June 23, 2017

Employee Misclassification: A Cautionary Tale

by Drew Piersall, Zashin & Rich Co. LPA

While there continues to be confusion regarding the distinctions between an employee and an independent contractor, under the federal Fair Labor Standards Act (FLSA), one Ohio judge recently found no confusion in determining an employer had misclassified employees as volunteers. In Hugler v. Cathedral Buffet, Inc. (Case No. 5:15-cv-1577), Judge Benita Pearson of the Northern District of Ohio determined that televangelist Ernest Angley employed unpaid volunteers in the church’s for-profit buffet restaurant, appropriately named the Cathedral Buffet.

Drew Piersall

Problems for the buffet began as far back as 1999, when a Department of Labor (DOL) investigation revealed that the Cuyahoga Falls eatery was misclassifying workers as volunteers and paying them no wages, in violation of the FLSA. Further, the DOL investigation revealed that the Buffet had been employing a minor in violation of the FLSA, failed to maintain accurate timekeeping records, and failed to pay overtime to one non-exempt employee. The Buffet paid a $37,000 fine at that time and promised to maintain accurate payroll records going forward.

In the years following the DOL’s investigation, and knowing that Cathedral Buffet was on the federal government’s radar, Reverend Angley was alleged to have issued paychecks to “volunteers,” who then signed the paychecks and handed them back over to the church secretary. This practice eventually stopped, and by 2014, Revered Angley publicly admitted that he had reverted to his old method of not paying volunteers. Not surprisingly, this prompted another DOL investigation.

Judge Pearson had little difficulty in determining that the volunteers were misclassified, and instead served as employees of the Buffet. “The economic realities of the situation in the case at bar suggest that the volunteers used by the Buffet were actually employees, and that the Buffet’s main purpose in using the volunteers was to save money.”

Because individuals can be held personally liable under the FLSA, Judge Pearson ordered Revered Angley and the Cathedral Buffet to pay employees nearly $400,000 in damages, split between unpaid wages and liquidated damages. Shortly after Judge Pearson’s decision was released, the Cathedral Buffet closed its doors, claiming that it could not maintain its low, family-friendly prices without the use of volunteers.

Practical Impacts on Business Owners

Speaking of the DOL, it made headlines on June 7, when it cancelled two controversial Obama-era guidance memos: one seeking to curb the misclassification of employees as independent contractors and another broadening liability for joint employment. Many observers believe this signals a shift toward diminished enforcement of employee classification issues under the current administration. With these memos now cancelled, the DOL will assumedly revert to the more traditional test of who is an employee versus an independent contractor by focusing on the level of control exercised over the “employee.”

The appropriate classification of employees is crucial to business owners, as there are ramifications under many employment discrimination laws, including but not limited to the FLSA, ERISA, unemployment compensation law, workers’ compensation regulations and tax laws. Use care when classifying, lest yours become the next cautionary tale.