Newsletter Sign-up

According to a report released last year by the Government Accountability Office, the national extent of employee misclassification is unknown. However, researchers noted that previous studies suggest that it could be a significant problem with adverse consequences. For example, the Internal Revenue Service estimated that employers misclassified more than 3 million employees. A study commission by the U.S. Department of Labor found that as many as 30 percent of employers audited in nine states misclassified at least some employees.

Catalina M. Avalos, a specialist in labor and employment law at Tripp Scott in Fort Lauderdale, Fla., said that to address the issue, the Obama administration recently called for an additional $25 million in the DOL's proposed FY 2011 budget for a misclassification initiative. Under the plan, the agency will hire 100 additional enforcement personnel to target employee misclassification and provide grants to aid states in addressing the problem.

Problematic industries. Although misclassification of employees can be found across a swath of industries, Avalos said some are more problematic than others. The trucking industry, she said, has seen a rise in the number of misclassification cases in recent years, as well as the construction industry. In a study of employee misclassification by the Maine Department of Labor, officials estimated an annual loss of between $4.5 million and $6.5 million in workers' comp premiums from construction employers who violated the law. Employers who properly classify their employees also face a competitive disadvantage when bidding against companies who misclassify workers.

Clearly define employees. Avalos said that employers can benefit from the use of contractors but must take steps to ensure that individuals are properly classified.

"It basically boils down to, ?What are the job duties and what type of control does the employer exact over the person?'" she said.

Avalos said employers should also ask themselves who is providing the materials or supplies to complete the job.

"Who is carrying the expense?" she asked. "The courts want to see that the independent contractor is assuming some of the costs of running the business and that they are free to do work for other employers to grow their businesses."

The tests used to determine whether a worker is an independent contractor or an employee are complex and differ from law to law. However, a person is generally considered an employee if he is subject to another's right to control the manner and means of performing the work. In contrast, independent contractors are individuals who obtain customers on their own to provide services, may have other employees working for them, and are not subject to control over the manner by which they perform their services.

"Employers don't micromanage the job of an independent contractor," Avalos said. "They say, ?This job needs to be done,' but the independent contractor determines how it is accomplished. Another factor is whether the individual is required to work set hours. Independent contractors should have the discretion to say, ?If the job takes two hours to complete, I don't need to work an eight-hour day.'"

Overall, Avalos said employers need to look at the totality of the circumstances, and if they want to deem a person an independent contractor, they should explicitly spell out the relationship in a contractor agreement.

"The employers and employee or independent contractor has to be vigilant about the relationship they have with each other and make sure it is well-defined," she said. "This will allow an employee to lay out all of the issues and avoid misunderstanding. In this document, you would want to identify the contractor status, address the issue of liability insurance, and define the specific responsibilities of the employer and independent contractor."

Read more at the WORKERSCOMP Forum^TM homepage.

April 19, 2010

Copyright 2010© LRP Publications