The Hospitality Lawg would like to thank Holli Hartman for submitting this post.  Holli works in our Denver Office and her practice focuses on employment counseling and litigation, with an emphasis on providing guidance to employers to avoid litigation.  Holli is also a contributor to our sister blog, the Employment Class Action Blog.

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In Whitehead v. Vacation Charters, Ltd., a class action judgment in excess of $2.2 million was entered against the owner/operator of a Poconos timeshare resort for misclassifying sales employees as independent contractors during a three-year period.

The Court of Common Pleas of Philadelphia County held that Vacation Charters and its owners were jointly and severally liable for depriving 259 class plaintiffs of their lawful wages and benefits under Pennsylvania’s Wage Payment and Collection Law.  The court found that the defendants required their timeshare salespersons to sign non-negotiable independent contractor agreements in mid-2005.  According to the court’s findings of fact and conclusions of law, while the form contracts stated that the salespersons were not “employees” for federal, state or local state purposes, the defendants continued to control all aspects of the sales staff’s work schedules, dress codes, marketing protocols and day-to-day services

As to commissions/wages, the contracts allowed the defendants to hold back from each salesperson’s wages and commissions up to 10% for any sale financed on a deferred payment basis.  The hold back was “charged back when a customer defaulted on his account by having made less than four monthly payments.”  Operationally, the hold back funds were not segregated, but held, without interest, in a general account where they could be spent on resort expenses.  In addition, the hold back would be increased to 50% when the purchaser had a low credit score and no wages/commissions would be earned until the purchaser paid 10% of the contract price - policies that were not disclosed in the independent contractor agreement

The class action was filed after the Internal Revenue Service and Pennsylvania’s Department of Labor and Industry investigated a former salesperson’s claims that he had not received holdback funds.  These agencies found that the salesperson was an employee entitled to unemployment compensation.  As the court pointed out, defendants “likely owe FICA, Medicare and FUTA to the Internal Revenue Service on behalf of the class members.” 

All of this means that the defendants are likely still on shifting ground when it comes to assessing the total liability it may be facing.  Its case illustrates that attempts to limit expenses by re-classifying employees as independent contractors can often backfire in a big way when even one former employee attempts to recover unemployment benefits.

Bottom line:  Misclassifying sales employees as independent contractors can put employers between a proverbial rock and a hard place.