The uptick in enforcement efforts is a result of state and federal government agencies looking for opportunities to enhance their revenues.
In fact, in an unprecedented move, the IRS, the DOL and several related state agencies recently joined together and agreed to share information regarding audits and investigations into employee misclassifications. This means that if the IRS conducts an audit, determines a provider misclassified employees as independent contractors and holds the employer liable for years of back taxes and penalties, the DOL may soon knock on that same provider’s door, perform its own audit and find the provider also is liable for unpaid wages and penalties. State agencies could follow next.
This past year, the Department of Labor conducted the largest number of investigations in recent history. It collected the most back wages it has collected to date (more than $280 million). Notably, many of these enforcement efforts have been directed at the healthcare industry.
With that sentiment in mind, this article examines the three most common non-employee classifications and provides examples of the rules the various enforcement agencies apply to each.
Independent contractors
Each agency that examines independent contractor classification uses its own unique test. Thus, there is no single bright-line rule for employers to follow when making determinations regarding independent
contractor status.
For example, the DOL generally follows U.S. Supreme Court precedent to focus on the “economic reality” of the situation in determining whether a person is properly classified as an independent contractor. This view takes the following into account:
The extent to which the worker’s services are an integral part of the employer’s business. If the worker’s duties serve an important function for the company, it’s more likely the person is an employee and not an independent contractor;
- The permanency of the relationship;
- The amount of the worker’s investment in facilities and equipment;
- The nature and degree of control by the principal (including who decides on which hours will be worked and who sets the pay rate);
- The worker’s opportunities for profit and loss; and
- The level of skill required in performing the job.
The IRS, on the other hand, applies a general rule that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The IRS examines many factors in making this assessment, including whether the worker is evaluated or directed in job duties, whether expenses are reimbursed, whether the worker is paid hourly versus a flat fee, whether the worker receives benefits, and the permanence of the relationship.
To add even more confusion, courts have employed various tests to determine independent contractor status, and state agencies utilize their own tests as well.
Rather than attempting to determine whether the elements of each of these various tests are met, an employer should look at the entire relationship with its independent contractors and consider the degree or extent of the right to direct and control the work.
Generally speaking, the less control the employer exerts over the worker, the more likely the worker will be considered an independent contractor.
In general, an employee (as distinguished from an independent contractor) is dependent on the business that he serves, while an independent contractor typically performs work on his own terms, sets his own hours, uses his own equipment, performs work in which he has special expertise, and is hired to perform a specific project, for a finite time period, that is unrelated to the central business of the company.
Although each situation must be analyzed based on the specific facts involved, looking at these general guidelines can help a provider to make an informed decision regarding classification of workers.
Unpaid interns
It should come as no surprise that the DOL is closely scrutinizing the use of unpaid interns as well. The DOL applies a six-part test to decide whether a worker is properly classified as an unpaid intern vs. an employee.
- The internship must be similar to training that the intern would receive from an educational institution. This means that the internship should be structured around a classroom or educational environment.
- The internship should benefit the intern as opposed to the employer. A red flag is raised in a situation where the employer relies on the intern to do the company’s work.
- The intern must not displace existing employees. Thus, employers should be careful about bringing in interns on the heels of a layoff, and you shouldn’t use interns to augment your workforce.
- The employer shouldn’t receive any advantage from using the intern; in fact, a “good” internship may actually impede the employer’s operations due to the focus on training the intern.
- The intern shouldn’t be entitled to a job at the end of the internship. Therefore, providers shouldn’t use internships as trial periods for employment.
- The employer and the intern must understand that the intern isn’t entitled to wages.
Volunteers
Under federal law, employees may not volunteer services without pay to for-profit, private-sector employers. Thus, unless your company qualifies as a non-profit, you must not allow people to “volunteer” to perform work without pay.
Conclusion
Because misclassification violations implicate a wide range of laws and frequently involve multiple workers, they can represent a significant liability for employers. Therefore, providers using independent contractors or other non-employee workers must ensure that these workers are properly classified.
Among other things, this means making sure that when you classify a worker as an independent contractor, you are prepared to prove that your classification decision is warranted under all of the relevant laws, including but not limited to the Fair Labor Standards Act, state wage and hour laws, workers’ compensation statutes, and the state and federal tax codes.
