The classification of employees by payroll services has always been important, but it is becoming even more so as the U.S. Department of Labor has stepped up its enforcement of worker classification in recent years. Misclassifying workers may help employers save money in the short term, but it's an illegal practice that can cause the company to be in legal hot water. The DOL implemented the Misclassification Initiative a few years ago, and it has signed agreements with multiple states regarding finding misclassified workers. According to an article in Lexology, the department is currently working with New York and 15 other states to boost employee misclassification initiatives and to improve investigations into potential employee classification violations. DOL's agreement with New York in particular aims to hold employers responsible for their unfair labor practices by charging them fines, but it also works to ensure those employers that do try to play by the rules are protected.
Laura Fortman, principal deputy administrator of the wage and hour division at DOL, said it's important these states and the department show they are united to ensure workers are compensated correctly and employers are treated fairly.
"Misclassification deprives workers of rightfully-earned wages and undercuts law-abiding businesses," said Fortman. "These memoranda of understanding send a clear message that we are standing together with the State of New York to protect workers and responsible employers and ensure everyone has the opportunity to succeed."
Classifying employees as independent contractors or as another type of worker other than what they truly are results in them not receiving the compensation to which they are entitled. HR professionals need to ensure their companies aren't showcasing signs that they may not be following correct business practices. To do so, HR professionals need to be able to identify potential risks and establish solutions to prevent workers from being misclassified in payroll systems.
Be proactive
There are specific elements that differentiate employees from independent contractors, and HR professionals and their employers need to identify these factors. According to an article in Business and Legal Resources, some of the biggest differentiators are how long the worker was expected to work at the company, his or her schedule and how he or she is compensated. Another BLR article noted how the employer controls the worker is part of whether that worker is a full-time employee or an independent contractor.
Law firm Anderson O'Brien suggested HR professionals look at the entire employer-worker relationship to determine whether the worker needs to be classified as a full-time employee or an independent contractor. According to BLR, the type of relationship the worker has with the company is important, as determining the relationship can help answer many questions HR professionals may have regarding whether the worker is an employee or an independent contractor.
However, the law firm also noted there is a misconception about pay that could cause workers to be misclassified. According to the law firm, some employers think any workers who are paid less than $600 annually would be independent contractors.
Employers should partner with an established Payroll/HR Outsourcing firm to ensure they are using the best worker compensation tools. According to BLR, HR professionals should request a determination preapproval from the Internal Revenue Service. This can done by completing and filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. However, HR professionals should note this can only be done to find a solution to federal tax matters.