Stay vigilant about contractor vs. employee classifications

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Posted by: CEA’s HR Advisor Team on Wednesday, May 17, 2017 at 12:00:00 am

The Department of Labor (DOL) characterizes misclassification of employees as independent contractors as “one of the most serious problems facing affected workers, employers and the entire economy.” According to attorney, Betsy Davis of LeClairRyan, "the change in leadership in Washington will not impact an employer's need to comply. Government investigators and plaintiffs' attorneys are still focused on the issue. Employers should focus on and review their worker classifications as well."

The penalties for misclassification are significant, and employers may be liable for unpaid minimum wages and overtime compensation; health and other benefits; denied medical leave; state and federal taxes; unemployment insurance and claims; and workers' compensation insurance and claims.

So what things should employers consider when determining whether someone is an employee or an independent contractor?

  • The economic realities test. Whether the worker performs the primary type of work that the employer performs for its customers or the worker provides a service to the employer's business – the former leans towards an employment relationship.
  • Risk of loss. A worker who is paid by the hour with no risk of loss is more likely to be an employee, as opposed to a worker who may suffer a loss of capital investment based on the manner in which he or she managed the project.
  • Independence. A worker who performs services only for one company and uses company equipment is more likely to be deemed an employee. In contrast, a worker who has formed an LLC, uses his or her own equipment and supplies, and performs services for a number of customers stands a better chance of being classified as a contractor.

Still, the DOL takes the position that "simply providing tools does not create an independent contractor relationship if the worker's investment is small when compared to the investment of the employer," Davis adds.

  • Time also matters. A lengthy work history weighs in favor of an employee relationship, while a specific project-based engagement weighs in favor of an independent contractor relationship.
  • Finally, a worker who is subject to the company handbook, conduct rules, and specific direction for completing a project is likely to be considered an employee.

California’s Labor Commissioner also enforces these requirements in California. For more assistance, give us a call. We can assist you over the phone or come on site and provide you with a classification audit! CEA members can also review our “Independent Contractor Fact Sheet” available on our website.

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