The Misclassification Initiative (part 2)

As I noted earlier this week, The Misclassification Initiative is, in fact, not an action movie, but a collaborative effort among federal agencies and state governments seeking to work closely together to address the problem of employee misclassification, including, among others, employees who have been misclassified as independent contractors or non-exempt employees misclassified as exempt employees.  In simple terms, federal agencies and certain state agencies have ramped up their collaboration and and information-sharing practices to encourage employers to comply with employment laws (including IRS rules, Fair Labors Standards Act, and others) and to punish them when they don’t.

Misclassifying an employee can be can be a costly decision for all parties involved.  Individuals classified as independent contractors by their employer do not have access to important benefits and other protections afforded employees under the law, such as family and medical leave, overtime for work in excess of 40 hours per week, minimum wage, and unemployment insurance.  Some of these protections–particularly the so-called “wage and hour” provisions–are also denied to employees when they are classified as exempt rather than non-exempt.   Meanwhile, employers who may believe they can trim as much as 30% from their payroll by hiring an independent contractor and avoiding payroll taxes or by classifying a non-exempt employee as exempt to avoid paying overtime are invariably faced with fines and forced to pay back-wages when the US Department of Labor discovers their attempt to skirt the law.

Fayetteville-based This Is It! BBQ & Seafood discovered this the hard way when DOL required the restaurant chain to pay $104,089 in back wages for 230 restaurant workers misclassified as exempt at five Georgia restaurants and fined the company an additional amount for child labor violations.  During its investigation, DOL discovered that workers younger than age 16 were allowed to work later than 9 p.m. between June 1 and Labor Day and later than 7 p.m. at other times of the year (in violation of the FLSA’s restrictions for young workers) and that the employer failed to maintain an accurate record of tips earned and hours worked (in violation of the Act’s record-keeping provisions).  Finally, DOL discovered that the restaurant company practice of deducting employee uniform expenses and lunch breaks that the employees did not take resulted in tipped employees making less than minimum wage.  (Read the DOL Press Release here).

There is an argument that misclassification of employees chills competition and gives an unfair advantage to companies that are willing to flout the law at the expense of their workers when such a company hires an independent contractor or classifies an employee as exempt rather than paying a non-exempt employee the legal wage.  Moreover, when independent contractors fail to pay as self-employment taxes those taxes that, for an employee, would be split between employee and employer and paid by the employer directly to the government, Social Security and Medicare funds as well as state unemployment insurance and workers compensation funds lose out, resulting in higher costs for everyone else.

Every state and federal law has different requirements for whether an individual qualifies as an “employee.”  If you are insecure about whether an independent contractor truly is an independent contractor or an employee you have classified as exempt is truly exempt, an employment lawyer at Briskin, Cross & Sanford would be happy to speak with you.

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