Government Agencies Declare Class(ification) War

The level of scrutiny placed on the ways in which employers classify those who work for them is likely to increase in the near future: the Congressional budget includes $14 million to combat misclassification and recover unpaid taxes and $4 million for personnel at the DOL Wage and Hour Division to investigate misclassification.

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Scantland Case A Knight in Shining Armor for Cable Companies?

In a recent Florida case, Scantland v. Jeffry Knight, Inc., the court handed employers a victory when it applied the economic realities test to find that service technicians for a cable company were properly classified as independent contractors. The court made this finding despite the technicians’ relationship with the employer having several features that could support an employer-employee relationship.

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DOL Restaurant Clean Up Continues

As part of an ongoing restaurant industry enforcement initiative, the Department of Labor recently levied a total of $1,307,808.00 in fines to Massachusetts area restaurants for various Fair Labor Standards Act violations. 

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IRS Provides Tax Break to Voluntarily Correct Improperly Classified Independent Contractors

Often, thinking it will save them money, businesses classify individuals providing services for them as independent contractors instead of employees. Independent contractors do not need to be on the company’s health insurance or pension plans, and the business does not need to pay matching FICA taxes. However, often the distinction between a contractor and employee is made for business convenience and economy—ignoring the fact that the law provides standards for distinguishing between the two.

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Subcontracting Trouble: Can Your Subcontractors' Employees Be Considered Your Employees for Wage and Hour Purposes?

If a company subcontracts some of its functions, can that company be liable for its contractor’s violations of labor law? In a word—yes. Especially when those functions are provided on-site and the companies are found to be a joint employers.

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While there has not been a specific law outlawing the misclassifications of employees as independent contractors, employers could be penalized for doing so by the IRS (since the proper withholding taxes would not have been paid), the Department of Labor (since overtime wages may not have been paid), or by Unemployment and Workers’ Compensation (seeking taxes and payments not previously made). A number of U.S. senators are looking to increase the consequences of misclassifications.

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Independent Contractors or Employees? Make Up Your Mind

EnCana Oil & Gas company has been sued by six alleged “independent contractors”, for unpaid overtime as well as for benefits. The claimants assert that they were misclassified as independent contractors, when they should have been treated as employees.

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DOL Testimony Regarding The Employment Misclassification Prevention Act And Misclassification Enforcement Efforts

In Joel Greenwald’s blog on April 30th, he wrote about The Employee Misclassification Prevention Act (“EMPA”).  EMPA is making its way through Congress and was the subject of a hearing by the Senate Health, Education, Labor and Pensions (HELP) Committee on June 17th.  The Committee heard testimony from Seth Harris, Deputy Secretary of the US Department of Labor, as well as the New York State Department of Labor Commissioner Colleen C. Gardner and others. 

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Employee Misclassification Prevention Act introduced in Congress: Are your employees being misclassified as Independent Contractors?

Given the estimated tens of thousands of employers that misclassify their employees as independent contractors, on April 22, 2010, an Ohio senator introduced The Employee Misclassification Prevention Act to provide workers with benefits they are not entitled to as independent contractors. Only those classified as employees are entitled to the protections of wage and hour laws, employment discrimination laws, and unemployment and workers’ compensation insurance. This federal legislation would amend the Fair Labor Standards Act and permit penalties for improperly labeling workers as contractors.

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Don't Be Blindsided with an Overtime Audit Due to Misclassifying Independent Contractors

The IRS has stepped up enforcement of rules regarding independent contractors. Early this year, the IRS started deploying auditors to conduct intensive audits of an estimated 6,000 employers in different industries and including both large and small companies. The federal government believes that misclassification is on the rise given that independent contractors receive fewer incentives to trim costs during these difficult economic times. The IRS is engaging in vigorous enforcement for various reasons, including to collect more money for the federal tax coffers and as a result of the Obama administration’s friendly approach to labor.

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Beware Employee Misclassification, Tread Carefully

The root of many lawsuits seeking unpaid overtime wages is company misclassification of workers as independent contractors. One such suit recently filed against Northwestern Mutual Life Insurance Co. seeks $200 million dollars for a proposed class.

Many companies have historically misclassified employees as independent contractors, often due to genuine confusion over conflicting government rules and court decisions in this area. However, the motivating factor is sometimes an effort to avoid overtime pay requirements, payroll-related taxes, employment benefits and other obligations.  

The federal and many state governments are recognizing that misclassifying workers as independent contractors denies the workers protections under the wage and hour laws, precludes such benefits as workers’ compensation and unemployment insurance payments, and denies protection under some non-discrimination laws. In response, these government entities are enacting new legislation and stepping up enforcement of existing regulations to ensure that workers are properly classified.

  • In early June 2009, Colorado enacted a new law that will impose harsh penalties—up to $5,000.00 per employee for a first offense and up to $25,000.00 per employee for subsequent violations—on employers that misclassify employees as independent contractors. 
  • Maryland has instituted the similar Workplace Fraud Act which will go into effect in October 2009. 
  • States such as New York and Massachusetts have created multi-agency task forces to effectively route out worker misclassification.  

At the federal level, the IRS is in the midst of a misclassification crackdown. Also, it is expected that new federal legislation will be taken up by Congress that will punish employers for employee misclassification since President Barak Obama sponsored proposed legislation, such as the Independent Contractor Proper Classification Act, when he was a member of the U.S. Senate.

Here are some factors to consider. While different agencies evaluating employee misclassification apply different tests, the issue is generally one of control. In a true independent contractor relationship, the client company (the one receiving the services provided) has a right to judge only the results produced by the independent contractor – not to direct or control any aspect of the mechanics that produce the result. Likewise, a true independent contractor has complete financial control of his or her operation, makes required investments, covers operating expenses and experiences a profit or loss distinct from that of any client. Additionally, the agency addressing the issue will consider factors such as whether the contractor is a separate business entity that holds itself out to the general public by advertising its services, is separately incorporated, has its own bank account and possibly its own general liability insurance.

More and more workers who had been classified as independent contractors are claiming that a former client company should have classified them as employees, and thus owes them back overtime pay. Because they considered these workers independent contractors, such companies often have no records of hours worked by these individuals, which greatly limits their ability to defend themselves in the multi-million dollar lawsuits many are now facing.

Thus, given the increased attention to this area, all businesses would be wise to be more careful than ever when using workers classified as “independent contractors.”