Many of the businesses we work with are faced with the decision of whether to classify workers as employees or independent contractors.
This topic has grown in interest over the past several years due to increases in hiring activity and increases in enforcement. In a recent memo, the U.S. Department of Labor provided some helpful insight to how the law should be applied.
There are advantages and disadvantages to each classification – and major consequences for misclassifying your workers.
If the worker is an employee, for example, the employer has significant control over the worker’s actions, duties and responsibilities. With this comes liability on the part of the employer for certain employment-related taxes as well as including the worker’s wages for purposes of workers’ compensation and unemployment insurance.
If the worker is hurt on the job or terminated, the business may also be faced with workers’ compensation or unemployment claims.
Meanwhile, if the worker is an independent contractor, the business cannot exert as much control over the worker, whether with respect to the worker’s duties and responsibilities, length of the working relationship, or how many hours and when the worker must perform the work.
At the same time, if the worker is an independent contractor, the business is not liable for taxes for the worker, and does not run the risk of claims for workers’ compensation or unemployment.
Worker classification is important in many industries, including construction, transportation, cleaning services, and many others. Determining whether a worker is classified as an employee or independent contractor is often difficult and involves a great deal of “grey area” -- but misclassification can have tremendous consequences.
If not approached with caution, businesses could be faced with class-action lawsuits by workers claiming they are employees. In addition, the U.S. Department of Labor consistently pursues instances of misclassification.
If a company is found liable for misclassifying employees as independent contractors, the business could owe back pay and other charges, as well as suffer the cost of the litigation (not to mention damage to the company’s brand and reputation).
For these reasons and others, whether an individual is an employee or independent contractor is a crucial determination. To assist with this, the courts have set forth six factors to consider:
6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise
(Refer to the U.S. Department of Labor, elaws – Fair Labor Standards Act Advisor, at http://www.dol.gov/elaws/esa/flsa/docs/contractors.asp for more on these 6 items.)
In a recent memo, the U.S. Department of Labor provided some helpful insight into these six factors.
For example, with respect to the worker’s opportunities for profit and loss (#5 on the list), the DOL distinguished between a worker’s ability to work more hours or take on additional projects (a characteristic of an employee) from a worker’s ability to make managerial decisions such as hiring/firing and purchasing materials or equipment (something that an independent contractor could wield control over).
Regarding the permanency of the relationship (#2 on the list), the DOL distinguished between those circumstances where the permanence or indefiniteness were due to the worker’s own business initiatives (the mark of an independent contractor) from those that were due to industry characteristics such as part-time work (most likely someone who should be classified as an employee).
The DOL also downplayed the significance of the degree of control by the principal (#4 on the list), saying this factor should not play an “oversized role.”
As a reference, the full text of the DOL’s recent memo can be found at this link.
Given the importance of this issue and the consequences of misclassification, businesses must carefully wade through this determination.
Need help determining whether your workers are appropriately classified? Contact your HNI representative or comment below, and we would be happy to assist and share what others in the industry are doing with respect to this issue.