For the past few years, the U.S. Department of Labor’s Wage and Hour Division has been cracking down on employer misclassifications of employees as independent contractors.
How does it come to be that employers make this misclassification? Are employers who misclassify “bad” employers? The answers: a) it’s easy to do (accidentally) and b) not at all. Good people make mistakes. Sure, there are some employers who knowingly and purposefully are misclassifying employees. Doubtful those folks are reading this, though!
Here are some facts that may help you better understand how misclassification situation like these arise.
1) The determination by Wage and Hour, that an independent contractor is actually an employee, is made on a case-by-case basis. It is a very fact-specific analysis, and looks at the following factors in making their determination:
a. The extent to which services rendered are an integral pat of the principal’s business;
b. The permanency of the relationship;
c. The alleged contractor’s investment in facilities and equipment;
d. The nature and degree of control by the principal;
e. The alleged contractor’s opportunities for profit and loss;
f. The amount of initiative, judgment, or foresight required for the success of the claimed independent contractor;
g. The degree of independent business organization and operation.
Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA), Revised July 2009, Wage and Hour Division, United States Department of Labor.
2) Whether or not someone is an independent contractor is not based on what the two of you agree! Let me repeat: The two parties cannot “agree” that the employee will be an independent contractor when the facts of the particular circumstance would find that the employee is, in fact, an employee. Just because the two of you have a “contract” that says the individual is an independent contractor, does not, in fact, make that the case.
3) Independent contractors can “morph” into employees! Here’s a scenario:
A business hires someone who has a legitimate bookkeeping service. This person holds him- /herself out to be a business, does other bookkeeping services for other companies, advertises, provides his/her own equipment, is his/her own boss. This bookkeeper comes to your place of business to do your bookkeeping work and spends perhaps two hours on your premises each week.
Your business grows, and the bookkeeping service spends more and more time each week at your place of business. At the same time, said bookkeeper works fewer and fewer hours for other businesses. Over time, the bookkeeper stops advertising, stops holding him-/herself out as a business, takes direction on a regular basis from you or someone in your business, and comes to your office 40 hours each week.
The bookkeeper has likely “morphed” into becoming your employee. There may, however, be circumstances where that bookkeeper managed to retain his/her independent contractor status. Remember, all the facts in each particular case are looked at to make the determination.
This illustration demonstrates just how important it is to have a qualified professional review, on some regular basis, the status of any independent contractors you may have working for you, before Wage and Hour finds out for you.
Give us a call to set up an appointment. We’ll help you, so that you can sleep better at night.