Are your workers properly classified?

Both large and small companies are suffering serious consequences for misclassifying individuals who they compensate for services. Consider the following…

Employee or Independent Contractor?

One who is compensated for providing services to another is either an employee or an independent contractor. If the service provider is an employee, the employee receives the benefit of, and the employer incurs costs associated with, the employer’s obligation to pay employment related federal and state taxes, the employer’s obligation to provide worker’s compensation insurance coverage, the employer’s obligation to fund income stability programs such as mandatory unemployment compensation and disability insurance, and the employee’s participation in the employer’s voluntarily established benefit and retirement programs. If the service provider is an independent contractor, she is responsible for her own employment related taxes and is not entitled to employer sponsored insurance, benefits and programs. Given the significant costs associated with having employees, employers are often tempted to classify service providers as independent contractors.

The line between employee and independent contractor is not always bright. Various multifaceted tests are applied when analyzing the question. In essence, the distinction turns on the degree of exclusivity and control the service provider has in the overall relationship. If the party providing the services does not operate an independent business through which it renders similar services to multiple clients, it is more likely that the party should be classified as an “employee” rather than an independent contractor. Similarly, if the party paying for the services determines when, where and how the services must be performed, and provides the “tools” to render the services, it is more likely that the service provider should be classified as an “employee” rather than an independent contractor. 

If an employer misclassifies an employee as an independent contractor, the employer can face significant damages, penalties and fines that can be awarded in private lawsuits by employees as well as administrative actions by federal and state governmental agencies. There have been notable cases of employee misclassification by large companies such as Uber, Microsoft, FedEx and Empire Today, but small companies are targeted as well.

Supervisory or Non-Supervisory Employee?

Assuming an employer classifies a service provider as an employee, the employer must also properly classify the employee as either a supervisory or a non-supervisory employee. Non-supervisory employees are entitled to benefits that supervisory employees are not—for example, elevated pay for overtime. Here, again, the line is not always bright. However, to be deemed a supervisory employee, the employee usually needs to have the authority to hire, fire, discipline or direct other employees. And, as with an employee/independent contractor misclassification, both large and small companies can face significant damages, penalties and fines for misclassification. Recent cases include a $3.8 million settlement by Kmart to resolve a class action lawsuit that alleged violations of federal and state labor standards laws and a class action lawsuit filed in New Jersey against Uber alleging violation of overtime wage laws.

Concluding thoughts… 

Whether large or small, companies should carefully analyze how they characterize those they compensate for services. Please feel free to contact me for more information about classifying service providers.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, Suite 102
Springfield, New Jersey 07081

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.