The IRS, DOL, and EEOC take aim at Employers for misclassification of individuals as independent contractors, or as exempt from the Fair Labor Standards Act. The agencies have discovered an easy revenue source. The Agencies have adopted a policy of strict enforcement, and employers have to make changes to their employment practices or pay penalties for non-compliance. To complicate matters the DOL, IRS, and EEOC all have different definitions. Non Compliance with the FSLA and employment law is big business for plaintiffs’ attorneys.
Increases in Minimum Wage
The potential for misclassification increases with the rise in their minimum wages. Not only does it change the rate of pay for non-exempt employees, it changes the salary test for exempt employees.
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.
Employers also need to hand out the model notice to employees or face a violation of the FSLA.
Audit Human Resources Practices
Employers need to Audit their Human Resources practices. Between government agencies, and plaintiff’s attorneys the company needs to audit 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, employers should review the salary and the duties test, to review whether 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. 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.