EEOC, IRS, and Courts’ Take on (Your) Misclassifications

Misclassification is high on DOL and IRS agendas, so it’s a good place to look for problems, says Gray. Unfortunately, there is no single test for classification that fits all circumstances. Employers need to be aware of three tests plus court questions to make a determination, Gray says:

• The FLSA Economic Realities Test [Go here for the FLSA Economic Realities Test]
• EEOC— 16 Factor Test
• IRS— 11 Factor Test
• Questions courts are likely to ask.

Gray and Joseph are both partners at the Orange County, California office of law firm Nossaman LLP. Their suggestions came at BLR’s National Employment Law Update, held recently in Las Vegas

The EEOC’s Nonexhaustive Factors for Title VII and Other Federal Antidiscrimination Laws

Indicators of an employment relationship:

• The employer has the right to control when, where, and how the worker performs the job
• The work does not require a high level of skill or expertise
• The employer furnishes the tools, materials, and equipment
• The work is performed on the employer’s premises
• There is a continuing relationship between the worker and the employer
• The employer has the right to assign additional projects to the worker
• The employer sets the hours of work and the duration of the job
• The worker is paid by the hour, week, or month rather than the agreed cost of performing a particular job
• The worker does not hire and pay assistants
• The work performed by the worker is part of the regular business of the employer
• The employer is in business
• The worker is not engaged in his/her own distinct occupation or business
• The employer provides the worker with benefits such as insurance, leave, or workers’ compensation
• The worker is considered an employee of the employer for tax purposes (i.e., the employer withholds federal, state, and Social Security taxes)
• The employer can discharge the worker
• The worker and the employer believe that they are creating an employer-employee relationship

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IRS’s 11 Factor Test

Behavioral Control

• Instructions the business gives the worker.
• Training the business gives the worker.

Financial Control

• The extent to which the worker has unreimbursed business expenses.
• The extent of the worker’s investment.
• The extent to which the worker makes services available to the relevant market.
• How the business pays the worker.
• The extent to which the worker can realize a profit or loss.

Type of Relationship

• Written contracts describing the relationship the parties intended to create.
• Whether the business provides the worker with employee-type benefits.
• The permanency of the relationship.
• The extent to which services performed by the worker are a key aspect of the regular business of the company

Courts

Then, of course, the courts can ask questions as well. Courts may ask the following questions to determine work relationship in addition to both an economic and an agency test, Gray says.

• What degree of control does the employer have over work, and who exercises that control?
• What is each party’s level of loss in the relationship?
• Who has paid for materials, supplies, and/or equipment?
• What type of skill is required for work?
• Is there a degree of permanence?
• Is the worker an integral part of the business?

Those lists will help with misclassification. What about lists for everything else you do? As Gray and Joseph said in yesterday’s Advisor, it’s all about audit audit audit. Audits are the only way to make sure that employees in every corner of your facility are operating within policy guidelines. If you’re not auditing, someone’s probably violating a policy right now.

The rub is that for most HR managers, it’s hard to get started auditing—where do you begin?

BLR’s editors recommend a unique product called HR Audit Checklists. Why are checklists so great? Because they’re completely impersonal, forcing you to jump through all the necessary hoops one by one. They also ensure consistency in how operations are conducted. That’s vital in HR, where it’s all too easy to land in court if you discriminate in how you treat one employee over another.

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HR Audit Checklists compels thoroughness. For example, it contains checklists both on Preventing Sexual Harassment and on Handling Sexual Harassment Complaints. You’d likely never think of all the possible trouble areas without a checklist; but with it, just scan down the list, and instantly see where you might get tripped up.

In fact, housed in the HR Audit Checklists binder are dozens of extensive lists, organized into reproducible packets, for easy distribution to line managers and supervisors. There’s a separate packet for each of the following areas:

• Staffing and training (incorporating Equal Employment Opportunity in recruiting and hiring, including immigration issues)
• HR administration (including communications, handbook content, and recordkeeping)
• Health and safety (including OSHA responsibilities)
• Benefits and leave (including health cost containment, COBRA, FMLA, workers’ compensation, and several areas of leave)
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• Performance and termination (appraisals, discipline, and termination)

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