Employers must classify workers accurately or they face large financial penalties. Businesses across the nation have paid damages and back wages in recent months for failing to comply with classification requirements.
Business & Legal Resources reported the U.S. Department of Labor settled in U.S. District Court with four New York-based plumbing and heating contractors who failed to classify 300 current and former workers, did not comply with overtime policies and poorly tracked payroll. The DOL will receive $1.42 million due to the contractors' violations of the Fair Labor Standards Act and classification of workers as independent contractors. Each worker will receive $710,000 from the defendants in back wages.
The FLSA is in place to protect employees from these types of situations.
"Underpaying and misclassifying employees as independent contractors are illegal and unacceptable actions," Jeffrey Rogoff, regional Solicitor of Labor in New York, told BLR. "The Labor Department will pursue all available legal measures to ensure that workers are properly classified and compensated for their work."
What are current classification requirements?
The FLSA requires employers to classify all of their workers as employees or independent contractors. According to the IRS, an employee is considered a worker under the control of an employer. This means the employer dictates behavior, finances and relationship. Employers can tell employees where, when and how they must complete assignments. Financial compensation and relationship boundaries can be defined in contracts between employers and employees.
Independent contractors, on the other hand, are not controlled by their employers. An independent contractor can perform work off the employer's premises, in whatever manner or time frame he or she chooses.
It's important to note that specific job titles do not have any impact on whether a worker is considered an employee or an independent contractor.
The Wage and Hour Division of the U.S. government often investigates businesses with low-wage workers to determine if employers are classifying employees appropriately. In 2013, the WHD found 108,050 workers misclassified by employers in many different service industries, resulting in $83,051,159 in back wages.
What are the penalties for failing to comply?
Should a business accidentally or purposefully misclassify workers, it faces monetary penalties. Though fees vary depending upon whether the DOL and the Internal Revenue Service believe the business misclassified workers intentionally or by accident, the consequences are stiff and strongly enforced. Penalties include:
- Paying $50 for every Form W-2 the business did not file for employees improperly classified as independent contractors
- Paying 1.5 percent of wages that were not withheld from employees
- Paying 40 percent of Social Security and Medicare taxes that were not withheld from employees
- Paying interest on any wage and tax amounts that were not withheld
- Paying the Failure to Pay Taxes fee of 0.5 percent of unpaid tax liability for each month workers were misclassified
- Paying up to $1,000 for each misclassified worker and 1 year in prison, should the violators be found guilty of criminal activity
To avoid paying fines for misclassifying workers, employers must ensure they comply with state and federal regulations.
In addition, some states are signing agreements with the government to help increase compliance. For instance, the Florida Department of Revenue recently signed a memorandum of understanding with the DOL, according to the department's website. The goal of the MOU is to encourage both parties to work together to eradicate misclassification of workers entirely and protect employees' rights.
An outsourced human resources software platform can dramatically decrease the likelihood that a business misclassifies its workers. Being able to provide workers with accurate tax documents and filing paperwork, in addition to maintaining compliant records, helps companies avoid running into trouble with its employees and the IRS.