums, unpaid work related expenses, overtime compensation, as well as interest and penalties. For example, Microsoft paid $97 million to settle a benefits case to its ICs who weren't covered under its stock purchase plan and that amount did not include what it owed the IRS.

Continue reading "Employee Misclassification Q&A: I was misclassified as an Independent Contractor instead of as an Employee? What is the difference and am I entitled to Employee Benefits and Overtime? " »