Small business wage and hour mistakes = workers’ comp risks

Published on Tue, 02/17/2015 - 21:07

As employers know too well, wage and hour litigation has exploded in recent years. According to Seyfarth Shaw, LLP, over 8,000 wage and hour lawsuits were filed under the Fair Labor Standards Act (FLSA) in 2014. That’s a 31.8 percent jump from 2009, and the trend shows no signs of slowing down.

While many employers have risen to the challenge and are being diligent about protecting themselves, many others continue to make the same mistakes:

  • Misclassifying employees as independent contractors
  • Misclassifying exempt employees as non-exempt
  • Miscalculating bonuses and commissions
  • Not paying overtime wages and off-the-clock work requirements due to exempt misclassification

These mistakes can not only get you into legal hot water, but they can be costly:

  • Claims brought by employees and former employees often end in multimillion-dollar judgments, with employers being held liable for unpaid compensation, liquidated damages equal to the unpaid compensation, attorneys’ fees, and a host of other damages and penalties.
  • According to the Department of Labor (DOL), more than 70% of employers aren’t fully complying with the FLSA, and misclassified employees cause huge financial losses to Social Security, Medicare, Treasury, state unemployment, and workers’ compensation funds. So Uncle Sam is cracking down on compliance with worker classification, minimum wage, overtime, and recordkeeping. Many companies have been forced to pay back wages for misclassification and other wage and hour violations.

But there are even more consequences for wage and hour mistakes – the negative impact on your workers’ compensation costs.

Uncle Sam isn’t the only one interested in how you classify your workers. Employee misclassification is considered workers’ comp premium fraud, and according to, it costs workers’ compensation insurance carriers hundreds of millions of dollars in lost premium every year. So your workers’ comp carrier has a vested interested in your employee/independent contractor classifications too. If they determine that some of your independent contractors don’t meet the criteria, they can charge you payroll for those workers – and you can be hit for back wages, back taxes, interest, and penalties.

What about your retirement plan? Independent contractors are usually excluded from retirement plan contributions, so if your independent contractors should suddenly be reclassified as employees, your company could face penalties and your retirement plan could be disqualified.

In other words, you could be facing a lot of messy paperwork and costly consequences for wage and hour mistakes.

The only way to avoid these costly risks is to be diligent about classifying your workers. Here are a few guidelines:

  • Comply with all worker classification rules, statutes, and regulations regarding pay and hours. For help, see the IRS brochure and Department of Labor resources at to educate yourself on wage-and-hour compliance.
  • Be smart about managing contracts with your independent contractors, and specify the scope and duration of work and the nature of the relationship. Create a separate contract for employees so you have proof that you manage each group of workers differently.
  • Get a W-9, Request for Taxpayer Identification Number, and Certification from all independent contractors, and provide 1099s to all contractors who earn more than $600 annually.
  • Conduct regular audits of payroll processing procedures and employee job descriptions/classifications.
  • Review your insurance coverage to identify potential exposures.

Wage and hour crackdowns and lawsuits are a new way of life for employers, and the laws can be complex. For more information about the impact of these issues on your workers’ compensation programs – and how to protect yourself – contact the small business insurance experts at Heffernan Insurance Brokers.