A Settlement May Be Just the Tip of the Iceberg

You’ve probably heard before how both the federal Department of Labor (DOL) and many state labor departments are focusing on the issue of worker misclassification. This is when a company claims a worker is an “indpendent contractor” (IC) but their job doesn’t meet the criteria to be classified as an IC. The rules surrounding the classification of jobs are complex, so it’s not surprising companies sometimes make a mistake. (Of course, in some cases the companies didn’t make a mistake — they took a calculated risk in an attempt to reduce their paperwork and taxes.)

technology workers, possibly independent contractors

In fact, as part of a stated Misclassification Initiative, the DOL has signed what’s called a “Memorandum of Understanding” with at least 14 states, pledging to share information and coordinate enforcement efforts. They’ve signed a similar Memorandum with the Internal Revenue Service (IRS) as well.

So it’s no surprise that the DOL investigators are finding quite a few companies that have misclassified some (or all) of their workers. Given the expense and hassle of litigation, it’s probably also no surprise that many of these companies opt to settle their cases rather than take them to trial. They figure they’ll settle and move on with their lives — often without admitting any wrongdoing.

Unfortunately, that may not be the case.

Settlement With the DOL Isn’t Necessarily the End of the Story

What might come as a surprise to those companies — and perhaps to others, too — is that accepting a consent judgment with the DOL may only be the beginning of the company’s woes, not the end of them.

Whether a worker is classified as an employee or an IC has wide-reaching implications affecting federal and state taxes and insurance programs, as well as possible issues related to overtime and minimum wage. Once a company has been called out by the DOL and settled their misclassification issue there, they may still have to face the IRS, their state wage and hour inspectors, state workers’ compensation board and state unemployment insurance agency to resolve issues such as:

  • Underpayment of FICA taxes
  • Underpayment of Workers Compensation premiums
  • Underpayment of Unemployment Insurance taxes
  • Possible violation of state minimum wage rules (if the state minimum is higher than the federally mandated $7.25 per hour)
  • Possible failure to properly pay overtime to overtime-eligible employees

Beyond that, individual workers can still pursue legal claims for additional benefits, even banding together to seek class-action certification.

Job Classification: Serious Business

Companies that misclassify their workers, whether accidentally or on purpose, can end up dealing with multiple agencies and multiple lawsuits. It’s really, really important to get that classification correct, right from the get-go.

As I’ve said, though, classification is a complicated issue. Different agencies use different criteria to decide if a job is an IC or an employee. If you are contemplating hiring someone as an IC, it’s imperative you talk with your employment law advisor to make sure the way you structure the job will support that classification and that you’re complying with all applicable regulations related to employing ICs.

Does your company employ ICs? What do you do to make sure their jobs are classified properly?

Photo credit: Canadian Veggie

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