Watch Out for Employee Misclassifications!

You can hardly pick up a professional journal these days without seeing something relating to a company being investigated because of employee “misclassification.” What exactly does that mean, and what are the consequences?

Many employers classify people that do work for them as “independent contractors.” If you use contract help or temporary employees to perform work that is not usually done by your employees or to enhance your current workforce’s capabilities, you are on the right track. All information that provides evidence of degree of control and the degree of independence must be considered. Facts that provide evidence of these degrees fall into three categories: behavioral control, financial control, and the relationship between the parties.

Just because there is a signed agreement between the parties does not an independent contractor make. If an employer is working the “independent contractor” as an employee – day-to-day instruction, setting times of work, providing equipment or materials, paying by the hour, etc. – to avoid paying federal employment taxes, VEC unemployment taxes, benefits, overtime, etc., the IRS could very well determine there is a problem. The consequence is payment of all back taxes, proper re-classification, and the possibility of additional penalties.

The second area of concern is the classification of an employee as either “exempt” or “non-exempt” in light of the Fair Labor Standards Act (FLSA). Exempt means that a position/person is exempt from the overtime provisions of the Act, in other words, you do not have to pay time and one-half for hours worked in excess of 40 in a given work week if the person is classified as “exempt.”

How does one establish an exempt position? There are three tests according to the FLSA – the salary level test, the salary basis test, and the duties test. Basically, to qualify as an exempt executive, administrative, or professional employee an employee must earn at least $455 per week. There are special cases for computer employees, outside sales employees, and highly compensated employees.

Generally, the salary basis test is satisfied when the employee regularly receives each pay period a pre-determined amount which is not reduced because of variations in the quality and quantity of work performed. In addition, the employee must receive the full salary for any week in which the employee performs work without regard to the number of days or hours worked. Please note, there are some exceptions here.

The final test is the duties test – what does the employee do? Duties typically fall into one of five areas: executive, administrative, professional, computer employee, and outside sales to be considered exempt from the overtime rules.

Improperly classifying employees can result not only back pay for 2 years, but also penalties and a look back for three years! Following the above suggestions will get you on the way to properly classifying your employees.

The above information is provided for informational purposes and is not to be considered legal advice. Questions, call Larry Elinskas at 804-966-8100.