Resort Industry Finds No Refuge From Liability for Misclassification of Salespersons

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.

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

Please see Baker Hostetler’s Hospitality Lawg for a related post on the Whitehead case.