March 10, 2017
The U.S. Department of Labor (DOL) has published a resource page on the misclassification of workers as independent contractors. This page can be a valuable tool for organizations that use independent contractors to conduct self-audits to ensure their practices do not run afoul of the law.
Misclassification of Workers Remains on the Government’s Radar
Worker misclassification continues to be a matter of close government scrutiny. According to the DOL:
Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, . . . When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers.
Furthermore, government agencies share information about employers identified as having misclassified workers. For example, the DOL and the Internal Revenue Service (IRS) have entered into a Memorandum of Understanding for the sharing of such information. Similarly, the DOL has entered into a Memorandum of Understanding with the Utah Labor Commission and the Utah Department of Workforce Services (DWS) for information-sharing purposes. Thus, if your organization attracts the attention of one of these entities, you should anticipate potential inquiries by other federal and state agencies.
Misclassification Can Result in Substantial Employer Liability
Organizations that are found to have misclassified employees as independent contractors are subject to substantial potential liability, including:
- liability for amounts due misclassified employees for minimum wages and overtime for all hours worked, plus an equal amount as “liquidated damages,” extending back over the previous two or three years;
- liability for benefits that would have been provided to misclassified employees;
- liability for any income tax and payroll taxes (including the employer portions) that did not get paid but that would have been paid if they had been withheld (and paid), plus interest and penalties; and
- liability for failure to pay unemployment taxes and maintain workers compensation coverage.
Proper Classification of Contractors Is a Complex Matter
Whether a worker is properly classified as an employee or as an independent contractor can be a complicated matter. Not only is it fact-specific, the factors to be considered depend on who is asking the question.
For example, for minimum wage and overtime pay purposes, the DOL generally considers six factors when considering whether a worker is an independent contractor or an employee. For withholding and payroll tax purposes, the IRS uses three categories of facts that “provide evidence of the degree of control and independence” in the relationship. For unemployment insurance requirements, the DWS looks to 15 factors to determine the extent to which a worker is “engaged in an independently established trade, occupation, profession, or business” and “has been and will continue to be free from control or direction over the means of performance of . . . services” rendered. For workers’ compensation purposes, the Utah Labor Commission uses a set of four statutory factors.
Given the complexity of the area and the potential high liability for mistakes, organizations that use independent contractors are well advised to check their practices to ensure legal compliance.
Mark A. Wagner concentrates his practice in employment law, homeowners association law, and health care law, and serves as Chair of the firm’s Employment and Labor Practice Group.