The topic has been in full focus in recent years as organizations downsize their full-time workforce. It is even under a brighter light today as health care reform’s provisions kick into force.
Some estimates speculate that 15 percent of all employees are misclassified as contractors — about 3.4 million workers. The consequences are a lost revenue to governments, lost rights by the workers and potential costly enforcement action against the company.
So how can a company steer clear of this problem? It takes vigilant and smart human resources and legal departments and a company leadership dedicated to doing the right thing. It takes vigilance because the legal line between company employee and contractor is not simply defined.
How can an employer tell the difference? Susan Fentin, a partner with Skoler, Abbott & Presser, P.C., told HRhero.com that employers have to consider state statutes, court decisions, and rules and tests from federal agencies. The IRS has a 20-factor test; the Equal Employment Opportunity Commission (EEOC) has a 16-factor test, and the U.S. Department of Labor (DOL) applies an “economic reality test” based on the Fair Labor Standards Act (FLSA).
The IRS test is summarized in three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Classification mistakes can be costly. According to employment attorney Fentin, failure to pay minimum wage or overtime can result in federal company liability and in addition attorney fees, damages, unpaid wages and taxes, plus other remedies under state law.
Like many details regarding your business, following the letter of the law right off the bat could save financial headaches later. Keeping your payroll in order by classifying your employees correctly is a crucial business detail you can’t afford to get wrong.