Independent Contractor Agreement nullified in its entirety; Pennsylvania Wage Payment and Collection Law enforced
-by InsideTheGate.com Staff, May 6, 2011
In an Order and Findings of Fact released April 29, 2011, the Court of Common Pleas of Philadelphia County, PA, found that the owners and operators of the Split Rock Resort in Pennsylvania’s Pocono Mountains had misclassified 259 class members salespersons as “independent contractors” and those class members were entitled to over $2.2 Million in wages, benefits and penalties plus interest under Pennsylvania’s Wage Payment and Collection Law.
The case is WHITEHEAD ET AL VS KALINS, AUGUST TERM 2008, NO 03764.
This post-trial judgment marks one of the first cases nationwide where salespersons have, at trial, successfully challenged the compensation structures for people who sell timeshare intervals. It has far-reaching implications for the timeshare industry as the use of Independent Contractor status for sales people increasingly comes under fire.
For decades timeshare salespeople have worked as Independent Contractors, also known as “1099 status” and “contract workers”. This classification is used mainly for the benefit of the developers or affiliated companies that hire them, as it saves the companies millions of dollars each year in Social Security taxes, FICA taxes and other financial obligations which they would have had to contribute if the salespeople were classified as employees. Under Independent Contractor status, all of those various tax obligations fall squarely on the shoulders of the sales people themselves.
Since the vast majority of timeshare sales people also work on a commission-only basis, the system is ripe for abuse and until recently sales people have had little recourse in the courts under state or federal laws governing employment issues.
Some of the most egregious abuses in that system revolve around the “reserve fund”. Originally developed as a defense against “heat merchants”– salespeople who would do anything to get the sale, collect their commissions and run before the cancellations came in– reserve funds are set up to hold a percentage of sales persons’ commissions, usually 10% with a limit on the amount to be held.
But it didn’t take long for developers and their affiliated marketing companies to discover the usefulness of reserve funds for other purposes. Almost immediately the funds began to be used instead as a way to not pay salespeople their full commission until the purchaser has made a specific number of timely payments, thus allowing the developer to use that money (interest free) for long periods of time.
“Chargebacks” were also originally to come from that fund, wherein if a buyer defaults on the purchase at a later time, the person who made the sale is charged back for the entire amount of commission paid on that sale, even though the purchase is long past the rescission period. But in most cases chargebacks are taken out of paychecks instead, so sales people never know for sure how much money they will receive on payday until they actually receive their checks.
In both cases, which really overlap, when sales people leave the job the reserve funds are often never returned and just as often their final paycheck has been docked into oblivion by chargebacks as well. The amount of money lost by sales people this way over the years is surely in the many millions of dollars.
The reserve fund and chargeback issues were at the root of this class action lawsuit. The parent company at the center of the dispute is Split Rock Resorts in the Pocono Mountains of Pennsylvania, owned and operated by W. Jack Kalins DBA Vacation Charters LTD.
According to court testimony, salespeople at Split Rock Resort had originally been paid as Independent Contractors, but were changed to employees in order to take advantage of a retirement plan that was only available to employees. When that failed they were reverted back to Independent Contractors. It seems that W. Jack Kalins arbitrarily changed the workers’ classifications to suit his own individual financial plans, which certainly did not impress the Court. For example, Independent Contractor status was used as a way for the developer to raise funds to pay for a multi-million dollar waterpark at the resort. The documents show that the developer did not keep the reserve funds in a separate account but commingled them with the company’s general funds, which he then used at his own discretion.
The lawsuit began when a former salesman, Austin Miller-Orteneau, attempted to collect money he believed was owed to him by the company for services rendered. The company refused his request, so Miller-Orteneau filed a Form SS-8 with the IRS asking for a ruling as to whether he had been properly classified as a non-statutory employee, as a qualified real estate agent, under IRC Section 3508. (Keep in mind that in Pennsylvania a timeshare sales license is required to sell timeshare, but not a real estate license. Miller-Orteneau was working under such a timeshare sales license.)
The IRS investigated and in February 2008 ruled that Miller-Orteneau was, without question, an employee and Vacation Charters was wrong to classify him as an independent contractor. The IRS further said that even if contracts had been signed designating him as an IC, those contracts were “immaterial” under the applicable common law. You can find a discussion of the IRS’s determination here: IC vs Employee Status: And the Winner Is…
With this ruling in hand, Miller-Orteneau joined another former salesman, one Albert Whitehead, in a civil class action lawsuit against Vacation Charters, W. Jack Kalins, Inc. and W. Jack Kalins asking for reimbursement for taxes they contended were overpaid due to their misclassification, along with compensation for benefits they did not receive from June 2005 until December 2008.
The court’s ruling on April 29 found that not only were Whitehead and Miller-Orteneau legally employees but that even if the Independent Contractor Agreement they signed had been legal, it was unenforceable on its face. In essence, the court nullified that contract in its entirety, and since the material basis of the ICA was illegal (the salespersons were employees as opposed to independent contractors) the chargebacks and reserve funds were not permitted under the circumstances. Part of the plaintiffs’ damages was reimbursements for chargebacks and holdbacks. Draws against commissions also came under fire in this decision.
The court found that all defendants during the class period are entitled to all wages and benefits under Pennyslvania’s Wage Payment and Collection Law. Whitehead was awarded $10,585.39, plus interest. Miller-Orteneau was awarded $3,452.94, plus interest. The remaining 257 class members will divide $1,628,382.63, plus interest.
Attorneys’ fees and costs were also awarded, and while the Court order specifies the amount of Plaintiffs’ awards it does not specify the amount that the IRS is owed, only that they are in fact owed the taxes, as is Medicare, and the state of PA.
The significance of this lawsuit is several-fold as it relates to timeshare, and could have far reaching consequences. It addresses the long-standing issue of timeshare salespersons’ rights and protections such as minimum wage, unemployment compensation, workers’ compensation insurance, health care insurance, protections under Title VII of The Civil Rights Act, and more.
Just as importantly, this finding plus the original IRS ruling can be used as precedents for future litigation against other timeshare companies, so it may be incumbent on timeshare companies to review their pay systems if they wish to avoid similar lawsuits.
Note that the “class period” for this lawsuit runs from July 1, 2005 up to and including December 31, 2008, so if you worked as an independent contractor for Split Rock Resorts and/or Vacation Charters during that period you will be contacted by the Court in the near future. Do not contact the attorneys directly, but you may contact the lead plaintiffs for any inquiries.
You will find the final ruling of the court in pdf format by clicking here.