On October 2, 2012, a class action lawsuit was filed against MHN Government Services and its parent, Managed Health Network (MHN), claiming that the government contractor misclassified over 1,200 employees as independent contractors and, as a result, failed to pay massive amounts of overtime pay required under the federal wage and hour law.
The 59-page lawsuit, Zaborowski v. MHN Government Services, filed in the federal district court for the Northern District of California, involves work at various U.S. military bases by Military and Family Life Consultants who were retained by MHN Government Services as independent contractors. The complaint alleges that the consultants work over 40 hours a week yet are not compensated for such hours on a time-and-one-half basis, as required by federal law.
According the complaint, the Military and Family Life Consultants (MFLCs) are retained on an indefinite basis under Consultant Task Orders that last for up to 180 days but “are automatically extended unless there is a performance or personnel issue that warrants a change in assignment or termination of the MFLC.” The MFLCs provide short term, situational, problem-solving, non-medical counseling services in support of military personnel and their families “in accordance with . . . all requirements, policies and procedures contained in the MFLC Provider Manual and MFLC Quality Assurance Surveillance Program.” The complaint alleges that the MFLCs are “taught how to do their job, told how to do their jobs, told when to do their jobs and told where to do their jobs”; are “extensively trained”; and are subject to “significant supervision and oversight.”
Government contractors are among those companies being targeted by plaintiffs’ class action law firms for misclassifying employees as independent contractors. Government contractors that rely on independent contractors are potentially at risk for misclassification liability not only in the form of unpaid overtime (as in the MHN Government Services case), but also for employee benefits, termination pay, and unreimbursed employee expenses if the workers are reclassified by a court as common law or statutory employees. Misclassification liability can also result from independent contractors filing claims with state agencies for unemployment benefits or workers compensation. Where the state agency finds that a worker was misclassified as an independent contractor, it typically seeks unpaid contributions (and penalties) for several years that the worker “and all those similarly situated” were not provided with coverage.
Based solely on the allegations in the court complaint, it appears that the government contractor may have incorporated into its own policies and procedures the requirements of the U.S. Government, and sought to exercise, perhaps needlessly, direction and control over the manner and means used by the workers in question in performing their services for MHN Government Services. Documents such as the government contractor’s Provider Manual and its Quality Assurance Surveillance Program can often be used by plaintiffs’ lawyers and government agencies as their main arguments to support their case and in seeking class action status.
Government contractors and other companies that rely on independent contractors (ICs) as one of their key sources of manpower or to supplement their existing workforce can take steps to minimize misclassification liability by ensuring that their relationships with such workers are properly structured, documented, and implemented. Bona fide IC relationships are permitted in all states but one in the U.S., although state law tests for IC status often vary from one state to another.
As described in detail in our White Paper, government contractors, like all other businesses that rely on ICs, should consider engaging in a form of IC Diagnostics™ to avoid or minimize exposure to IC misclassification liability. This starts with an analysis of all applicable federal and state IC tests and an examination of each of the “48 Factors-Plus” found by the courts and administrative agencies to be relevant to a determination of IC status. Some businesses need little if any restructuring to their IC relationships, while others can benefit from more substantial changes to enhance the likelihood of a successful defense to any challenge to their use of ICs.
Regardless of whether a government contractor’s IC relationships need restructuring or not, documentation of the IC relationship can be critical under most state and federal laws governing the status of workers – and many IC agreements have either not been updated or were never drafted in a manner that minimizes IC misclassification liability. Thus, re-documentation of the IC agreement, including use of state-of-the-art provisions keyed to the relevant legal tests for IC status, is typically an essential aspect of IC Diagnostics™. Where a government contractor uses forms such as Consultant Task Orders (such as the form used in the MHN Government Services case), change orders, and other engagement documents, they too should be updated or drafted in an IC-compliant fashion, consistent with the IC relationship and the actual practices of the government contractor.
Use of manuals, guidelines, policies or procedures (such as the Provider Manual and its Quality Assurance Surveillance Program cited in the complaint filed in the MHN Government Services case) should also be drafted consistent with the structural framework of the IC relationship and the absence of direction and control over the manner and means of performance of the services. Even the most bona fide IC relationship can be subject to challenge if these types of documents are not drafted in an IC-compliant manner.
Finally, any restructuring and re-documentation should be intelligently implemented in a manner that enhances the IC relationship and minimizes the likelihood of legal challenges. ICs should be treated as ICs and not like employees; communicating with them in language customarily used with employees can be used as a factor favoring employee status. IC vernacular should ideally be used with ICs.