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Talent Management Perspectives

Published July 2009

How to Avoid Potential Lawsuits: Two Questions You Must Ask

 

  Erin Green

Last month, former employees filed a $200 million class-action lawsuit against Northwestern Mutual Life Insurance Co., alleging the company failed to pay them minimum wage and overtime compensation. Now, talent managers should take note of the employment law lessons this case provides and consider rectifying potential lawsuit-inducing problems in their own companies.

"The thing to be noted about this lawsuit is that it really could happen to any employer," said Wendy E. Lane, an attorney at Rutter Hobbs & Davidoff Inc. "All it takes is one disgruntled employee to file a class-action lawsuit on behalf of every employee."
 
Many talent managers may not have stopped to consider the need to evaluate their employee classification procedures and practices. Lane recommends talent managers assess and address common issues that can lead to problems down the road.

Talent managers should ask themselves and their attorneys two important questions.

1. What determines whether a worker is classified as an independent contractor vs. an employee? "A lot of employers think that as long as they're doing a 1099 for the worker as opposed to doing withholding, as they would for a normal employee, that that's sufficient and that will make [the workers] independent contractors," Lane said. "That's not the case; it's not about whether you simply do a W-2 or a 1099. It's a lot more detailed than that. Also, just having a contract or a written agreement that says you hereby agree that you're working for us as an independent contractor, that's not necessarily sufficient. It's a factor to be considered, but those two issues alone are not determinative. It's a multi-element analysis, but what [talent managers] need to keep in mind is that there can be up to 11 factors that determine it."

2. How does an employer distinguish between exempt and nonexempt employees? "Exempt employees are free of the overtime and meal period rules, for example," Lane explained. "They get paid a salary, and they can be expected sometimes to work as much overtime as it takes, and they don't get extra pay. However, I've found that many employers don't understand that to [classify] an exempt employee, you can't just say, 'Oh, well, I pay them a salary.' A lot of employers think salaried vs. hourly - if you're salaried, you're exempt; if you're hourly, you're nonexempt. [But] it's not just a matter of salary. There are several factors under the law that have to be considered. There's a whole analysis that has to be conducted as to whether somebody is appropriately [classified as] exempt vs. nonexempt, and it's not just as to whether they're salaried or hourly."

Answering these questions and addressing the issues that are brought up can help both prevent potential future lawsuits and assure employers that they are following all laws in place.

"More often than not, companies make these mistakes not because they're trying to be deceptive, but because they just don't know the rules and laws," Lane said. "I would urge employers and HR to consider that spending a couple of hours to hire counsel to look over their handbooks, their classification procedures - how they've classified employees vs. contractors and exempt vs. nonexempt - is well worth the money for the peace of mind. To shave off a few dollars and not hire counsel could result in very expensive, serious mistakes."