(3-5 minute read)
By Jennifer Stocker, Partner, Barnes & Thornburg LLP
Employee misclassification refers to the practice of inaccurately labeling a worker as an independent contractor instead of an employee. (“Misclassification” can also refer to the situation when an employer mislabels a worker as “exempt” (i.e., not entitled to overtime pay), but that subject is for another day).
Some say employers intentionally misclassify workers as independent contractors in order to avoid costs like minimum wage, overtime pay and/or unemployment taxes, benefits, unemployment insurance, workers’ compensation and family and medical leave; indeed, those employment benefits account for approximately 30% of the cost of employing a worker.
In my experience, misclassification more often results from ignorance and the difficult task of defining the employment relationship.
The Department of Labor enforces federal rules regarding the classification of employees and takes an active role in doing so, given estimates that more than $2.5 billion annually is lost due to misclassification, and the underpayment of Social Security taxes, income taxes, and unemployment insurance.
State governments that also stand to lose out on tax revenues and workers’ compensation and unemployment compensation premiums related to misclassification also have a keen interest in the proper classification of workers as employees.
If you engage and classify workers as “independent contractors” you must do what the federal and state enforcement authorities will do if you are audited: apply the “economic realities test” to determine whether you are accurately classifying a worker as an independent contractor. The broad question the economic realities test attempts to answer is who has the right to control and direct the work being performed. Thus, the test looks at whether the employer or the worker controls the worker’s duties and hours, whether the employer or the worker supplies the tools and directs the manner in which the work will be performed, whether the worker is subject to discipline, whether the worker is able to undertake work for another entity.
These are all important factors in determining the right to control under the economic reality test and whether or not you are vulnerable to an audit and/or a lawsuit for misclassification. Luckily, if you have not yet lived through a DOL audit or a misclassification lawsuit, there’s still time!
August 1, 2019
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