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DOL: Beware turning employees into ‘owners’

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in Employment Law,Human Resources

When it comes to circumventing the Fair Labor Standards Act (FLSA), innovation may be born of hardship. The latest employer scheme to avoid paying overtime, workers’ comp premiums and payroll taxes comes out of Utah and Arizona, where several jointly owned construction firms have been requiring employees to become “member/owners” of the businesses.

Workers under these arrangements sign contracts giving them limited ownership rights. However, they don’t have any significant operational control and don’t actually get a share of the profits.

While the practice gives workers fancy titles, it strips them of their rights to minimum wage and overtime protections under the FLSA, as well as unemployment and workers’ compensation benefits under state law. Workers become responsible for self-employment taxes.

Following a five-year investigation, the U.S. Department of Labor’s Wage and Hour Division (WHD) has managed to shut down this operation. The three real owners of 15 companies will fork over $700,000 in back pay, payroll taxes and liquidated damages.

A similar case against an Arizona drywall contractor recently concluded with a $600,000 judgment against the company.

For any employers contemplating this model, be aware that federal and state governments are scrutinizing unusual pay schemes more closely than ever before. The U.S. Department of Labor has signed memoranda of understanding with 20 states to combat misclassification.

In this case, Utah coordinated with WHD through its Worker Classification Enforcement Council. Utah passed legislation requiring limited liability corporations to provide their “members” with workers’ compensation and unemployment insurance.

Advice: Have your attorney review in advance any restructuring that changes the employer-employee relationship.

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