Feds and States Clamping Down on Misclassified Employees
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The California Labor Commissioner recently ruled that drivers for Pacific 9 Transportation were misclassified as independent contractors and ordered the company to pay $6.9 million in back wages. Also in California, the 9th Circuit Federal Court in 2015 approved a $228 million settlement against FedEx for misclassifying more than 2,000 California Fedex Ground drivers. The state of Wisconsin just announced that it found 8,613 misclassified workers at Wisconsin companies in 2016.
In recent years, employers have increasingly contracted out or otherwise shed activities to be performed by other entities through the use of subcontractors, temporary agencies, labor brokers, franchising, licensing, and third-party management. Legitimate independent contractors play an important role in our economy — but when employers deliberately misclassify employees in an attempt to cut costs, everyone loses.
Employers sometimes misclassify workers to reduce labor costs and avoid employment taxes. A misclassified employee — with independent contractor or other non-employee status — lacks minimum wage, overtime, workers’ compensation, unemployment insurance, and other workplace protections. By not complying with the law, these employers have an unfair advantage over competitors who pay fair wages, taxes due, and ensure wage and other protections for their employees.
The Fair Labor Standards Act governs federal wage/hour standards and provides a minimal level of protection for employees. (States may enact stricter employee protection laws.) Whether a worker meets the Fair Labor Standards Act’s definition of employee depends on the working relationship between the employer and the worker, not job title or any agreement that the parties may make. The U.S. Department of Labor has issued Administrator’s Interpretation No. 2015-1 to guide employers on
FLSA standards for identifying "employees who are misclassified as independent contractors." You can find the entire document and additional resources at dol.gov/whd/workers/Misclassification. In summary, the interpretation uses an "economic realities" test to determine whether the worker is economically dependent on the employer or in business for him or herself.
The Department of Labor says "...most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as ‘to suffer [allow] or permit to work’ and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor."
The Consequences of Misclassification
Employers caught misclassifying employees — whether deliberately or not — can be required to pay fines, penalties, and back taxes. If you have questions on classifying your employees, please contact the Insurance professionals of EPIC’s CRA ProRental™ Insurance Program. Call us at: 800.234.6363.
