For years, we have been warning employers of the dangers of misclassifying workers as independent contractors when they are actually employees.

Information-sharing among agencies on the rise

The federal government shows no signs of backing away from enforcement here. Between 2008 and 2015, the Department of Labor (DOL) hired 2,000 investigators, doubling its number. To step up its effort, the DOL is also reaching out to other agencies for cooperation. In fact, on September 13, 2016, the Wage and Hour Division of the U.S. Department of Labor announced a three-year memorandum of understanding (MOU) with the Oklahoma Employment Security Commission (OESC). The MOU facilitates information-sharing between state and federal agencies. For example, if the OESC finds an employer is misclassifying workers as independent contractors for the purpose of avoiding state unemployment taxes, that information will be shared with the DOL, which can then investigate and determine whether the employer has also misclassified workers to get around federal wage and hour laws.

The DOL also works with the Internal Revenue Service (IRS) and at least 34 other states to “combat employee misclassification and to ensure that workers get the wages, benefits and protections to which they are entitled.” When it comes to sharing information, the Oklahoma Employment Security Commission, the Oklahoma Tax Commission, and the Workers’ Compensation Commission were already sharing information.

In summary, if you are caught, the likelihood of a violation costing more just went up with agencies working together to determine the extent of a violation.

Assessing your risk

Given the fact that so many state and federal agencies clearly disfavor the use of independent contractors, why do employers use independent contractors? Typically, an employer wants someone with a specialized skill, or they want the staffing flexibility of hiring workers for specific tasks, not for full-time jobs. Hiring an independent contractor, if done correctly, also avoids expenses such as employer-sponsored health insurance and 401(k) plans, overtime costs (the Fair Labor Standards Act applies only to “employees”), withholding for taxes, FICA and OESC, and unemployment claims and workers’ compensation liability.

So how do you know if you are successfully using independent contractors? The Fair Labor Standards Act uses an economic realities test while the IRS an 11-factor test. The most important question seems to be: Who has control – the worker or the company? To determine control, a court will look at factors like: Who sets the workers hours? Is the worker paid by the hour? Does the worker have daily assignments? A supervisor? Does the employee have to clock in, or check in for assignments? These factors make the worker appear to be an employee. For example, if the worker is doing the same work in a cubicle next to an employee, they are likely an employee also. A true contractor will be assigned a project and likely will own the equipment and tools necessary to complete the job. A contractor should also have the opportunity for profit and loss, not earn more by working more hours. Courts and the various enforcement agencies also look at the permanence of the relationship. If the worker has been there for years doing the same thing, they are likely an integral part of the business – namely, an “employee.”

Although this is not an all-inclusive list, below are some signs that an individual may have been misclassified:

1. The individual is paid by the hour, not the project
2. The individual gets paid vacation or sick leave
3. The worker gets business expenses reimbursed
4. The type of work done by the individual is typically paid on a W-2 basis to other workers
5. The worker was asked to sign a non-compete

What does NOT make someone an independent contractor? Having them sign a written contract saying they are a contractor when all of the factors stack up against that conclusion doesn’t make it so. Also, merely issuing a 1099 instead of a W-2 does not, in and of itself, rule the day when all the factors are stacked up in favor of the “employee” designation. Simply saying “Everyone else in the industry does it this way” will also not get you very far if the factors show you as the employer in control of the work.

Increased liability on numerous fronts

So, let’s assume one of the agencies mentioned has found that you have misclassified employees. Or, a worker sues claiming he should have been an employee. What’s the extent of the liability? Well, for federal contractors, the liability could extend to losing the government contract.

Monetary damages typically include:

1. Unpaid overtime (potentially including liquidated damages and attorney fees)
2. Inclusion in any ERISA benefit plan (could be retroactive to hire date unless the plan specifies there is no coverage until a worker is determined by a court to be an employee)
3. Liability for workers’ compensation claims
4. Liability for unemployment claims
5. Last, but not least, state and federal tax, plus penalties and interest

Why does the government care? Well, OESC Executive Director Richard McPherson had this to say in this week’s announcement of the MOU: “Proper classification of workers is vital to maintaining integrity in our workforce and ensuring a more robust business environment for individuals as well as Oklahoma businesses.” Clearly, while believing this is an area of abuse of workers, the agencies also see a loss of revenue for themselves.

So what should you do if you think you have misclassified workers? Do a self-audit. Look at all of the individual workers you have classified as “independent contractors.”