Friday, May 28, 2010

Use of Unpaid Workforce by For-Profit Businesses

In these difficult economic times it may be tempting for a business that is trying to cut down costs to accept help from unemployed unpaid professionals who are simply looking to get the right experience. However, business owners that are using unpaid volunteers should be careful: misclassifying employees can turn into a costly mistake that can even lead to bankruptcy.

There is no recognized legal authority that allows a “for profit” business (as opposed to a charity or government employer) to use unpaid volunteers. Also, there is a lot of inconsistency among the courts in the use of the definition of “employee” as opposed to a “volunteer”. So, beware: if the relationship sours, a volunteer can claim that employer-employee relationship existed and can ask for unpaid minimum wages and even overtime pay. Business owner may also be liable for unpaid taxes (Social Security, unemployment and workers’ compensation payroll taxes) and failure to withhold income tax.

Based on the Supreme Court decisions and DOL interpretations, it is safe to say that volunteers would be those who:

(1) work without an expectation or receipt of compensation or benefits,
(2) are not economically dependent on this position,
(3) work on a less than full-time basis,
(4) perform services of the kind typically associated with volunteer work (charitable purposes, such as help to minister to the comfort of the sick, elderly, indigent, infirm, or handicapped, and retarded or disadvantaged youth) and
(5) who would not be displacing any paid workers.

I don’t believe that any volunteers working for a for-profit business would satisfy the above criteria.

Consequences for misclassifying employees as volunteers can be grave. For example, in December 2009, AOL agreed to settle a class action suit brought against it by thousands of former volunteers (community leaders who during the 1990’s spent approximately 2-4 hours per week hosting chat rooms, reviewing bulletin board postings, etc), claiming that they were employees and not volunteers and should have been paid at least minimum wages for the work they performed for AOL. What started as a two-person lawsuit was later certified into a class action and now AOL may be paying millions of dollars to settle the litigation. In May 2010 the Court issued the final approval of the settlement.

Therefore, correctly classifying employees is very important for any business, whether it is a start-up or an established enterprise. The amount of money that may be saved by using volunteers now may pale in comparison to all the back wages, legal fees, fines and penalties that a business would have to pay later if sued by the disgruntled volunteers or investigated by the Department of Labor.

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