Proper Classification of Workers and Good Recordkeeping Will Save You Money

If your friendly employment lawyers sound like a broken record with respect to improper classification of employees and accurate recordkeeping under the Fair Labor Standards Act (FLSA), it might be because they know what they’re talking about (seriously). As we recently noted, the Department of Labor (DOL) under the Obama administration has been aggressively pushing an agenda addressing worker misclassification, including investigating potential violations of the FLSA employee classification requirements. These efforts have resulted in huge fines and settlements between the government and private employers. This year alone, the DOL has reported more than $3.6 million in settlements with and judgments against employers resulting from misclassification of workers, violations of the FLSA’s minimum wage and overtime provisions, and failure to meet mandated recordkeeping requirements, which certainly is not chump change.The DOL’s targets are not just large companies. Employers ranging in size from just a few hundred workers to more than 14,000 employees have been hit with penalties as a result of DOL investigations. Many of the larger fines resulted from employers’ failure to properly classify workers as “employees” as defined by the FLSA, instead classifying and paying their workers on an independent contractor basis. While it may seem appealing to engage workers on an independent contractor basis because of increased payroll taxes and workers compensation insurance — particularly where workers have flexibility on hours worked, working location, and job duty execution — it also is a decision that should only be made after careful evaluation, preferably in connection with legal counsel.

Further complicating matters, employers continue to experience headaches based on classifying workers as exempt, which avoids the need to pay overtime under the FLSA, where the job duties performed by employees do not meet one of the applicable exemptions. These issues have both wage and hour consequences, as well as potentially significant state and federal tax consequences.

In a bit of a triple-whammy, if a DOL investigation results in a misclassification finding, it will almost certainly also yield a violation of the FLSA’s recordkeeping requirements. Employers are mandated by the FLSA to keep accurate rate of pay records (among other things) for their hourly, non-exempt workers. Because there are no recordkeeping requirements for independent contractors under the FLSA and reduced requirements for exempt employees, many employers simply do not keep reams of documentation for these workers, which creates an automatic problem if those workers are deemed to be classified incorrectly. The derivative recordkeeping finding carries with it its own set of potential fines and penalties.

Simply put, whether or not an employer’s misclassification of workers is intentional, employers may pay dearly if investigated.

Proper classification of workers is no simple task either. As we have discussed in previous posts, employers would be wise to review their independent contractor relationships as well as their exempt versus non-exempt classifications to ensure compliance, because if workers are misclassified, substantial problems can result. Unfortunately, the line between contractor and employee, or exempt and non-exempt, can often be blurry. For contracted workers, classification is particularly muddy when the worker has some freedom from control, yet works under the auspices of the employer’s name and/or in the employer’s place of business. Further, some workers prefer engagement as independent contractors, but truly are not; or later, after a relationship sours, a contractor sues to recover lost wages and overtime he suddenly believes he is due.  And, as if this isn’t enough, an IRS audit may result in a de facto employee classification review.

Employers should of course want to avoid these situations. Regular review, even if it sounds like a broken record from your friendly employment lawyer, is the best way to avoid them.