Since the onset of the recession, there has been a surge
in worker misclassification litigation and enforcement against employers that
are trying to effectively manage their finances, but are incorrectly
classifying their workers. There is also concern around the Affordable Care
Act’s employer mandate, which may make misclassifications a tempting
alternative to offering group health coverage.
The Department of Labor and the Internal Revenue oversee
the federal Fair Labor Standards Act, which establishes minimum wage and
overtime pay standards and how much private and public employers should pay
their employees. At the state level, there are also a slew of regulations that
can make any HR professional or benefit plan sponsor concerned.
Linda Doyle, trial partner at international law firm
McDermott Will & Emery, says many employers with large teams of individuals
in one category – such as trainers in the tech world or sales representatives
in product and promotion businesses – have asked how they could come under the
ACA’s coverage limits. This has been an area she’s been docking a lot of
analysis in.
“There are benefits, but there are also huge costs and
potential liabilities if you get this wrong,” says Doyle. “You know saving
health insurance money is a way to avoid the teeth of the Affordable Care Act;
it may be a laudable goal, but you may be just putting off extensive liability
down the line.”
It doesn’t help that many employers are still trying to
climb out from the recession.
“Particularly after the last recession, which I think we
are technically are still in, there was a lot of headcount management,” Doyle
explains. While noting that “‘temporary’ doesn’t necessarily mean ‘independent
contractor’, or ‘work-from-home’ doesn’t mean ‘independent contractor’,” she
says “there are really some employers that just don’t understand this is a
category – even if the employee or individual agrees to it.”
Nancy Vary, director of the Knowledge Resource Center for
Buck Consultants at Xerox, explains the ACA, and employee benefits needs in
general, is an influence in these decisions.
“It all factors in, because if you’re an independent
contractor, typically you’re not in a situation where you will not be receiving
any kind of employee benefit,” Vary says.
In 2012, the National Employment Law Project stated that
10-30% of employers, or even more, misclassify their employees as independent
contractors. This equates to millions of misclassifications and billions in
revenue losses for state and federal governments. Because employers with
independent contractors or other exempt employees are not tied to benefit and
payments requirements levied by federal, state and local agencies, this is the
conundrum, says Jeff Phelps, chief operating officer at Nelson Compliance, a
consultant firm that helps employers figure out their contingent workforces.
“The problem is with independent contractors is, of
course, employers are not contributing to the tax base for those individuals,”
says Phelps. “That’s the No. 1 driver, that’s why you see the legislation and
regulation getting tougher and more enforcement. They want to go after the
misclassification issue, because they want to recover taxes that have not been
made as well as [future] taxes.”
Phelps adds that typical employee protections afforded to
employees such as the FLSA, Title VII of the Civil Rights Act of 1964 and the
Family and Medical Leave Act are not offered to independent contractors.
The current severity of misclassification cases and
costs, which employment lawyers will tell you rival what was seen in the
dot-com era – especially after Microsoft agreed to pay the IRS $97 million to
settle a benefits suit that included its independent contractors that were not
allowed access to the company’s stock purchase plan.
“If you are an employer and you get this wrong, you have
tax liability,” says Doyle. “You also have the problem that Microsoft faced
years ago, if you call someone an independent contractor but they are really an
employee, and your benefit plans give employees certain buckets of benefits,
then you owe them those benefits.”
Under Employee Retirement Income Security Act plans, or
state insurance plans, employees cannot waive their rights to benefits, says
Doyle, even if they agreed to the exemption. She says a lot of employers
rewrote their benefits plans in order to address the issue. But now, as 10
states enacted worker misclassification laws in 2012 and more than 14 regions
did so in 2013 – including the District of Columbia – the topic is top of mind
for employers.
Meanwhile, the Consolidated Appropriations Act of 2014,
enacted in January, was authorized for just this purpose and the DOL has plans
to award $10.2 million to fund worker misclassification detection and
enforcement activities in 19 state unemployment insurance programs. “This is
one of the many actions the department is taking to help level the playing
field for employers while ensuring workers receive appropriate rights and
protections,” says Thomas E. Perez, the U.S. secretary of labor.
“The DOL has engaged in quite a bit of outreach over the
best few years but its focus in many respects has been on educating the
workers, educating the employees and providing them assistance in filing
complaints,” says Buck Consultants at Xerox’s Vary. But, “you get a sense where
the DOL’s head is, and that’s not that different from many government agencies.
They are, after all, in the enforcement business.”
Because each state regulation may vary, with some state
laws being more strict than those at the federal level, Phelps says the
independent contractor classifications, and misclassifications in general, are
being labeled as “an unfair business practice.”
“All of those costs that an employer would have satisfy
within the W-2, they don’t have to satisfy as a 1099,” Phelps explains.
But all employers want to know whether there will be some
reprieve or clarification. According to Doyle, the DOL’s broad strokes of
intervention, essentially audit programs and education programs, may help some
uninformed organizations. Meanwhile, Vary adds that compliance audit of pay
practices and time sheets can help employers skirt some of the liability going
forward.
Because misclassifications are neither a function of HR
departments or upper management, it’s a puzzle that has not been solved and
will likely not be for a while, Phelps says.
“I don’t see anything coming down in terms of regulation
that’s going to make this simpler,” says Phelps, who has spent more than 30
years in the human capital management industry. “All we’re seeing is greater
enforcement.”
Source: Employee
Benefit Adviser
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