Back to Index Page   Schiff Hardin's Labor and Employment Breakfast Briefing, Thursday, February 8, 2007, at 9:00 a.m.   This free seminar will include presentations on the following three topics: Handling the Departing Employee — Choosing Employees for Layoff and Preparing Releases; Navigating the Regulations on Intermittent Leave Under the Family and Medical Leave Act; and What Every Employer Should Know about California Employment Laws. An emailed invitation and more information on the Breakfast Briefing will follow.   Illinois minimum wage increase effective July 1, 2007 Effective July 1, 2007, the minimum wage in Illinois will increase to $7.50 per hour. The minimum wage will continue to increase by 25 cents per year until the wage reaches $8.25 per hour on July 1, 2010. Employers may continue to pay employees under the age of 18 up to 50 cents per hour less than the adult minimum wage.

Schiff Hardin LLP continues on its path as an emerging national law firm by joining forces with San Francisco-based Morgenstein & Jubelirer LLP, effective January 1, 2007. We are excited to welcome the following 7 attorneys to the Schiff Hardin Labor and Employment Group: Wendi J. Berkowitz, William J. Carroll, Katharine Demgen, Stephen M. Hankins, Bita A. Karabian, Kathleen A. Stimeling, and Bruce A. Wagman.

A federal district court in Arizona has determined that an employer's decision to put an employee on an indefinite, paid administrative leave constituted an adverse employment action. This decision is notable because it applies the standards for "adverse employment action" set forth in the recent U.S. Supreme Court decision Burlington Northern v. White, to a paid administrative leave. (The Burlington decision is discussed in depth in our June 23, 2006 Labor and Employment Alert). The Burlington Court held that a plaintiff seeking to establish an adverse employment action in a retaliation case must show that the challenged action might have dissuaded a reasonable worker from engaging in protected activity. Grasping on the Burlington decision, the Arizona District Court held in Foraker v. Apollo Group that a public employer's decision to place an employee on paid administrative leave constituted an adverse employment action under the Family and Medical Leave Act (FMLA).

In Foraker, the employer placed the plaintiff on paid administrative leave in September 2005. The employer maintained that it put the employee on the paid leave because other employees were complaining that the plaintiff's behavior made them uncomfortable, a claim which the plaintiff denied. Although the plaintiff continued to receive full compensation and other benefits during his leave, the employer eliminated all of the plaintiff's job responsibilities and prohibited the plaintiff from coming into the workplace. The court held that, when coupled with the loss of all experience and education that would come from fulfilling one's job responsibilities, and the loss of all periodic performance reviews for an indefinite period of at least 12 months, the administrative leave "might have dissuaded a reasonable worker" from requesting FMLA leave.

This decision is important because the court found that the Supreme Court's ruling in Burlington supercedes a long line of pre-Burlington decisions holding that paid administrative leave can never constitute an adverse employment action. The Foraker court rejected this line of cases, finding that the specific facts surrounding the plaintiff's administrative leave demonstrated that it was an adverse employment action. In particular, the court found it significant that the plaintiff had remained on paid administrative leave for almost one year, with "no indication from Defendant as to when he might be permitted to return to work."

Interestingly, the court concluded that because the employer compensated the plaintiff for his administrative leave, the plaintiff was not entitled to economic damages. The court nonetheless ordered a hearing to address whether equitable relief (reinstatement or promotion) could be awarded on plaintiff's claim. Whether equitable relief will be awarded — or is even appropriate — is unclear. Federal courts are reluctant to second-guess an employer's business decisiosn regarding its employees, and ordering a reinstatement or promotion could be doing just that.

While Foraker appears to be limited to its facts, this decision may carry some weight in cases where the court is unsure about whether paid administrative leave constitutes an adverse employment action. The defendant will likely appeal this decision. We will continue to monitor the appeal, as well as the court's decision on whether equitable relief is appropriate, and will provide an update when more information becomes available.

In a stark illustration of how courts and administrative agencies look to the realities of a relationship instead of the title given to it to determine whether an individual is an "employee" or "independent contractor," the Massachusetts Supreme Court recently found in Coverall North America, Inc. v. Commissioner of the Division of Unemployment Assistance that a franchisor was liable for contributions to the state's unemployment fund for the reported earnings of a franchisee who claimed that she was an "employee" of the franchisor. While the court's determination turned upon the particular nature of the relationship at issue in the case, it does serve as an important reminder that an "independent contractor" or "franchisee" label does not insulate an employer from liability under statutes designed to protect or benefit "employees."

As set forth in the decision, the franchisor, Coverall North America ("Coverall"), specializes in selling commercial janitorial cleaning businesses, and provides its new franchisees training in cleaning techniques and management techniques, as well as an initial customer base. If the franchisee establishes a new customer through its own direct solicitation, the new customer is required to sign a contract with Coverall. Coverall also bills all customers directly, and deducts finance charges, royalties and management fees from subsequent payments to the franchisee.

The claimant began working at a nursing home under the direction of a Coverall franchise. After the franchise lost the nursing home account, the claimant purchased her own Coverall franchise and became a franchise owner so that she could continue her position at the nursing home. Coverall then gave this new franchisee the nursing home account and "assigned" her to work at the nursing home Monday through Friday, five hours per day, for an indefinite period, in exchange for a payment of $1,485.00 monthly for services rendered. Coverall negotiated the contract for services directly with the nursing home, billed it directly, and handled all complaints about the franchisee's services, without any involvement of the franchisee. Although the franchisee received her daily tasks from the nursing home itself, she was also supervised by a Coverall field consultant.

When the franchisee complained to the Coverall field consultant that the assigned tasks for the nursing home could not be completed during a 25-hour workweek, the consultant directed her to complete the tasks nevertheless, causing the claimant to have to work additional hours and weekends, without additional compensation. She eventually refused to do any additional work, filed a claim for unemployment benefits, and claimed that she was an employee discharged by Coverall.

Although the agency responsible for unemployment claims initially rejected the claimant's claims on the grounds that she was working as an independent contractor, not an employee, the hearing examiner reversed and found that Coverall was obligated to pay contributions to the state fund based on the claimant's earnings. The appeals board affirmed, and upon Coverall's request for judicial review, a Massachusetts District Court also affirmed.

On appeal, the Massachusetts Supreme Court — the state's highest court — also affirmed, finding that Coverall could not establish the three factors set forth in the state's unemployment compensation statute for an individual to be deemed an "independent contractor" unentitled to benefits. Specifically, the court found that Coverall failed to meet its burden of showing that the services at issue were performed "as part of an independently established trade, occupation, profession, or business of the worker," as required under the statute. The court also noted that even though the franchisee was entitled to expand her business, any new customers would have been clients of Coverall, not her own. As such, the court found that the services constituted "employment" for Coverall rather than services by an independent contractor, and thus Coverall was liable for contributions for the franchisee's reported earnings.

This decision was clearly dependent on the unique nature of the franchise relationship between Coverall and the individual claimant. Still, employers must be aware that a label — or even an agreement — does not control whether an individual is an employee or independent contractor. Rather, an agency or court will conduct a fact-specific analysis to determine whether an individual is entitled to rights or benefits afforded employees under state and federal statutes. Employers should periodically review all of their independent contractors to confirm that they are properly classified. Please contact any member of Schiff Hardin's Labor and Employment group for additional information about this case or for information regarding classification of independent contractors.

Catherine Hobart Thompson, "Immigration Law for the Construction Industry," Lorman Education Services, Charlotte, N.C. (March 6, 2007) [Link]; Atlanta Electrical Contractors Association, Atlanta, Ga. (May 3, 2007)

Henry W. Sledz Jr., "2006-07 Developments in Labor and Employment Law," Food & Dairy Human Resources Conference, La Quinta, Calif. (March 6, 2007)

Ralph A. Morris, "How Far Can (Or Should) You Go? Pushing the Ethical Envelope," American Bar Association Section of Labor and Employment Law Midwinter Meeting, New Orleans, La. (March 31, 2007) [Link]