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Employee Misclassification: Avoid the Risk

The United States Department of Labor (“DOL”) received more funding in 2010 to conduct investigations under the Fair Labor Standards Act (“FLSA”) and is expected to receive even more funding in 2011. The DOL’s budget for 2010 provided for 250 more Wage and Hour investigators. President Obama’s proposed budget for fiscal year 2011 includes a $244 million budget for the Department’s Wage and Hour Division, a $20 Million increase from this year’s budget. Of its total budget, the Wage and Hour Division intends to allocate $25 Million to its new “Misclassification Initiative.”

 The stated goal of this “Misclassification Initiative” is to protect workers’ rights because when employees are  misclassified as “independent contractors” they are deprived of benefits and protections to which they are legally entitled. The other effect this initiative will be to help the United States claim over a billion dollars a year in unpaid Social Security, unemployment insurance and income taxes from both employers and workers. A business that classifies an individual asan independent contractor rather than an employee saves about one-third of payroll costs by not having to pay Social Security taxes, unemployment and workers’ compensation taxes and certain employee benefits. The DOL has estimated that up to 1/3 of United States employers are incorrectly classifying at least one employee – either by error or intent.

Part of the problem is that the distinction between “employee” and “independent contractor” is complicated. Job titles alone do not determine the applicability of the FLSA’s exemptions.

The DOL’s Wage and Hour Division looks at seven factors to help determine the difference between an independent contractor and an employee:

1. The extent to which the services rendered are an integral part of the principal’s business;
2. The permanency of the relationship;
3. The amount of the contractor’s investment in facilities and equipment;
4. The nature and degree of control by the principal;
5. The contractor’s opportunities for profit and loss;
6. The amount of initiative, judgment or foresight in open market competition with other required for the success of the independent contractor;
7. The degree of independent business organization and operation.

Further, the Employee Misclassification Prevention Act was recently introduced in the House and Senate (HR 5107 and SB 3254, respectively). This act would amend the FLSA by requiring employers to provide each person hired written notification of the person’s classification (employee versus independent contractor), a statement directing the person to the DOL website, contact information for the local department of labor office, and a statement to independent contractors that: “Your rights to wage, hour, and other labor protections depend upon your proper classification as an employee or non-employee.

If you have any questions or concerns about how you have been classified or suspect that you may have been misclassified, contact the U.S. Department of Labor.

 

This article was contributed by Molly Bartalos an attorney with Dysart Taylor Lay Cotter & McMonigle, P.C.  To reach Molly  or another member of the firm please visit their website at  www.dysarttaylor.com 

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