Why is there so much confusion about classifying employees?
Sometimes the issue of who is controlling the work is not as clear as it seems. With certain professions — such as IT personnel, where the work is often complex — it is hard to evaluate who is really controlling what is done. An employer might think, ‘I am not telling them how to do their jobs.’ But just because you are not making specific decisions does not mean that you are not still controlling the details of the work.
Another source of confusion is that some companies mistakenly assume that temporary employees and independent contractors are interchangeable. An executive may think, ‘We only need that person for a short time. Let’s just get a contractor because it is just a few months.’ However, the fact that it is not a long-term or ‘regular’ position does not automatically make that worker an independent contractor. The company still needs to evaluate the nature of the relationship and who is controlling the work to be done.
Finally, things change. The relationship may initially have been properly classified as an independent contractor status. The company thought this person would provide a specific service of limited duration. But the person turned out to be a great fit with the company, there were other things she could do, so she keeps working, now at the direction of the company. While the relationship changed, the company never changed the classification from independent contractor to employee.
What steps can a company take to stay out of trouble and avoid misclassification?
First, evaluate the status of your workers and review your business relationships to determine if any of your independent contractors are improperly classified.
Also, consult with legal counsel to evaluate whether you truly have an independent contractor relationship. Many companies think that they are protected from misclassification because they have independent contractor agreements in place, but if those agreements are not properly drafted, then it does not really do the company any good. Many independent contractor agreements are just modified employment agreements. A lot of times, both the company and the independent contractor are happy with the arrangement. But if the relationship ends badly and a government agency gets involved, that initial agreement to the arrangement will not be enough to protect the company and the consequences could be significant.
What are the consequences of misclassifying employees?
Misclassification can carry some pretty substantial financial consequences. From an IRS perspective, there are unpaid federal income tax withholdings and liability for Social Security and Medicare contributions. If the Department of Labor is involved, you potentially have the failure to pay overtime and to provide benefits, such as health and pension.
There are also fines and penalties related to all of the above. On top of that, once you draw an agency’s attention to your organization, it will look beyond just one employee; an audit can spread to everyone who might be in the affected class.
Miriam Rosen is an employment law attorney at McDonald Hopkins LLC. Reach her at [email protected] or (248) 220-1342.