A new rule regarding worker classification was announced by the U.S. Department of Labor in October, news that was not surprising because new administrations and market forces mean the rules are constantly being revisited and revised. It will take some time for companies and regulators to parse out the new rule, but the proposed changes are a good reminder that worker classification is ever-changing, legally complex, and carries a fair amount of risk.
And even without the proposed new DOL rule, worker classification is a topic of concern as companies continue to diversify their workforces with permanent employees, independent contractors, and freelance workers. Now that remote work and flexible employment are more commonplace, companies realize they are operating in a legal landscape that hasn’t caught up with workplace trends. The global workforce in a global economy is in many respects far ahead of the tax and labor laws currently in place in the United States.
The Department of Labor is far from the only government entity that touches on worker classification. Multiple federal agencies review worker classification and each approaches the issue from a different angle, ranging from tax issues, worker exploitation, labor regulations, and regulations related to a company’s size. Federal agencies have an obligation to tell states about abuses (and vice versa) and state and local entities have their own duty to enforce local regulations.
Penalties for misclassification can be ruinous
Worker classification isn’t problematic simply because of laws; all companies understand the need to adhere to regulations. The penalties associated with worker classification can be applied to each W-2 that an employer did not file because of an improper classification. If an entire segment of workers is found to have been improperly classified, the penalties can multiply exponentially. Penalties are also assessed to cover what the government sees as unpaid wages and unpaid taxes. The punishment ramps up for intentional versus unintentional misclassification.
Misclassification puts companies at risk for big penalties, but also big headlines, like the headlines that resulted when a medical staffing company in Virginia was ordered by a federal judge to pay $7.2 million in back wages and damages to more than 1,000 employees.
Common misclassification issues
Classification issues take many forms. One common scenario arises when a company rehires workers after layoffs and places those workers in positions that are legally different from the job they were doing previously. A W2 worker who is laid off may be rehired as an independent contractor – which is legal – but care must be taken to ensure the new position meets the requirements of a 1099 position.
The scenarios go on to include classification issues that arise when a worker in a temporary position attempts to file for unemployment benefits at the end of a contract term, or when an independent contractor is assigned to work alongside full-time, permanent employees, doing the same work as those employees.
The rise of the gig economy, especially with the success of Uber and Lyft, would seem to have provided clear examples of what a business model heavy on independent contractors looks like, but those companies have not been immune to scrutiny or penalties when issues of classification have been raised.
EOR/AOR experts help prevent worker classification issues
An independent contractor compliance and engagement expert, like People2.0, can stay on top of change to regulations and advise on classification.
No matter where you are in the process, whether you’re just launching a workforce program that includes independent contractors or simply realizing you need expertise to understand the nuances of regulations, People2.0 can respond quickly and efficiently and help shore up your back-end processes. Having EOR/AOR services from a specialized firm can reduce the bureaucratic burden and mitigate your company’s risk.