By Alexandra A. Bodnar
One of the great things about being an employer in the sports or entertainment industry is that young, inexperienced people want to come work for you and are willing to do just about anything to get their foot in the door.
One of the realities of being an employer in the sports or entertainment industry is that just because people are willing to work for you for free as an "intern" or accept a nontraditional payment arrangement does not mean that you should agree to one. The rules regarding compensating workers are fairly well defined and the penalties for noncompliance can be significant.
The types of claims that can arise are well illustrated by some recent lawsuits in the headlines:
- Fox Searchlight Pictures is embroiled in a lawsuit brought by unpaid production interns who claim that they should have been compensated as employees for their work on the movie Black Swan. Madison Square Garden Interns is facing a similar lawsuit brought by "interns" and student associates." Lady Gaga recently settled a case brought by her formal personal assistant, who earned a salary of $75,000 but alleged that she was entitled to be paid overtime. The Oakland Raiders were recently sued by a class of current and former cheerleaders claiming that they were employees and therefore should have been paid for all hours worked.
In order to understand the permeation of claims that can be made and how to protect your organization from liability, it is helpful to start with a framework. All workers are presumed to be hourly "non-exempt" employees unless they fit within a specific exception to this rule: either because they meet one of the "white collar" exemptions, because they are properly categorized as an independent contractor, or because they are properly categorized as an intern.
As an employee, a worker is entitled to receive at least minimum wage for all time worked and overtime at one and a half times the employee's regular rate after 40 hours per week. Fair Labor Standards Act ("FLSA") 29 US Code (USC) §§ 206, 207. Additionally, more stringent state law may apply depending on where the employee is performing work. For example, in California, employee is entitled to a higher minimum wage than federal law (California Labor Code § 1182.12) and is also entitled to overtime at one and a half times the employee's regular rate after eight hours of work per day, after 40 hours of work per week, and on the seventh consecutive workday in a workweek, and at double time after 12 hours of work per day and after eight hours of work on the seventh consecutive workday in a workweek. California Labor Code § 510.
If you're hiring someone, the presumption should be that he or she will be paid in accordance with these rules unless one of the following exceptions applies.
Avoid Overtime and Minimum Wage if your Employees Fall Within an Exemption
Certain types of employees are exempt from both minimum wage and overtime requirements and others are exempt from overtime requirements only. A specific test must be met for each exemption, and in some cases, the exemptions can be combined if the employee's duties fall within more than one exemption.
The most common exemptions are called the white collar exemptions. These allow salaried executive, administrative and professional employees to be exempt from overtime and minimum wage protections. To fit within these exemptions, employees must be paid on a "salary basis". This means that the employee must receive, on a weekly or less frequent basis, "a predetermined amount" of compensation that is "not subject to reduction because of variations in the quality or quantity of the work performed." 29 Code of Federal Regulations (CFR) § 541.602; 8 California Code of Regulations § 11040. Additionally, there is a minimum salary requirement of two times the minimum wage which, as is discussed above, can be different under state and federal law. 29 CFR § 541.600 (a); Labor Code § 515(a). Next, the employees must fit the "duties" test for their exemption (or a combination of exemptions).
Under federal law (29 CFR § 541.100), the executive duties test requires the following:
- The employee's primary duty is management of the enterprise, a customarily recognized department or subdivision; The employee customarily and regularly directs the work of two or more other employees; and The employee has the authority to hire or fire other employees or the employee's suggestions and recommendations are given particular weight.
Under California law (8 California Code Regulations § 11040) the executive duties test also requires that as part of the employee's primary duties (what the employee spends 50% of the time doing) the employee must customarily and regularly exercises discretion and independent judgment.
Under federal law (29 CFR § 541.300), the professional duties test requires one of the following:
- A learned professional's primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. A creative professional's primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
Under California law (8 Cal. Code Regs. § 11040) the professional duties test is slightly different. It requires that the employee's primary duties (what the employee spends 50% of the time doing) include:
- The customary and regular exercise of discretion and independent judgment; Work that is predominantly intellectual and varied in character; and For learned professionals, work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized instruction; or For creative professionals, the work is original and creative in character in a recognized field of artistic endeavor
Under federal law (29 CFR § 541.200), the administrative duties test requires that the employee's primary duties include the following:
- The performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and The exercise of discretion and independent judgment with respect to matters of significance.
Under California law (8 Cal. Code Regs. § 11040) the administrative duties test requires the following additional elements be part of the employee's primary duties (what the employee spends 50% of the time doing):
- The employee regularly and directly assists an employee falling under the executive or administrative exemption; or The employee performs under general supervision, (a) specialized or technical work that requiring special training, experience, or knowledge or (b) special assignments and tasks.
Under federal law, highly compensated employees (earning more than $100,000 per year) are exempt from FLSA overtime and minimum wage requirements if they customarily and regularly perform one or more of the duties of an executive employee. See 29 CFR § 541.601. California does not recognize the highly compensated employee test, so an employee working in California who met this test would also have to meet another California exemption in order for the employer to avoid paying the employee overtime. Federal and California law also exempt outside salespersons from the minimum wage and overtime rules. Although the rules are slightly different under California and federal law, in order to qualify for this exemption, employees must work more than half the time out of the workplace making sales or obtaining orders or contracts. 29 C.F.R. § 541.500; 8 Cal. Code Regs. § 11070. Additionally, California has an exemption for inside salespersons and an exemption for computer professionals. 8 Cal. Code Regs. § 11070.
While it may be tempting to pay a personal assistant or other "gopher" a set salary, it is generally dangerous to do so because the duties of such a worker likely do not fit within any of the available exemptions. Personal assistants generally aren't spending most of their time managing, directing, hiring or firing other employees so that they fit within the executive exemption (or by extension, the highly compensated employee exemption even if you were to overpay them). Nor are they performing the type of high level work that would qualify them as a creative or learned professional. Nor do they generally have the independent discretion required to fall within the administrative exemption. Additionally, although they might be assisting with computer-related tasks or even sales, they are not likely to fit within the computer or sales related exemptions.
If you are a for-profit private sector employer, employees may not "volunteer" their services for you. 29 USC § 203. However, you may have an unpaid intern if the internship meets the following criteria.
- The training, even though it includes actual operation of the employer's facilities, is similar to that which would be given in a vocational school; The training is for the benefit of the intern; The intern does not displace regular employees, but works under their close supervision; The employer derives no immediate advantage from the intern's activities and, on occasion, the employer's operations may even be impeded; The intern is not necessarily entitled to a job at the conclusion of the training period; and The employer and the intern understand that the intern is not entitled to wages for the time spent in training.
- May 17, 2004 US Department of Labor (DOL) Opinion Letter April 7, 2010 US Division of Labor Standards Enforcement (DLSE) Opinion Letter
The third and fourth bullet points in the test are usually the sticking points. The more useful the intern is to you, the less likely it is he or she can be unpaid. If the intern is following people around to "learn the ropes", then the internship is likely for his or her benefit. If part of "learning the ropes" is making himself or herself useful by copying the documents you need, getting you ready for an important meeting, or getting you coffee, then the relationship is for your benefit and you might owe the intern an hourly wage.
Another exception to paying workers an hourly wage is a properly categorized independent contractor. Courts apply the "economic realities" test to determine if an employee qualifies as an independent contractor for FLSA purposes, and consider:
- the principal's right to control the work; the worker's opportunity for profit or loss depending on the worker's skill; the worker's investment in equipment or materials or other workers; any special skills required; the degree of permanence of the working relationship; and how integral the service is to the principal's business.
See e.g. Donovan v. Sureway Cleaners, 656 F.2d 1368 (9th Cir. 1979). Similarly, California courts apply the "Borello" test (S.G. Borello & Sons, Inc. v. Department of Industrial Relations 48 C.3d 341(1989)), considering:
- the worker's right to control the manner and means of performance; whether the relationship may be terminated at will; whether the worker has an occupation/business distinct from the principal's; whether the type of work is usually done under the principal's direction or by a specialist without supervision; the skill required; who provides the tools and place of work; the length of time the services are to be performed; whether the worker may hire and fire others; whether payment is by time, piece, rate or job; whether the services are part of the employer's regular business; and whether the parties believe they are creating an independent contractor relationship.
Thus, you cannot merely agree with someone that they will be a "freelancer" or independent contractor and therefore paid differently than the FLSA or state law requires. Rather, you have to analyze the requirements carefully and ensure that your working relationship passes the relevant test or tests to qualify.
Penalties for Noncompliance
Non-compliance with these rules can prove to be extremely costly. The misclassified intern, gopher, personal assistant or freelancer bringing a successful claim will be entitled to pay for all of the hours he or she worked. If the worker was paid a salary and should have been paid an hourly rate, the hourly rate will be derived from the salary, no matter how high the salary is, and overtime will be based off of that hourly rate. Additionally, the worker will be entitled to penalties, interest and attorney fees and costs.
The price tag increases exponentially if the worker can demonstrate that he or she is one member of a class of similarly situated workers, for example an internship program that fails to meet the relevant requirements. In that case, one disgruntled worker can file a class action representing all of the workers who are similarly situated.
Because of the exposure, employers should take care to analyze the appropriate status of a worker before any work has been performed and should take a look at any internship programs, departments where "freelancers" are used frequently, and independent contractor arrangements to make sure that they comply with the applicable tests.
- Overtime Exemption Cheat Sheet Independent Contractor Cheat Sheet