Contractor Classification Check-ups
HR Advisor feature article | February 2011
Employers may unknowingly trigger risks of labor violation penalties and fines by improperly classifying individuals as independent contractors. By doing so, employers may also be denying workers of certain employee benefits (e.g. overtime and the federal Family Medical Leave Act). In fact, a 2007 Cornell University study had estimated the average unemployment insurance taxable wages (from 2002-2005) that was left underreported due to employers misclassifying workers as independent contractors was $4.28 billion for the state of New York alone.
In a joint partnership with the Department of Treasury, the Department of Labor’s (DOL’s) Wage and Hour Division (WHD) has been actively engaged in its worker misclassification initiative designed to detect and deter wrongful misclassification issues. Thus, employers need to be aware of developments and efforts relating to the “Worker Misclassification Initiative,” such as requiring employers to:
- Develop a worker classification analysis for each employee designated as exempt from minimum wage and overtime provisions under the federal Fair Labor Standards Act,
- Provide employees a written summary of the classification analysis, and
- Retain copies of the written summaries for additional recordkeeping requirement purposes.
Various types of tests (e.g. the IRS “20-factor” test) can be used to help employers distinguish between employees vs. independent contractors. General guidelines include identifying:
- The business relationship that should be clearly based on the “the degree of control and independence” between an employer and the worker,
- Employer withholding of income taxes, withholding and payment of Social Security and Medicare taxes, and payment of unemployment taxes on wages paid to an employee, and
- Employer-provided employment benefits (e.g. vacation, sick leave, or training / tuition reimbursement) to employees.
What can employers do now in light of the DOL’s increased worker classification enforcement efforts?
- Review all the employment relationships with those currently identified as independent contractors.
- Determine whether an independent contractor should be deemed an employee.
- Correct and remedy as needed any worker misclassified as an independent contractor.
- Document the findings to demonstrate your good faith efforts of maintaining your workplace compliance obligations.
The key is to respond proactively as an employer, and do not assume you will never be formally challenged by workers or targeted by authorities from the DOL.
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