The Idaho Department of Labor is stepping up efforts to identify companies that misclassify employees as independent contractors. It recently signed a memorandum of understanding with the U.S. Department of Labor to work together to help prevent the misclassification of workers. In doing so, Idaho joins 23 other states who have signed similar agreements, including Alabama, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Rhode Island, Texas, Utah, Washington, Wisconsin and Wyoming.
Why Focus on Independent Contractor Status?
Federal and state labor agencies care whether workers are classified as employees rather than independent contractors because the classification can determine whether the individual is entitled to important workplace benefits and protections. Many employment laws, such as those governing minimum wage and overtime pay, meal and break periods, family and medical leave, workers’ compensation, unemployment compensation, employment taxes and anti-discrimination, apply only to employees, not independent contractors. Consequently, if an employee is misclassified as an independent contractor, he or she misses out on the protections and benefits provided by such laws.
Another reason cited by David Weil, Administrator of the U.S. Department of Labor Wage and Hour Division, is that employers who follow the law by properly classifying workers as employees often cannot compete on a level playing field with employers who misclassify their workers as independent contractors. Companies who misclassify workers often avoid the added costs of properly paying, insuring and withholding employment taxes for workers who should be treated as employees. According to the DOL, this lower cost of utilizing independent contractors may give non-compliant companies an unfair advantage in the marketplace. For these reasons, remedying misclassifications is at the forefront of the agencies’ enforcement efforts.
What’s At Stake For You?
Companies that misclassify employees as independent contractors face substantial liability. Ken Edmunds, Director of the Idaho Department of Labor, suggests that even though businesses often use independent contractors because they think it will save them money, in the end, misclassifications can cost them “a whole lot more,” with the potential for severe monetary fines and even criminal charges.
The Internal Revenue Service (IRS) and state tax entities will pursue back taxes with interest based on the employer’s failure to withhold income taxes and make FICA contributions. Employers also remain liable for unemployment taxes related to the misclassified workers. In addition to the back taxes, employers may face criminal and civil penalties.
Employers also face wage claims for unpaid overtime pay that would have been due to the worker if properly treated as an employee. If the misclassified individual was denied leave under the FMLA or participation in a group benefit plan, the employer may face claims under those respective laws. Failure to complete I-9 forms or other employment eligibility requirements may result in additional liability. In short, you may become liable for failing to comply with or offer any benefit or protection that was denied to the individual because of the misclassification.
What Should You Do?
If your company uses independent contractors in your workforce, take steps now to audit whether those workers meet the tests for independent contractor status. Remember, you do not escape liability if the individual asks or agrees to be treated as an independent contractor. You must analyze whether the individual meets the requirements for that classification.
Although numerous factors go into determining whether a worker is an independent contractor, the Idaho Department of Labor lists two criteria that must be met:
- The worker must be free from the right of direction or control in performing work, both under a contract of service and in fact; and
- The worker must be engaged in an independently established trade, occupation, profession or business.
A fact sheet titled “Independent Contractor or Employee?” provides additional detail to help you determine the proper classification of workers and is available on the Idaho Department of Labor’s website. A similar fact sheet on Employment Relationships Under the Fair Labor Standards Act (FLSA) is available from the U.S. Department of Labor, Wage and Hour Division.
With both the federal and state labor departments stepping up efforts to audit companies to discover employee misclassifications, taking steps now to avoid the associated liability is warranted. It also will help your organization avoid costly lawsuits filed by independent contractors who missed out on overtime pay and other employee benefits.