Does your company use independent contractors or freelancers?
If so, beware. You may be scrutinized by The DOL Misclassification Initiative. According to the U.S. Department of Labor (DOL), misclassified employees generate substantial losses to Treasury, Social Security, Medicare, state unemployment and workers’ compensation funds. According to the U.S. Government Accountability Office (GAO), independent contractors fall within the category of contingent workers—such as temporary or part-time employees—which make up approximately 30 percent of the U.S. workforce.
To close the gap, the DOL is on a mission to make sure independent contractors are not employees in disguise. In addition, the DOL is looking closely at employer-compliance with minimum wage, overtime and record keeping provisions. As a result, countless companies have been ordered to pay back wages for misclassification and other wage and hour violations. While companies in all industries are at risk, those in construction, installation, home healthcare, hospitality and transportation/trucking appear to have been most impacted by investigations to date.
The Workers’ Compensation Impact of Misclassification
The DOL isn’t the only entity that may be looking at how you classify workers. Your workers’ compensation insurance carrier can review your employee/independent contractor classifications as well. In fact, employee misclassification is considered to be a form of workers’ compensation premium fraud – causing workers’ compensation carriers to lose hundreds of millions of dollars in premium every year according to ISO.com.
If the work comp carrier determines that some independent contractors don’t meet standard independent contractor criteria, they can charge payroll for those workers. The only way to guarantee that a carrier won’t charge payroll for independent contractors is if they carry their own workers’ compensation insurance.
How to Stay in Compliance
First and foremost, be judicious when it comes to worker classification. Don’t be tempted to mis-classify workers for short-term savings. In addition to being slapped with back wages, back taxes, interest and penalties, your retirement plan may be at risk. Independent contractors are generally excluded from retirement plan contributions. If independent contractors are reclassified to employees, your company may be penalized and your qualified plan could become disqualified.
Follow these guidelines:
• Review the IRS brochure for guidance. (http://www.irs.gov/pub/irs-pdf/p1779.pdf) Generally, the relevant facts fall into three categories: behavioral control, financial control and relationship of the parties.
• Contractually manage the independent contractor relationship with a work agreement that specifies the scope and duration of work to be completed. It should also specify that the worker is:
Not an employee and that this is an independent contractor relationship
Not entitled to employee benefits or covered by workers’ compensation
In control of how and when the work is completed
Responsible for providing their own work tools
• Create a separate contract for employees so it’s easy to see that you manage each group of workers differently.
• Require independent contractors to complete a Form W-9, Request for Taxpayer Identification Number and Certification.
• Issue Form 1099 to all independent contractors who earned more than $600 annually.
• Don’t provide independent contractors with employee perks such as vehicles or computers.
• Do not provide independent contractors with an employee handbook or invite them to company events.
• Do not set independent contractors’ work hours.
• Beware of hiring former employees and retirees back as independent contractors. If you’d like to do this, seek legal counsel so that you follow proper protocol.
As always, Heffernan’s goal is to help employers manage potential risks and avoid costly surprises. Please contact us if you have any questions about how these wage and hour issues may impact your workers’ compensation program. Also, ask us about Employment Practices Liability coverage and HR Consulting Services.