Is The Classification Of Your Workers Putting Your Business At Risk?

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Businesses have a lot at stake in properly classifying their workers as either employees or independent contractors. The Rhode Island Department of Labor and Training has taken the position that “[t]he misclassification of employees as independent contractors is workplace fraud. Rhode Island will not allow bad actors to take advantage of their employees by failing to provide them with necessary workplace protections . . . . Allowing this activity to persist is unfair to Rhode Island businesses that play by the rules.”[1]

Like other states, Rhode Island requires employers to withhold state and federal income taxes, Social Security taxes, and Medicare taxes for each of their employees. In addition, employers must pay taxes on wages paid to employees as well as contribute to Workers’ Compensation premiums. However, businesses may avoid payment of those taxes and Workers’ Compensation premiums if workers are classified as independent contractors. Further, independent contractors do not enjoy the same workplace protections as employees, such as family and medical leave, minimum wage pay, unemployment benefits, overtime pay, health insurance, retirement benefits, as well as protections from discriminatory employment practices under the State Fair Employment Practices Act, R.I. Gen. Laws § 28-5 et seq.

Misclassifying an employee as an independent contractor may result in fines, penalties, and private lawsuits in which impacted workers seek, among other things, wages, benefits, and other relief, such as reinstatement of employment, fringe benefits, seniority rights and reasonable attorneys’ fees and costs. See R.I. Gen. Laws §§ 28-14-19.1, 28-14-19.2, and 28-14-17. Conversely, businesses that misclassify actual independent contractors as employees may be losing money by unnecessarily paying taxes and benefits.

Within the past year, at least four class action lawsuits were filed in the United States District Court for the District of Rhode Island against Rhode Island businesses that allegedly misclassified workers as independent contractors rather than employees. In seeking to address employers’ misclassification of employees in Rhode Island, on May 7, 2015, the United States Department of Labor and the Rhode Island Department of Labor and Training entered into a memorandum of understanding (referred to as a “Common Interest Agreement”). Under the terms of the agreement, the parties agree to share information and coordinate law enforcement efforts aimed at cracking down on the misclassification of employees by Rhode Island businesses.   In so doing, the parties intend to “advance the common legal goals of the parties,” including protecting wages, retirement income, equal employment opportunities, unemployment benefits, workers’ compensation entitlements, the safety and health of the workforce, and “ensur[ing]a level playing field for law-abiding businesses, and proper compliance with applicable tax and licensing laws.”

As part of this effort, the Rhode Island Underground Economy and Employee Misclassification Task Force (enacted in June 2014), which was established both to protect workers’ rights and the businesses that properly classify their employees, recently created an anonymous tip line for allegations of misclassification, staffed by the Rhode Island Division of Taxation.

While it has always been important for businesses to properly classify their workers, it is particularly imperative in light of Rhode Island’s agreement with the United States Department of Labor regarding the coordination of law enforcement efforts to prevent misclassification. In determining how to properly classify a worker, the totality of the working relationship should be considered.   Most often, an employer-employee relationship exists when the business has the right to direct and control the worker who performs the services. A business should consider the degree of behavioral and financial control it exerts over its workers, as well as the type of relationship that exists between the business and the worker in determining how to classify its workers. However, there is no “magic” formula and the factors considered are not necessarily exclusive.

Under this framework, a worker is more likely an employee if:

  • the business dictates when and where the work must be done and supervises the worker in the performance of the services;
  • the business dictates and provides the necessary tools, equipment, and/or clothing (such as a uniform) to perform the services;
  • the business requires that all work be performed by the worker personally;
  • the business has the right to change the methods used by the worker or direct the worker on how to do the work;
  • the worker does not have a significant investment in the facilities and equipment used for the services;
  • the worker does not incur a financial risk in the performance or non-performance of services; and
  • the work performed is a key aspect of the business.

The Internal Revenue Service has published a “20 Factor Test” that businesses are encouraged to use as a guide in determining how to classify workers. The 20 Factor Test focuses on the degree of control that the business exercises over the worker (such as providing instructions, training, supervision, and set hours of work), whether the worker has made any significant investment in the facilities utilized, and whether the worker makes his or her services available to the general public.

Importantly, the fact that a worker has signed an agreement stating that he or she is an independent contractor has no bearing on whether that worker is in fact an independent contractor. Rather, it is the reality of the working relationship—not the label—that is determinative. Likewise, employee status is not determined by the time and mode of pay.

There are many advantages to hiring independent contractors, especially from a cost-saving perspective; however, the cost-saving perspective should not overshadow a business’ careful consideration of the financial risks involved in misclassifying workers. One way to protect your business is to implement effective policies to ensure that workers are properly classified.

[1] Scott Jensen, Director of the Rhode Island Department of Labor and Training, in United States Department of Labor Wage and Hour Division News Brief (May 7, 2015), available at http://www.dol.gov/opa/media/press/whd/WHD20150910.htm

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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