copyright© 2011 wecomply, inc. all rights reserved. 8/6/2015 worker classification

Copyright© 2011 WeComply, Inc. All rights reserved.

04/19/23

Worker Classification

Copyright© 2011 WeComply, Inc. All rights reserved. 3

Employees vs. ICs

Each worker must be classified as employee or independent contractor (IC)

•Employee if organization can control what worker will be doing and how it will be done

•IC if organization has right to control result but not means or methods used

Importance of distinction:

•Employees have legal rights that ICs generally do not

•Employers have legal obligations toward employees that they don't have toward ICs

•Federal and state governments lose tax revenue if workers who are employees are misclassified as ICs


Employees vs. ICs (Cont’d)

Each worker must be classified as employee or independent contractor (IC)

•Employee if organization can control what worker will be doing and how it will be done

•IC if organization has right to control result but not means or methods used

Importance of distinction:

•Employees have legal rights that ICs generally do not

•Employers have legal obligations toward employees that they don't have toward ICs

•Federal and state governments lose tax revenue if workers who are employees are misclassified as ICs


Exempt vs. Non-Exempt Employees

Each employee must be classified as exempt or non-exempt

•Most employees are non-exempt and must be paid at least minimum wage and receive overtime compensation

•Executive, professional, administrative and outside-sales employees are exempt from wage-and-hour-laws and are not entitled to overtime pay

•Proper classification depends on employee's duties and responsibilities — not title

Misclassification can lead to fines, penalties, awards of back-pay to affected employees, and class-action lawsuits


Pop Quiz!

Which of the following best describes a key factor that determines whether an employee falls into one of the exempt categories?

A.The type of work.

B.The type of organization.

C.The worker-organization relationship.


Consequences of Misclassification

Consequences of incorrect classification can be huge:

•FedEx agreed to pay $27 million, including $14.5 million to drivers who claimed they were misclassified as ICs

•UPS settled misclassification case involving employee benefits and overtime back wages for $12.8 million

• Hewitt settled misclassification case for $4.9 million involving "benefits analysts"

• Quest Diagnostics agreed to pay $688,772 in overtime back wages for computer systems workers


Patchwork of Laws

Tests for classifying workers as employees or ICs:

•Control and Independence (federal income taxes)

•Economic Realities (federal wage-and-hour and other laws)

•ABC (state unemployment-compensation cases)

•Right of Control (state workers'- and unemployment-compensation cases and certain federal laws)

•Relative Nature of the Work (state workers'-compensation cases)

Tests differ in significant ways but also overlap and have common threads

Fine distinctions are for legal counsel to resolve


Patchwork of Laws (Cont’d)

Tests for classifying workers as employees or ICs:

•Control and Independence (federal income taxes)

•Economic Realities (federal wage-and-hour and other laws)

•ABC (state unemployment-compensation cases)

•Right of Control (state workers'- and unemployment-compensation cases and certain federal laws)

•Relative Nature of the Work (state workers'-compensation cases)

Tests differ in significant ways but also overlap and have common threads

Fine distinctions are for legal counsel to resolve


In the news…

IRS and DOL in Hot Pursuit

The U.S. Government Accountability Office estimates that the federal government will lose $7 billion in payroll tax revenue over the next decade due to worker misclassification. In an effort to curb these losses, the Internal Revenue Service (IRS) is launching a new initiative that will increase the number of audits to determine the "employment tax gap." For its part, the Department of Labor (DOL) has also set aside $25 million to ramp up enforcement efforts against misclassification on both the federal and state levels.

Government Chases Lost Revenue in Misclassification Case


Characteristics of ICs

ICs are self-employed individuals who provide services without employment relationship ICs generally provide equipment, insurance, training and extra labor

Tests for ICs: •Independence and Autonomy: The more independence and autonomy, the more likely worker is IC •Nature of Services: The more a worker's services are discontinuous and temporary, the more likely worker is IC•Established Business: The clearer it is that worker has established business, the more likely worker is IC How we treat workers may determine whether they are ICs or employees


Independence and Autonomy

ICs usually decide time, place and manner in which to do their work Our relationships with ICs should be similar to our relationships with vendors •ICs work independently and choose their own employees or subcontractors• E.g., plumber works inside your home but has a set rate and determines on

his/her own how to unclog the drain ICs should work with limited instruction or control Control is usually limited to accepting or rejecting their results ICs should decide when to take breaks and how and when to do their work


Independence and Autonomy (Cont’d)

ICs usually decide time, place and manner in which to do their work Our relationships with ICs should be similar to our relationships with vendors •ICs work independently and choose their own employees or subcontractors• E.g., plumber works inside your home but has a set rate and determines on

his/her own how to unclog the drain ICs should work with limited instruction or control Control is usually limited to accepting or rejecting their results ICs should decide when to take breaks and how and when to do their work


Pop Quiz!

Which of the following best describes a key factor that distinguishes ICs from employees?

A.The type of work.

B.The type of organization.

C.The worker-organization relationship.


Nature of Services

ICs' services are usually discontinuous, temporary and not tied to the organization's normal operations•Don't invite or allow ICs to work on premises unless it's necessary•Avoid regular, written reports•Don't invite ICs to regular staff meetings or refer to them as "employees"•Don't give ICs employee handbooks; give "suggestions" or "guidance"

ICs' services should be tied to defined contracts

ICs should complete projects one at a time with new contract for each

We can't "fire" an IC; we can only terminate contract


Established Business

ICs should not depend on our organization for their business needs We should not offer employee benefits to ICs ICs have a right to advertise and provide services to other organizations •We should not be ICs' sole source of income• We should not give ICs so much work that they work full-time for us • ICs are free to reject any project that we offer ICs should not use our stationery, business cards or have bios on our website ICs should pay and arrange for their own travel


Exempt vs. Non-Exempt Employees

FLSA: All employees are either "exempt" or "non-exempt" from minimum-wage and overtime-compensation requirements State laws may impose further requirements on employers for non-exempt employees We must keep track of non-exempt employee hours and enforce overtime-reporting rules

FLSA requirements violated most often: •Failure to keep adequate records of payments to non-exempt employees •Improper exemption of employees from minimum-wage and overtime requirements Employees are non-exempt unless they fall into special categories


Exempt vs. Non-Exempt Employees (Cont’d)

FLSA: All employees are either "exempt" or "non-exempt" from minimum-wage and overtime-compensation requirements State laws may impose further requirements on employers for non-exempt employees We must keep track of non-exempt employee hours and enforce overtime-reporting rules

FLSA requirements violated most often: •Failure to keep adequate records of payments to non-exempt employees •Improper exemption of employees from minimum-wage and overtime requirements Employees are non-exempt unless they fall into special categories


Pop Quiz!

Which of the following is an employer's most important responsibility when it comes to non-exempt employees?

A.Training.

B.Recordkeeping.

C.Discipline.

D.Proper management.


Exempt Employees

Employers need not pay minimum wage or overtime to exempt employees, including —

•Executives, highly compensated employees and owners of at least 20% of their business

•Learned or creative professionals

•Administrative employees

•Computer employees

•Outside salespeople

•Certain other employees


Exempt Employees (Cont'd)

Executive — •Has primary duty of managing business or one of its departments or subdivisions •Regularly directs work of at least two full-time employees or their equivalent, and •Has hiring and/or firing authority

Highly compensated employee — •Is paid at least $100,000 per year •Performs office or other non-manual work as primary duty •Performs any exempt duties of executive, administrative or professional employee Employees with at least 20% interest in company are exempt if they are actively engaged in company's management



Learned or creative professional is employee whose primary duty requires advanced knowledge in a field of science or learning that — •Customarily requires prolonged course of specialized intellectual instruction •Requires originality, talent in recognized field of artistic or creative endeavor

Administrative employee — •Has primary duty related to management or general business operations of employer •Can exercise discretion/independent judgment over matters of significance Employee's title does not establish exempt status


In the news…

Managers Sweep Up Huge Award

The U.S. Supreme Court has let stand a $35.6 million judgment against Family Dollar Stores in a case brought by 1,424 employees under the FLSA. A federal-court jury had found that the company had violated the FLSA by wrongly classifying the employees as store managers in order to deny them overtime pay. The employees were regularly required to work more than 60 hours per week and to perform duties not usually associated with store managers, such as mopping floors, stocking shelves and unloading trucks. The jury apparently agreed with the employees' assertion that they were "managers in name only."

Jury Slaps Family Dollar Stores for Widespread FLSA Violations



Other categories of exempt employees:

•Computer employees — programmers, software engineers, etc., who have certain primary duties and are compensated at or above certain minimum rate

•Outside salespeople — employees whose primary duty is making sales or obtaining orders and who do so away from employer's place of business

• Miscellaneous workers — employees of seasonal amusement or recreational businesses, newspaper-delivery people, and casual babysitters

FLSA regulations bar exempt status for certain "blue-collar" employees — e.g., police officers, firefighters, paramedics and some other public-safety personnel


In Conclusion...

When interacting with co-workers —

•Know who are ICs and who are employees and treat them accordingly

•Keep track of non-exempt employees' hours and make sure they report all overtime

• When hiring or promoting, find out whether position is considered exempt or non-exempt

If you feel that a worker has been misclassified or that ICs are being treated like employees, please tell our legal counsel


04/19/23

Final Quiz


04/19/23

Questions?


04/19/23

Thank you for participating!

This course and the related materials were developed by WeComply, Inc. and the Association of Corporate Counsel.

copyright© 2011 wecomply, inc. all rights reserved. 8/6/2015 worker classification

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