Ensuring the proper classification of workers is a concern for many reasons. Taxes, employment laws and employee benefits are the main ones. Have you run into situations where you were unsure of whether a worker should be classified as an employee or contractor?
“We need to think about these contractual employees (in whatever capacity they are in), we still need to think about how they are going to fit with us and, if we’re going to go this route, how do we classify them to make sure we don’t run the risk of challenges.” Amy Letke told us in a recent BLR webinar.
Let’s take a look at some of the reasons it’s important to get the classification right.
Why Is It Important To Properly Classify Workers?
The short answer is because of employment laws. Numerous employment laws cover only employees, and misclassification of workers as non-employees denies the protections of these laws. If a governmental agency or a court determines that an employer has misclassified workers as a non-employee, the employer faces penalties for violations. Here are some examples:
Fair Labor Standards Act (FLSA). Two important requirements of the FLSA are for employers to pay minimum wage and overtime rates for employees.
“If we misclassify workers in this particular category, we can face violations and fines for not following those regulations.” Letke explained. If a governmental agency or a court determines that the employer has misclassified workers as unpaid interns instead of as employees, for example, the employer may face violations under the FLSA for not paying minimum wage and overtime rates.
Workers’ Compensation. Workers’ compensation is a system of state laws that provide medical care and compensation to injured workers on a no-fault basis. Many states only mandate coverage for employees. An example of a possible violation is the misclassification of workers as independent contractors instead of as employees and failure to provide paid medical care and compensation for work-related injuries or conditions as required by workers’ compensation laws.
“If you’ve got someone classified as an independent contractor instead of as an employee and you fail to provide paid medical care or compensation [after a workplace injury], you could really be in trouble. Just keep in mind: independent contractors is a very tricky area.” Letke told us.
Immigration Reform and Control Act (IRCA). The IRCA requires employers to complete Forms I-9 for all employees hired on or after November 7, 1986, as documentation to work legally in the U.S. If an employer has misclassified workers as independent contractors instead of as employees, it may face violations under the IRCA for not having Forms I-9 completed and possibly for employing individuals who are not eligible to work in the U.S.
Family and Medical Leave Act (FMLA). FMLA is the federal law which requires employers to grant leave for family and medical circumstances, and to reinstate the employee to the same or an equivalent position upon conclusion of the FMLA leave. It also requires employers to continue health benefits at the same level as prior to the start FMLA leave.
The risk here is that an employer could have a misclassification of workers as unpaid interns or as independent contractors instead of as employees, and thus have a failure to provide FMLA leave, job reinstatement, and continuation of health benefits as required by the FMLA.
Beyond these employment laws, there are other reasons why it’s important to properly classify workers. One of the biggest reasons is that employers face possible civil lawsuits for misclassifying workers.
“Independent contractors might sue previous employers for denial of benefits, and stock options and other compensation if they felt they were misclassified.” Letke told us as an example. A well-known case is the Vizcaino vs. Microsoft class action suit resulting in a $97 million settlement in favor of the misclassified workers.
Last but certainly not least, employers should be classified correctly to be in compliance with IRS obligations. Employers have to pay their portion of payroll taxes for employees, but do not have this obligation for independent contractors. If workers are misclassified as contractors, the IRS may penalize the employer for failing to pay these taxes.
For more information on the importance of properly classifying workers, order the webinar recording of “The Contingent Workforce: How to Strategically Integrate Temps and Contractors to Fulfill Your Full-Time Needs.” To register for a future webinar, visit http://store.blr.com/events/webinars.
Amy Letke, SPHR, GPHR, is the founder and CEO of the HR consulting and HR outsourcing company HR Integrity, Inc. She has 20 years of progressive experience in human resources management and senior leadership in various industries.