-by TS Newshound
June 7, 2010– The June 5 edition of Woody’s Roadkill Cafe addressed the case of WHITEHEAD ETAL VS VACATION CHARTERS LTD., a lawsuit filed in 2008 contending that Vacation Charters had misclassified its salespersons as independent contractors when in fact they should have had employee status. On June 4, 2010 in Pennsylvania, a Philadelphia County judge issued an unprecedented ruling granting class action status for the lawsuit, with some 275 people included in the class.
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.
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. 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, 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.
Among the reasons the IRS cited in their determination:
- The worker provided his services in a permanent retail establishment (an offsite sales center in this case)
- The worker received his work assignment through the company and performed his services following the company’s work methods, instructions & routines
- The worker was required to perform his services personally at the company’s location, during hours required by the company
- The company retained the right to change the worker’s methods and to direct the worker to the extent necessary to protect the company’s investment, reputation, etc.
- The worker did not invest capital or assume business risks
- The worker’s remuneration was based on commissions established by the company and customers made payments to the company for the timeshares
- It was the company, not the worker, who retained financial control of the work relationship
- The worker was not engaged in an independent enterprise but rather the work that he did was an integral and necessary part of the company’s business operations
- The worker performed his services on a continuous basis as opposed to a one-time transaction
In this case the IRS clearly and definitively made a distinction between a “qualified real estate agent” and a “licensed timeshare salesperson”.
With this ruling in hand, Miller-Orteneau joined another former salesman, one Albert Whitehead, in a civil class action lawsuit against Vacation Charters, Split Rock Resorts and W. Jack Kalins asking for reimbursement for taxes they contend were overpaid due to their misclassification, along with compensation for benefits they did not receive from June 2005 until December 2008 in the total amount in excess of $2,100,000. This lawsuit was filed in August, 2008. Approximately 275 former employees are affected by the suit, and on June 4, 2010, the court agreed to join all the former employees as a single class, thus granting unprecedented class action status for the case.
In the interim, the state of Pennsylvania has placed a $190,000 lien against Vacation Charters aka Split Rock Resorts and has denied every appeal taken by the defendants, as did the IRS. Ultimately Vacation Charters was forced to change its policy of paying its salespersons as independent contractors; the defendant employers began paying their sales persons as employees on January 1, 2009.
It remains to be seen whether or not a similar tack will be taken by timeshare salespersons who are registered real estate agents who believe themselves misclassified as independent contractors, but some of the larger timeshare employers in the USA have already moved to reclassify their agents as employees, often offering a base salary as a draw against commissions, especially in California where the rules are strict.
It is important to note that having a full real estate license does not NECESSARILY render the worker an independent contractor. The pivotal issue is the degree of control exercised by the company. For example; if one works for REMAX as a real estate salesperson, under the “control and direction” of the company, that individual is an employee notwithstanding the full real estate license. (The company has mandatory sales meetings, specific schedules, the company gives you the “leads”, the company controls your territory, etc.) Or, if the remuneration is anything but TOTAL commissions you are an employee. Under IRS code 3508, a draw, a salary, etc. renders one an employee. Put more simply, the IRS and the courts have virtually interpreted the words “independent contractor” literally. If you are not totally “independent” of the company, you are not an independent contractor. The IRS is cracking down heavily on the misclassification issue because they lose tens of millions a year in tax revenues because of it. See the link below for more on this issue.
Within the timeshare sales community there continues to be debate about the issue, with some preferring independent contractor status and others preferring the security of employee status. A preference either way may become moot sooner than they think.
For those unfamiliar with exactly what’s at stake, here is some basic data for you, as explained to me by an accountant:
- As an IC you are responsible for paying the full 15% FICA tax (Federal Insurance Contributions Act). As an employee you are responsible for 7.5% of the tax and your employer is responsible for the other 7.5%. Thus, if you earned $75,000 in a given year your FICA responsibility as an IC would be approximately $11,250. However, as an employee your tax would be only about $5,625. Moreover, as an employee you can still deduct many work-related expenses just as you can as an IC– but with half the liability.
- As an IC, if you are terminated for any reason you are not entitled to unemployment benefits because the company is not responsible for FUTA taxes (Federal Unemployment Tax Act) and/or state unemployment taxes.
- As an IC, if you are discriminated against due to race, religion, ethnicity, gender, age, etc. you have little recourse. As an employee you are protected by the full panoply of Government protections under Title VII of the Civil Rights Act.
- If you are injured at the workplace and cannot work as an IC, you have no access to workman’s compensation because the company is not required to carry workman’s compensation insurance.
- As an employee, if you earn no commissions in a particular week you are nevertheless entitled to at least the state’s or Federal minimum wage. That may not be much, but at least it’s something.
The trial is expected to take place later this year, and I’ll update you once a decision is rendered in the case.
The case is WHITEHEAD ETAL VS KALINS, AUGUST TERM 2008, NO 03764. Plaintiffs’ attorney Mark Kearney can be reached at 215-977-1016.