Risk & Business Magazine Lovitt & Touché Fall 2015 - Page 31

Intense Focus on Misclassification Risks Resulting in Exposure to Employers BY: MAGDALENA OSBORN, VICE PRESIDENT/GENERAL COUNSEL, LOVITT & TOUCHÉ E mployers working with volunteers or independent contractors take heed, the U.S. Department of Labor’s (DOL) enforcement against misclassification is booming. In 2010, President Obama instituted the “misclassification initiative,” targeting employers benefiting from workers who were improperly labeled as independent contractors where federal law would consider them employees. Just last year “wage and hour division investigations resulted in more than $79 million in back wages for more than 109,000 workers in industries such as the janitorial, temporary help, food service, day care, hospitality and garment industries.”1 Arizona’s department of labor took a keen interest in investigating misclassification in construction, which in April of this year yielded $700,000 in back wages, damages, and penalties assessed against 16 defendants in Arizona and Utah.2 The misclassification initiative is a joint effort between the DOL and the Internal Revenue Service to enhance the ability of both agencies to assess penalties against non-compliant employers. The DOL is also pursuing state partnerships (having already entered into agreements with 26 states) to coordinate enforcement and strengthen its ability to address misclassification. Penalties assessable against employers include back wages, back taxes, future tax implications, attorney fees, and, where plaintiff proves the employer acted intentionally, discretionary treble or punitive damages. of employee benefits and protections. Many non-profits have also experienced exposure to substantial penalties where volunteers would be considered employees and those individuals were not put on payroll. Federal law dictates that volunteers and independent contractors, who should be classified as employees, cannot lawfully agree to forego employee classification. 1 The extent to which the work performed is an integral part of the employer’s business With heated litigation spreading across all jurisdictions, the DOL recently clarified its position on employer compliance using existing law under the Fair Labor Standards Act (FLSA).3 Employers are directed to follow definitions already included in the FLSA, and cautioned that common law or other statutory classifications are not controlling. FLSA’s definition of “employ” is “to suffer or permit to work,” and when reviewing whether a worker is an employee or truly independent one must consider the “economic realities” test commonly used by courts. Amongst the economic realities factors, the following are generally considered by the DOL in most circumstances: 4 The worker’s skill and initiative 2 Whether the worker’s managerial skills affect his or her opportunity for profit or loss 3 The relative investments in facilities and equipment by the employer and worker 5 The permanency of the worker’s relationship with the employer 6 The nature and degree of control by the employer Although the FLSA and economic realities test are nothing new in our legal landscape, the DOL’s recent guidance is a strong reminder of the government’s intense focus on misclassification and resulting exposure to employers. Endnotes 1 www.dol.gov/whd/workers/ misclassification/#resources 2 www.dol.gov/opa/media/press/whd/ WHD20150518.htm 3 www.online.wsj.com/public/resources/ documents/InterpretMisclass.pdf The recession brought with it an increase in independent contractor jobs as a way for business owners and individuals alike to cope with the drastic decline in the job market. In 2013, 30% of the workforce (7.7 million people) reported being self-employed. Estimates indicate by 2020, 40% of the workforce may be self-employed. The government is concerned that this undermines U.S. economy, results in underpayment of taxes, and deprives misclassified workers RISK & BUSINESS MAGAZINETM FALL 2015 31