You hire a freelance audio engineer to do a show. He does a good job and sends you an invoice. You write him a check and say thanks.
Business should be as simple as this, right? Well, not exactly.
During the show, the freelancer stepped off the control deck and shattered his leg. He needs extensive medical treatment and rehabilitation. He will be unable to work for at least nine months. His workers' compensation claim was declined because he wasn't covered under your policy. Now, you're being sued.
While you are waiting for that to be settled, you hire a full-time person to be the evening A/V manager at a hotel property. You pay her $500 salary per week and her regular hours are 4 p.m. to midnight. A big convention comes in, and she works until 6 a.m. three nights in one week. On payday, she asks where her overtime money is. When you say no to the overtime because she is salaried management, she contacts the state employment office. You are now being audited for overtime violations.
These may sound like extreme cases, but many companies unknowingly expose themselves to such situations on a regular basis. In the right circumstances the employer might win these example cases, but only if you have correctly applied the rules. In the meantime, you are diverting time and money from business activities to manage these problems. There is no business without risk — the issue is how you choose to manage that risk.
There is not enough space here to detail all labor laws and their implications, but we can look at a few of the more common issues affecting employees and contractors in our industry. It is necessary to emphasize, however, that the following comments do not constitute, and are not intended to be, legal advice. Labor laws vary from state to state, and all companies should seek professional advice regarding compliance with the laws of each state in which they operate. Rules are also open to interpretation, and there are many departments and agencies that have jurisdiction on overlapping issues.
We will, however, try to identify some key issues that need your attention and show why they are important. If running a business were simpler, we could just discuss how to work with independent contractors, but the line between contractors and employees is very thin. Some of our industry practices run very close to this line. As a manager, you need to know which issues the law covers and which are choices governed by your firm's tolerance of risk.
There are five major categories that managers should understand regarding staff:
- Exempt vs. nonexempt employees
- Full-time vs. part-time employees
- Workers' compensation insurance
- Independent contractor status
- Agency-provided labor
Once these issues are understood, the manager will first have to decide what adjustments, if any, are needed to comply with the law and, secondly, how to manage financial risk on liability issues.
OVERTIME AND EXEMPT VS. NONEXEMPT
I am often asked whether salaried individuals are entitled to overtime pay. In my opinion, the answer is yes, some are.
It is common practice for many companies to employ certain staff as salaried workers as a means to make certain that those employees are exempt from overtime pay. But simply putting someone on salary does not automatically make him or her an exempt employee.
The U.S. Department of Labor sets the test standards for exempt/nonexempt employee status. In the simplest terms, nonexempt employees are hourly with overtime rights, and exempt employees are salaried. The complete definition has more to do with job description and function than how an employee is paid. Nonexempt employees are eligible to receive overtime pay regardless of whether they are paid hourly or salaried. Because most employee functions are nonexempt work, the law defines only the exceptions. That is, everything that is not exempt must therefore be nonexempt.
The laws that address overtime pay are specified in the Fair Labor Standards Act. The FLSA does not apply to all companies or all employees, but the exceptions are somewhat specific, and so you should seek professional counsel before classifying any worker as exempt, as the financial penalties for incorrectly paying overtime are severe.
Any discussion of overtime exemptions usually leads to a review of comp time policies. “Comp time” is time off with pay in lieu of overtime pay. With few exceptions, private companies cannot legally substitute comp time for overtime for nonexempt employees. Some exempt employees can be compensated with comp time, but be sure your application of exempt status is accurate. The FLSA clearly states that overtime for nonexempt workers is equal to one-and-a-half times their normal hourly rate for all hours worked in excess of 40 in a given workweek.
FULL-TIME VS. PART-TIME
The definition of full-time versus part-time is more straightforward. Part-time status applies to individuals who, on the average, work less than 24 hours a week in a year for your company. Any employee who works more than 1,000 hours in a year is considered a full-time employee and is thereby eligible for the same benefits afforded your other full-time employees — paid vacation and holidays, access to health benefits, sick leave, etc. Because the status is based on average hours, the part-time worker can, in fact, be scheduled for more than 24 hours in a given week. Part-time workers are also eligible for overtime after 40 hours in a workweek.
In general, all independent contractors are considered employees unless it can be shown that they are not. The IRS has provided a 20-question guideline in regard to this with the two most important tests pertaining to direction and control. When you, the employer, specify work hours, location and method, the worker is classified as an employee. On show site, you have an advantage that the skilled technician is not necessarily under your direct control, probably provides his or her own tools, and is paid for the job, not just his or her time. When you hire freelancers to work in your shop, you take control over when, where and how they perform their service. Interpretation of these criteria will vary from state to state and auditor to auditor, but in general, that individual is acting as your employee.
About now, a little voice in your head is probably screaming, “Everyone uses freelancers, and no one calls them employees!”
It's indeed an industry-accepted practice to hire independent contractors on an hourly rate with some sort of guaranteed minimum booking. This could be a stagehand for a four-hour call at $10 an hour, or a camera operator for $250 a day based on a 10-hour day. In theory the contractor is responsible for filing his or her own taxes, receives no company benefits from your firm, and is not eligible for unemployment benefits at job's end.
In a perfect world, there is no reason to challenge these practices. However, many companies unintentionally create an employee-employer relationship. Some common practices that undermine independent contractor status include the employer doing any or all of the following: defining work periods, specifying pay rates, supervising all work, providing training, or using the contractor in the same nonexempt activities as its other employees. When any of these circumstances exist, the worker may become eligible for unemployment benefits when the job is over or workers' compensation if he gets hurt on the job. If he qualifies as a full-time employee, then you might be liable for additional benefits as well. If there is some doubt as to the status of the worker, classifying him as an employee poses fewer potential risks to the employer.
So what makes the independent contractor truly independent? The key is for the freelancer to behave like a business, which involves three conscious steps. First, the freelancer needs to operate under a business name; second, he or she needs to have a tax number (that is, an Employer Identification Number — not a Social Security number) and provide it to you on a W-9 form; and third, he or she must provide proof of workers' compensation and general liability insurance.
It's possible for an individual to do all of these without incorporating or incurring significant costs in most states. Other states may require as much as 4 percent of wages to cover workers' comp. You should expect your freelancer to pass this cost on to you.
WORKERS' COMPENSATION INSURANCE
Workers' comp insurance is designed to pay for medical treatment and rehabilitation and to provide disability pay for workers injured on the job. The employer pays the premium and the worker receives the benefits. Many states do not require workers' comp for smaller companies, but that generally does not lessen your liability. Best practices suggest that a company's only real defense against a future workers' comp claim from a freelancer is to require that the independent contractor provide proof of worker's comp insurance prior to any incident, or include that worker in your coverage.
If you choose to include your freelancers on your firm's workers' comp policy, this will provide them coverage and protect your company. This will also create a potential employer-employee relationship, which could make the worker eligible for any disability and paid time-off benefits enjoyed by your other employees.
There is not much distinction between an agency and an independent contractor where compliance is concerned, but an agency provides better defense against liability for the employer. When you hire stagehands or technicians through an agency or broker, they are theoretically employees of that agency.
Nonetheless, it is still best to require proof of insurance for both workers' compensation and general liability from the agency. While most states do not require workers' comp, that does not mean you should operate without it. The risks far outweigh the costs. Even if you book labor through another party, that does not remove you from the chain of liability. Technically, you could still be sued if the injured worker's agency is uninsured or if your direction somehow contributed to the injury. Again, it is best to seek the advice and counsel of an insurance professional for your specific business and locale.
THE BOTTOM LINE
I hope it's clear that there are some labor issues that are dictated by law and others that are guided by choice. It is necessary to know and follow the laws of your state or seek the counsel of professionals.
When choosing how your firm handles labor choices, the issue is how much risk you are willing to take. Making uninformed choices about workers' comp and employee status can lead to devastating results when a worker or freelancer chooses to challenge you on his employment rights. There are a number of free resources online that can help you with further research. Your state's employment department or agency is a good starting point.
Even if you believe you are already addressing the issues raised here, it would be worth your time to dig a little deeper.
Tom Stimson directs sales and operations at Alford Media Services in Dallas; his e-mail address is [email protected]. This article, which originally appeared in our sister publication SRO, is one of a series produced by the International Communications Industries Association, the premier trade association for the professional audiovisual communications industry. For more on this topic, visit our Web site at www.specialevents.com.