Quarter 1, 2023: Is My Business Misclassifying Employees as Independent Contractors?
A recent study found up to 30% of workers in America are misclassified by businesses as independent contractors. Misclassifying an employee as a contractor can have severe legal and financial consequences for a business, including $1,000 per misclassified employee, wage claims, and, in serious instances, even prison time. The U.S. Dept. of Labor (DOL) and IRS have separate standards for distinguishing contractors from employees, and these laws are constantly evolving.
In mid-2023, the DOL is expected to implement a dramatic shift in the way employers classify workers under the Fair Labor Standards Act (FLSA). The new rule proposes to restore a multifactor, totality-of-the-circumstances analysis, which, unlike the current rule, would eliminate assigning a predetermined weight to certain factors. The proposed rule instructs employers to examine a non-exhaustive list, which includes (i) the worker’s opportunity for profit or loss, (ii) the nature, reason, amount, and value of the worker’s investments, (iii) permanency of the work relationship, (iv) nature and degree of control (such as scheduling or supervision), (v) the extent the work is integral to the business, and (vi) the necessary skill of the worker. On the other hand, the IRS uses three tests (each with a variety of factors) to determine the classification. These include behavioral control, financial control, and relationship type tests. The behavioral test focuses on the extent the business can control the worker, the financial test focuses on how the worker is paid (among other factors), and the relationship type test focuses on how the worker and the business perceive their relationship (such as if the parties have a written agreement).
Misclassification may lead to liability for civil penalties (including a wage claim) to reimburse the worker for minimum wage and overtime pay under the FLSA or other legal mechanisms. A state or federal department of labor may seek fines, damages, or other financial reimbursement for the misclassified worker based on the denial of benefits and labor standards protections. Intentional misclassification can lead to more severe penalties, including but not limited to the possibility of a year in prison. A business is also required to withhold and pay federal employment taxes and income tax for its employees. The IRS may levy penalties and hold a business liable for taxes if the business misclassifies an employee without a reasonable basis.
Is your business prepared for the DOL’s new rules on contractor/employee classifications and 100% confident its workers are properly classified, even if a worker could arguably fit into either category? If you are concerned you are within the 30% of businesses misclassifying workers or need an independent contractor agreement based on the new DOL rule, contact Attorney Spencer Pittman at [email protected].