Happy New Year! If you are like me, you made a nice mental list of New Years resolutions that will soon be broken, forgotten, or maybe - just maybe- achieved. For anyone with a business, I highly recommend you add "don't misclassify workers" to your list of corporate resolutions. If you don't, you may have more like 228,000,000 problems (in USD). Bling-bling.
Misclassification continues to be the incurable plague of HR. When I speak to HR professionals, misclassification almost always comes up as a topic of interest because it is still a very gray area. Take all the confusion with the fact that many companies have an HR department of one (or few), misclassification can be a huge thorn in HR's side.
Without further adieu, here is a summary of misclassification, the do's and the don'ts, and the $228,000,000 reasons why it matters.
Misclassification refers to the great employee vs. independent contractor debate. In recent years (mostly the past decade), the IRS and DOL have picked up on a growing trend where companies are hiring "workers" as 1099's (independent contractors) as opposed to the traditional W-2 (employee). Companies did this to save money because a 1099 isn't guaranteed minimum wage, is not eligible for overtime, does not require employment benefits like healthcare, and is exempt from things like unemployment insurance, workers compensation, and other similar "employment" laws. In other words, its an easy way to build a workforce with little cost to the company. The problem is that there is actual criteria to be a true independent contractor and many of the 1099ers are not even close to meeting this criteria. If this sounds a lot like fraud, that's because it is.
Employees vs. 1099s
You will be SHOCKED to learn that the definition of "employ" in the Fair Labor Standards Act is worthless and a mere five words ("suffer or permit to work"). Since this definition is what we attorneys call "overly-broad" and therefore worthless, the federal courts (including the Supremes) have chimed in with some tests to determine if a worker is actually an employee or really an independent contractor. The most notable test is the economic reality test which is the slimmed down version of the IRS factor test. I won't go into great detail about these tests because this is a blog and not a text book but the most important thing to note is that "control" is the magic word for all the 1099 criterion. The less control the employer has over a worker, the more likely that worker is an independent contractor correctly classified. The more control the employer has, the more likely that worker is an actual employee. But, the economic reality factors are all weighed equally so you have to evaluate the big picture all.the.time.
FedEx, for one. FedEx found itself coughing up $228 million to misclassified workers last year. Microsoft also cares as evidenced by its $97 million settlement back in the early 2000s. Even the evil cable titan Time Warner Cable cares and had to pay $5.5 million to settle a misclassification case. Uber is about to care and could be facing millions of dollars in damages if its pending California appeal doesn't end well. If you think these scenarios are a bit "worst case" for your smaller company, imagine how much it would hurt if all your 1099s suddenly became eligible for minimum wage, overtime, workers comp, unemployment, and even discrimination lawsuits. Trust me when I say the 0's add up quickly.
Ready to make that New Years Resolution?
The most frequent question I receive from HR professionals is "my boss is demanding we bring people on as independent contractors and I have little say in this decision so WHAT DO I DO?" I understand that sometimes as HR, you are only as powerful as the power you are given and arguing with your boss about his or her hiring practices is sometimes a lost cause. Here are some things you can do to at least be as diligent as possible.
1- Complete a self-audit. Look at all your current (and possibly future) 1099s and apply the economic reality factors. If its looking like that person is more like an employee, draft a memo and send it up the chain of command.
2- Complete an external audit. Hire an outside consultant or attorney to complete the same audit as above but with a neutral - and often more trained- set of eyes. Have the auditor draft a report and send to you to then forward up the chain.
3- Talk to an attorney. If your employer already has one and you have access to them, bring it up at your next meeting. If your employer doesn't have one, perhaps suggest a HR attorney may be valuable to ensure compliance with all employment laws.
North Carolina says what about this?
HB 482 is still sitting in the General Assembly but if passed would create a specific set of factors for North Carolina (similar to the economic reality test in that control is still the key). This bill would also have a $1,000 civil penalty per misclassified employee and may have repercussions on one's ability to bid public jobs and maintain certain licenses. This bill is worth keeping an eye on.
As always, if you're still in the weeds with misclassification, give us a call or email and tell us how we can help!