Classifying your workers may seem like a trivial administrative task, but it carries significant weight in corporate legal compliance. The evolving nature of employer-employee relationships, increasing “gig” economy workers catalyzed by the COVID-19 pandemic, and greater government scrutiny has put more pressure on employers to get this right. Frankly, businesses can’t afford to misclassify employees.
Understanding whether your workers are employees or independent contractors is essential as employees generally enjoy more rights and benefits, such as insurance and paid time off, compared to contractors.
Employee vs. Independent Contractor Classification
When deciding whether to classify a worker as an employee or an independent contractor, the U.S. Department of Labor provides clear guidance through a recent final rule effective starting on March 11, 2024. This rule, under the Fair Labor Standards Act, introduces a six-factor test for analysis:
- Opportunity for profit and loss depending on managerial skill
- Investments by the worker and the potential employer
- The degree of permanence of the work relationship
- The nature and degree of control
- The extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative
These factors each play a key role in determining how to classify employees (the IRS has a more narrow view considering three main classification factors). For instance, if the employee maintains significant control over the work and the manner by which the work is done then the worker is more likely to be defined as an employee. If the worker does the tasks independently with little or no oversight then they’re more likely to be a contractor.
While the federal standards provide the clearest guidelines, there are additional standards to be aware of at the state level. States like California have been taking the lead on these matters, including the recently implemented (and litigated) AB 5 that expanded rights for gig economy workers.
Penalties for Misclassifying Employees
Misclassification will result in severe penalties at both federal and state levels if exposed. If found guilty of misclassifying employees, your business could be liable for:
- Back wages
- Back taxes
- Unpaid insurance and other benefits
- Anti-discrimination violations
- Fines
- Interest on unpaid wages, taxes, and benefits
- I-9 violations
- Legal fees
Furthermore, misclassified employees might seek compensation through lawsuits for lost career opportunities and other financial losses incurred due to the misclassification. The cumulative financial and reputational damage can be substantial, highlighting the urgent need for diligent worker classification.
Classify Your Workers With Confidence
At Ivory Law Group, we recognize the challenges businesses and corporations face in classifying workers correctly. We often work directly with clients to ensure understanding and compliance with these evolving employee classification standards. Our team is equipped to work with you both in classifying workers properly and remedying misclassification issues should they arise. To protect your business from the complicated matter of classifying employees, contact Ivory Law Group for Corporate Counsel Delivered Differently.
Ivory Law Group
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