Never has the potential peril for misclassification of individuals as independent contractors or employees as exempt been greater.
As each level of government tries to ferret out every possible dollar of potential tax revenue, a target of choice has become the alleged employer misclassification of individuals as independent contractors because of the reduced payroll taxes from independent contractors versus employees. Employer problems in this area are compounded by differences between the Internal Revenue Service ("IRS"), U.S. Department of Labor ("DOL"), and Equal Employment Opportunity Commission tests for independent contractors' status.
The plaintiffs' bar in recent years has pursued class and collective misclassification claims under the Fair Labor Standards Act ("FLSA") and state and local wage hour laws as proverbial pots of gold.
Increases in Minimum Wage
The potential stakes will rise in 2014 as many jurisdictions raise their minimum wages well above the federal FLSA $7.25 per hour level.
For example, Montgomery and Prince George's counties in Maryland are going to $11.50 per hour, and Washington, D.C., and California have or are significantly raising their levels. Voters in a referendum raised the minimum wage in an area around the Seattle-Tacoma International Airport to $15 per hour. And, of course, there is a national campaign focused on fast food restaurants to raise the minimum wage to $15 per hour.
Impact of the Affordable Care Act
A new threat to employers from misclassification arises from the Affordable Care Act ("ACA"). An individual misclassified as an independent contractor could bring a claim against, as well as trigger an ACA penalty for, an employer not offering essential health care coverage if the person was ultimately held to be an employee.
The penalty for failure to provide minimum essential health benefits is equal to the number of full-time employees times $166.66 per month for every employee after the first 30 employees. Any termination of the "contractor" after such a claim of misclassification could also trigger a retaliation claim under the ACA's broad retaliation provision, Section 1558.
The IRS and DOL have advised that a focus of their audit and enforcement activities will be to identify misclassified workers. Thus, this aspect of the ACA adds to the already broad tax and wage-hour exposure for the misclassification of employees as independent contractors.
In addition, it is also being argued that if an applicable large employer fails to offer coverage to individuals who are held to be employees rather than contractors, they may be liable for the medical claims of those individuals who did not have coverage. If this position is adopted, an employer could face massive bills if such an individual has, for example, a catastrophic accident or serious illness.
The American with Disabilities Amendments Act
The burgeoning number of disability discrimination claims since the enactment of the American with Disabilities Amendments Act is also relevant. Just as a job description may be critical evidence in proving that an employee was properly classified as exempt, it may also be critical evidence in showing the essential functions of a job and helping to establish whether an employee or applicant could perform them.
Avoiding Liability in 2014
In light of the potential wage hour, tax, ACA, and ADA exposure, one potential high-priority objective for human resources leadership in 2014 is to undertake a review of current independent contractors and to make sure that such individuals actually fit the multi-factor test to qualify as independent contractors.
This process should include a review of key contractual provisions that support independent contractor status as well as those to avoid as inconsistent with independent contractor status.
Similarly, to the extent there are employees classified as exempt, where there may be questions as to the propriety of that classification, a New Year review of whether such employees actually fit within the executive, administrative, professional, outside sales, computer professional, or other FLSA exemptions is well warranted.
Part of that review should involve assessing whether a position's job description reflects duties that qualify for an exemption and, when appropriate, revising the description or the classification. In addition, assuring that the essential functions of the position, including items like attendance and ability to communicate, when appropriate, are documented in the job description is necessary. This effort can mean the difference between success and failure on a disability claim, especially an intellectual disability claim.
A strategic point is that performing a review of classification issues and revisions of job descriptions under the direction of counsel for the purpose of seeking and providing legal advice will create the best basis for assertion of the attorney-client privilege to documents created in the review process.