DOL Again Changes It's Position On What Is An “Independent Contractor”

Effective March 11, 2024, the Wage and Hour Division, Department of Labor will once again modify its regulatory guidance and will replace guidance that has been in place since 2021 in regard for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA). According to the DOL, the analysis will be “more consistent with judicial precedent and the [FLSA’s] text and purpose.” See 89 FR 1638.

The DOL’s guidance spans about 268 pages and 126048 words, all in an effort to once again explain what the DOL believes is and is not an independent contractor for purposes of the FLSA.

Generally speaking, the FLSA provides statutory requirements for minimum wage, overtime, and record keeping requirements for workers that are employees of an employer. The FLSA does not provide and has never provided a definition of “independent contractor.” The FLSA defines “employee” and “employer” in a tail-chasing, circular fashion, which has caused challenges for the courts, the DOL, hiring entities, and workers since the enactment of the FLSA near 100 years ago.

Under the FLSA, The term “employer” “includes any person acting directly or indirectly in the interest of an employer in relation to an employee and includes a public agency, but does not include any labor organization (other than when acting as an employer) or anyone acting in the capacity of officer or agent of such labor organization.” 29 U.S.C. § 209(d).  The term “employee” – as applicable to most private hiring entities – is defined as “any individual employed by an employer,” and “employ” is defined to “include[ ] to suffer or permit to work.” Id. at § 209(e)(1), (g). So, if a person is “employed by an employer” and is permitted to work, the person is an employee.

The DOL regulations except from the definition of “employee” any individual who volunteers to perform services for a public agency, provided that “(i) the individual receives no compensation or is paid expenses, reasonable benefits, or a nominal fee to perform the services for which the individual volunteered; and (ii) such services are not the same type of services which the individual is employed to perform for such public agency.” Id. at § 209(d)(4)(A).

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10 Commandments For Travel Time As Hours Worked

The Fair Labor Standards Act (“FLSA”) is a statutory regime with teeth. Employers are wise to understand the ins and outs of the FLSA and how it demands that employers properly classify employees and compensable work time, deduct from pay, and record keeping.

This Freeman Law Insights blog addresses when a non-exempt employee must, under the FLSA, be paid for time spent in travel. If a state law provides greater benefit than the FLSA, the state law may control in a particular situation.

Cory’s 10 Commandments for Travel Time as Hours Worked (or Not) under the FLSA:

  1. General Rule. Normal travel from home to work and back is not worktime.
  2. General Rule Elaborated. Time spent in home-to-work travel by an employee in an employer-provided vehicle, or in activities performed by an employee that are incidental to the use of the vehicle for commuting, generally is not “hours worked” and, therefore, does not have to be paid.  The general rule applies only if the travel is within the normal commuting area for the employer’s business. An exception is where an employee travels home from work and then is called back to work for an emergency matter; that time in travel is compensable.
  3. Travel During Work Hours. Time spent traveling during normal work hours is considered compensable work time.
  4. One-Day Assignment. Travel from home to work on special one-day assignment in another city is compensable. Normal deductions for meal periods.
  5. Travel is Principal Activity. Time spent by an employee in travel as part of the employee’s principal activity, such as travel from job site to job site during the workday, constitutes hours worked.
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Nonprofits And Prohibited Inurement (?)

It’s always wonderful when Congress includes in a statute a word that practically no one – except maybe tax attorneys – might use in their lifetime, much less in day-to-day parlance:

Inure.

When was the last time you used the word “inure” in an everyday conversation?

Never, I predict.

However, the word “inure” is one of the most critical words in the nonprofit or tax-exempt space. In this regard, section 501(c)(3) of Title 26 of the Internal Revenue Code (“Code”) affords exemption from federal income tax to “Corporations [and others] . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual . . . [.]. See 26 U.S.C. § 501(c)(3).

In common usage, “inure” means, basically, to vest or granting a right of enjoyment. And, “private shareholder or individual,” as used in section 501(c)(3) of the Code, means, basically, control persons – officers, directors, and those in managerial control of the organization.

Under section 501(c)(3) of the Code, the prohibition of “inurement” to any private shareholder is absolute.

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We Did What?! Now What? – Nonprofit Organizations And Excess Benefit Transactions

This Freeman Law Insights blog provides an overview of the excess benefit transaction rules of 26 U.S.C. § 4958 and corresponding Treasury Regulations, 26 C.F.R. § 4958-1, et. seq.

Excess Benefit Transaction. Under the Internal Revenue Code, an excess benefit is the amount by which the value of the economic benefit provided by a tax-exempt organization directly or indirectly to or for the use of a “disqualified person” (i.e., a control person, director, officer, etc.) exceeds the value of the consideration, including the performance of services, received by the organization for providing such benefit.

Taxes Triggered. The Internal Revenue Code imposes a tax equal to 25% of the excess benefit on each excess benefit transaction. That 25% tax “shall be paid by” the disqualified person. In addition, the Code imposes a tax equal to 200% of the excess benefit in any case in which the 25% tax is imposed and the transaction is not corrected within the applicable taxable period. Thus, the amount of excess in an excess benefit transaction can trigger excise taxes assessed against the disqualified person who benefits from the transaction up to 225% of the excess involved.

Taxes Assessed Against the Organization’s Manager(s). The organization’s managers (i.e., those serving on the governing board or otherwise approving the transaction, as applicable) who knowingly participate in the approval of, or who acquiesce by silence to such a transaction can be assessed with an excise tax of up to 10% (up to $20,000) of the excess. The term “knowing” includes actual knowledge of and/or negligently failing to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction.

Reasonable Cause. The managers may avoid the excise taxes under section 4958 of the Code if their participation is due to “reasonable cause,” meaning the manager exercised responsibility on behalf of the organization with ordinary business care and prudence.
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Attentione! International Employment – US Employees In Italy

This Freeman Law Insights blog regards considerations, challenges, and opportunities for a domestic U.S. employer looking to or engaged in the employ a U.S. citizen who resides in the country of Italy. This is not legal advice; just legal information, unless you paid for it. However, the legge information here should be useful for those U.S. employers interested in expanding the now ubiquitous U.S. employee remote work regime into the country of Italy.

Employer of Record. The U.S. employer should first evaluate and consider engaging an employer of record who is active in such services in the country where the U.S. citizen will perform the work. An employer of record is, essentially, a third-party service that operates as an employer on a hiring U.S. company’s behalf. This allows the hiring company to avoid having to establish an entity in the foreign country. The employer of record usually handles the legal requirements for complying with the foreign laws for payroll, contracts, and benefits.

Military Considerations. If the employee is a dependent of a member of the U.S. military, the employee should be aware that the rules of Status of Forces Privileges (SOFA) may or may not jeopardy certain military privileges by virtue of the employee’s employ while stationed overseas. See, for example, SOFA information on work in Italy here. https://home.army.mil/italy/my-garrison-Italy/pcsguidevic/living-vicenza/spouse-employement. However, the SOFA privilege matters were recently (August 30, 2023) modified to mitigate the adverse consequences to those U.S. citizen dependents on military bases in, for example, Italy and who work for a U.S. employer, provided that the U.S. citizen has a missione visa. See Telework to US Employers. And, U.S. employees who qualify for the approved telework as such likely fall under U.S. and not Italian employment laws.

Worker Tax Matters. The wages paid to the U.S. citizen living in Italy and working for a U.S. employer are subject to U.S. federal income tax withholding. Limited exceptions apply. A U.S. citizen living and working in Italy is required to file a U.S. tax return and a similar return in Italy, reporting wages from the U.S. employer-issued Form W2. The employee should be advised to engage independent tax counsel because the confluence of U.S. and Italy personal tax laws is or can be complicated.
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National Labor Relations Board Update: Decision In Stericycle, Inc. And Teamsters Local 628

Overview. On August 2, 2023, the National Labor Relations Board issued its decision in Stericycle, Inc. and Teamsters Local 628, a collection of cases consolidated on the issue. The not-so-brief NLRB opinion is linked in the link below in this report.

In sum, the NLRB prescribed a new standard for evaluating whether an employer’s workplace rules or policies tend to interfere with employees’ exercise of rights under the NLRA Sections 7 and 8, being the National Labor Relations Act provisions that allows and encourages concerted conduct among employees in regard to work conditions, pay, and related matters.

Basically, the NLRB has placed employers in the crosshairs (again) for, but not limited to:

Policies that prohibit bad or negative statements about an employer.
Policies that require cooperation or to maintain positive work environment.
Policies that require an employee to speak with a manager about improper pay deductions or improper denial of rest periods.

The NLRB’s concern is on mainly “tone-related” policies (which is subjective, but, as shown below, reviewed from the employee’s perspective) that the NLRB believes “chill” employees’ right to engage in concerted action about work conditions, pay, etc. Much like we dealt with in the recent NLRB matter.
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IRS Issues Exempt Organizations Technical Guide For Disqualifying And Non-Exempt Activities For 501(c)(3) Organizations

On July 14, 2023, the IRS issued Technical Guide 3-10 for Disqualifying and Non-Exempt Activities – Trade or Business Activities – IRC Section 501(c)(3). The TG 3-10 discusses the “fragmentation” of nonprofit and for-profit business models that may be engaged by tax-exempt organizations. And, TG 3-10 dovetails quite neatly with the below-linked three-part Freeman Law Insights series that I published in 2022 on unrelated business income tax matters affecting tax-exempt organization. See and compare TG 3-10 with prior Freeman Law Insights post, Tax Exemption and Unrelated Business Income Rules (UBIT): “Substantially Related” (Part 3 of 3).

All really solid resources. Taken together, these resources provide valuable insight in this complex area of the tax-exempt space.

IRS Technical Guidance

Exempt Organizations Technical Guide TG 58 Excise Taxes on Self-Dealing under IRC 4941
Exempt Organizations Technical Guide TG 62 Excise Taxes on Taxable Expenditures
TG 1 Instrumentalities of the United States, Government Corporations, and Federal Credit Unions; and TG 3-3 Exempt Purpose, Charitable IRC 501(c)(3)
Exempt Organizations Technical Guide TG 6 IRC 501(c)(6) Business League

Nonprofit and Exempt Organization Attorneys

Every nonprofit is different, that’s why we collaborate with our nonprofit clients to identify and meet their unique needs. Freeman Law represents associations & 501(c)(6) organizations, churches and other religious organizations, foundations, private foundations, 501(c)(3) organizations, and other nonprofit clients. While nonprofits encounter many of the same economic concerns and administrative challenges as any business, they also face many unique challenges. Schedule a consultation or call (214) 984-3000 to discuss your nonprofit concerns or questions.

Have a question about nonprofit organizations? Contact Cory Halliburton, Freeman Law, Texas.

Texas Supreme Court Orders On The “Save Chick-Fil-A Law” In Dohlen v. City Of San Antonio

exas Supreme Court Orders on the “Save Chick-fil-A Law” in Dohlen v. City of San Antonio (April 1, 2022)
Dohlen v. City of San Antonio, No. 20-0725, __S.W.3D__ (Tex. April 1, 2022)

Overview. In this case, the Texas Supreme Court addresses, for the first time, Chapter 2400 of the Texas Government Code, being the “Save Chick-fil-A Law” (or more formally: Prohibited Adverse Actions by Government – Protection of Membership In and Support to Religious Organizations). As discussed below, Chapter 2400 provides an express waiver of governmental immunity for government action that is in violation of Chapter 2400, including action to deny any government benefit based on a person’s affiliation with a religious organization.

Dohlen v. City of San Antonio. In March 2019, and after certain San Antonio City Council persons made reference to Chick-fil-A’s support of anti-LGBTQ religious organizations, the City Council voted to ban Chick-fil-A from the San Antonio airport. In June 2019, Chapter 2400 of the Texas Government Code was signed into law, with an effective date of September 1, 2019. A few days after Chapter 2400 became effective, several individuals who complained that they would be unable to enjoy Chick-fil-A at the San Antonio airport, filed suit against the City of San Antonio (“City”) pursuant to Chapter 2400. The City sought a dismissal based on governmental immunity and lack of standing. The trial court denied the City’s request. The City appealed that decision to the court of appeals which found that the City was immune from the suit. The claimants petitioned that ruling to the Texas Supreme Court, which essentially found that claimants allegations at the trial court level were insufficient to invoke a waiver of immunity contained in Chapter 2400; however, claimants should be afforded an opportunity to replead at the trial court level to allege sufficient facts.

Chapter 2400 of the Texas Government Code. Chapter 2400 consists of 6 individual statutes: Tex. Gov’t Code §§ 2400.001, .0015, .002, .003, .004 and .005.
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A Picture, A Painting, And A Prince: The Supreme Court Addresses The ‘Fair Use’ Doctrine

On May 18, 2023, the U.S. Supreme Court issued its 43-page majority opinion in the case of Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith, No. 21-869, 598 U.S. __ (May 18, 2023) (slip opinion linked here).

Facts. The facts of the case center around artistic creations of Andy Warhol and Lynn Goldsmith.

In the 1980s, Goldsmith, a photographer extraordinaire, captured images of many rock-n-roll stars, including Prince. In 1984, Goldsmith licensed to Vanity Fair magazine one of her photos of Prince for “one time” use as an “artist reference.” Vanity Fair wanted to use the photo for the creation of illustrations to be included in an article about Prince. Vanity Fair engaged renowned artist, Andy Warhol, to prepare the illustrations. Goldsmith was credited for the source and was paid $400. But, Warhol went on to create additional works using Goldsmith’s photo or the illustrations he created from it. In 2016, the Andy Warhol Foundation for the Visual Arts, Inc. (AWF) licensed one of those works to magazine publisher, Condé Nast, for illustrating another story about Prince. AWF received $10,000 for the license. Goldsmith received nothing.

Shown below are the three creative works in issue in the case:

Goldsmith, 598 U.S. __ (May 18, 2023) at pg. 4 (slip opinion)

Goldsmith informed AWF that the use of the photo in the Condé Nast magazine infringed her copyright in the photo she provided to Vanity Fair in 1984. In response, AWF sued her, claiming that AWF’s use was “fair use” and thus, pursuant to 17 U.S.C. § 107, was not an infringement on Goldsmith’s copyright. Goldsmith counterclaimed for infringement.
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Treat People With Kindness (But Don’t Forget Secular Tax Law)

When my eldest daughter entered her senior year of high school, she paid the high school’s parking-space-paint-fee and used the opportunity to paint and profess her mantra of: Treat People with Kindness.

Kindness – a term stemming from circa 1300, with origins of the religious act of benevolence.

“Benevolence” – the quality of being kind.

For tax-exempt public charities, benevolent acts must be considered within the guardrails of section 501(c)(3) of the Internal Revenue Code. To enjoy tax-exemption as an organization described in Section 501(c)(3), the organization must be organized and operated primarily to accomplish one or more of the exempt purposes specified in section 501(c)(3). See 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(c). To enjoy or maintain tax-exempt status, the charitable organization must avoid use of charitable assets for the substantial benefit of unqualified individuals or, for certain, control persons.

So, how do public charities, especially religious organizations, manage the confluence of benevolence (i.e., kindness) and tax regulations when seeking to tend to the poor, naked, infirmed, or hungry, i.e., those “in need”?

In a technical sense, the answer is, basically, identification of need and provision of sufficient resources that do not exceed that need—identify a life necessity that the beneficial recipient cannot meet with available resources.

Not a perfect science.

But, theoretical science should not unreasonably deter the objective of treating people with kindness.
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Texas Deeds And Conditions Subsequent | The Other Reversionary Interest

Assume That Owner A Deeds To Buyer B Real Property In Texas Via A Special Warranty Deed That Contains The Following Provision:

The property shall be used exclusively for XYZ purposes. In the event said property should cease to be used for such XYZ purposes, said property shall become the property of Organization ABC and Organization ABC shall have the right to use and hold said property and dispose of same as Organization ABC may determine.

What happens if Buyer uses the property for other than XYZ purposes?

Can Owner A enforce the use requirement? If so, what process is used to enforce?

If Buyer B sells the property to a third party, can Buyer B’s successor-in-interest use the property for other than XYZ purposes?

Can Organization ABC enforce the provision in the deed if Buyer B or Buyer B’s successor-in-interest use the property for other than XYZ purposes?

So many questions… But, in Texas—a state having over 171 million acres of real property and a 175-plus year history—these types of legal issues and questions are not uncommon.

The hypothetical deed provision noted above is, more likely than not, a type of reversionary interest. Reversionary interests are generally referred to as a “possibility of reverter” or “right of entry”—the latter also known as a “power of termination.” The distinction between the two types of reversionary interests is that a possibility of reverter is said to transfer possession of the property automatically to the holder of the reversionary interest upon satisfaction of a condition, while a right of entry requires some action on behalf of the holder of the interest to take possession of the property after the condition is broken.
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