Affordable Care Act Amplifies Risk of Misclassifying Employees

by Jan Cottingham  on Monday, Sep. 2, 2013 12:00 am  

From left: Chris Doolittle of BKD LLP, Missy McJunkins Duke and Amber Bagley of Cross Gunter Witherspoon & Galchus.

“Unfortunately, the fact is that most of the time when I encounter employers who have people classified as independent contractors, they really are inappropriately classified,” Duke said.

Some business sectors tend to use more independent contractors than others, fields like construction, information technology, transportation and health care. Those sectors need to be particularly careful.

In addition, the recession and the sluggish recovery led some employers “to classify people as independent contractors because it was less expensive,” Duke said.

Amber Bagley, also with Cross Gunter, said that she had noticed the Arkansas Department of Workforce Services becoming more aggressive about classification. A triggering event for a state audit is a worker labeled by his employer as an independent contractor filing for unemployment benefits.

“The majority of misclassified workers are discovered through the Unemployment Insurance claim filing process,” Ronald Calkins, assistant director of the state Department of Workforce Services, said in an emailed response to questions from Arkansas Business.

“DWS also performs random audits of employers throughout the year and misclassified workers are sometimes discovered during this process,” he said.

And though Duke and others have seen increases in employees classified as independent contractors, Calkins said his agency had not noted such a trend.

In determining whether an employee should be classified, Bagley said, “Ultimately, a person’s free will and their ability to make employment decisions for themselves really factors into the outcome. For instance, if you have an independent contractor agreement that is exclusive of that person’s time, and pretty much forbids them from working for any other group, then you can almost come to the quick conclusion that that person isn’t able to go and contract with someone else. But again, it’s a very gray area.”

“Companies are not defenseless,” Doolittle said. Businesses can submit a form SS-8 to the IRS asking that agency to determine worker status, whether an individual is an employee or independent contractor.

“You have to go with what the law requires,” Duke said. “It’s not a business decision; it’s a legal decision.”

Employment Relationship and the Fair Labor Standards Act

The Wage & Hour Division of the U.S. Department of Labor has provided a fact sheet on the meaning of the “employment relationship.” It says:

The U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls. Among the factors that the Court has considered significant are:

  • The extent to which the services rendered are an integral part of the principal’s business.
  • The permanency of the relationship.
  • The amount of the alleged contractor’s investment in facilities and equipment.
  • The nature and degree of control by the principal.
  • The alleged contractor’s opportunities for profit and loss.
  • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  • The degree of independent business organization and operation.

Source: U.S. Department of Labor



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