THE FOCUS ON MISCLASSIFICATION
In labor and employment circles, all the talk these days centers around the various pending Federal initiatives intended to crack down on the misclassification of employees.
Whether intentional or unintentional, the misclassification of employees as exempt (as in exempt from overtime and minimum wage obligations) or as independent contractors (avoiding FICA withholdings, worker’s compensation premiums and unemployment insurance taxes) is nothing new. What is new is the Federal government’s focus on the issue, as a potential revenue stream (projected at up to $7 billion over ten years) and also from a public policy perspective (that misclassification constitutes an unfair advantage over law-abiding businesses - to the tune of as much as 20-30% of the cost of labor).
Consider the following proposals currently pending:
- $25 million for a "Misclassification Initiative," a joint Department of Labor/Department of Treasury program that includes the hiring of as many as 100 new enforcement personnel. See: http://www.dol.gov/opa/media/press/oasam/OASAM20100145.htm
- New legislation amending the Taxpayer Responsibility, Accountability and Consistency Act to make it more difficult for employers to classify workers as independent contractors for employment tax purposes, and increase the penalties for violations. See: http://www.govtrack.us/congress/billtext.xpd?bill=s111-2882
- A proposal to alter the manner in which the Federal government awards $500 billion in government contracts each year, favoring companies that offer higher pay, health coverage, pensions, or other benefits (and disqualifying companies cited for labor, environmental or other violations).
What can you do?
1. If you have independent contractors, be sure you are familiar with the state and federal independent contractor tests. The state test, found in the worker’s compensation and unemployment insurance statutes (at http://dwd.wisconsin.gov/wc/employers/independent_contractors.htm and http://www.dwd.state.wi.us/lirc/ucdg_ee_.htm#EE410, respectively), contains ten elements. For unemployment insurance purposes, the individual must meet seven of the ten elements to be considered an independent contractor. For worker’s compensation purposes, the individual must meet all of the elements to be considered an independent contractor.
On the Federal level, the Internal Revenue Service uses a 20-point, "right-to-control" test. The Department of Labor relies on an "economic realities test" (a hybrid of sorts, taking into account the degree of control the employer exercises and also the degree to which the individual is economically dependent upon the employer).
2. If you have exempt employees (salaried above a set level, with no possibility for overtime pay), be sure they meet the tests set out for state and federal exemptions. Unless an employee meets all the criteria of one of the various exemptions (e.g. executive, administrative, professional, outside sales, etc.), overtime and minimum wage obligations apply. Remember that the focus here is not on the job title or job description, but on the actual duties the employee performs on a day-to-day basis.
3. If you employ truck drivers, construction workers, home health workers or computer professionals, know that these jobs are often at the intersection of exempt/non-exempt and employee/contractor determinations and, accordingly, a magnet for state and federal investigators.
4. Confer with your legal counsel. As you may have surmised, the various determinations set forth above are both nuanced and highly fact specific. And the stakes may be higher than ever
Mark J. Goldstein
Labor & Employment Attorney, Milwaukee, WI