About once a year, I feel compelled to address a common problem in employment matters - “non-employee” misclassification. This occurs for a couple of reasons. First, I spend a lot of time every year speaking with clients regarding classification issues. Second, almost every year, federal or state legislators and regulators issue guidance, rules, or bills addressing this issue - i.e., the Payroll Fraud Prevention Act of 2013 introduced November 12, 2013 in the Senate. And so, here we are again.
In misclassification matters, the most common "non-employee" categories are independent contractors, volunteers, and interns.
The most common problem, and the one that gets the most attention, is independent contractors. The U.S. Department of Labor (DOL) uses eight factors to determine whether an individual is an employee for enforcement purposes. These include, among other things, the extent to which the services in question are an integral part of the employer’s business; and the permanency of the relationship; the amount of the alleged contractor’s investment in facilities & equipment.
Other federal and state agencies use different tests. The Internal Revenue Service uses a control test by analyzing three categories of the relationship: (1) behavioral control; (2) financial control; and (3) the type or relationship.
Volunteers who perform functions similar or equivalent to other paid employees are also a problem. This type of “volunteerism” is a problem even if it is the individual offering to volunteer of their own volition, and even more so when an employer requires employees to volunteer.
In addition, employers using volunteers from the public to perform work that is integral to the business, or bartering for volunteered time raises issues as well. This is only permitted in limited circumstances.
Finally, internships are a big deal right now, as illustrated by recent litigation in the fashion industry. The rules relating to unpaid internships are strict, taking into consideration factors like whether the training to the intern is similar to that which would be given in a vocational school; the training is for the benefit of the trainees or students; the trainees or students do not displace regular employees, but work under their close supervision; and others. Failure to meet even one the DOL standards will subject the employer to potential liability.
Misclassification can result in overtime and minimum wage violations of the Fair Labor Standards Act (FLSA) as well as corollary state statutes and regulations. But the problem does not stop there. Misclassification can also lead to penalties for failure to carry proper unemployment insurance, workers’ compensation, federal and state withholdings, and a variety of others. Employers need to understand that federal and state level often have reciprocal agreements to share information when they find an employer misclassifying employees.
The point here is to be careful. Don't just assume you are in the clear when using independent contractors, volunteers, or interns. Employers should:
- Identify all independent contractor, volunteer, and intern classifications;
- Carefully review non-employee relationships to ensure compliance with federal and state statutory and regulatory requirements;
- Make appropriate modifications to non-employee relationships to ensure compliance with statutory and regulatory compliance;
- Consider utilizing IRS voluntary compliance programs; and
- Reclassify non-employees as employees where an employment relationship clearly exists under the statutory and regulatory compliance.
Please contact our offices if you have additional questions or would like assistance in auditing your classifications of non-employees and other related employment matters.