There’s a new startup bandwagon on the loose, making regular stops around the tech world each week. It pulls up in the form of an article on the sharing economy and how one more rising startup is transitioning contract workers to employee status. One week it’s Luxe Valet, the next
The whole thing is a sexy way of bringing the very real issue of worker misclassification to the forefront of the news. Today, 40.4%
The Department of Labor (DOL) is taking notice of the new climate. The department recently put out an “Administrator’s Interpretation” meant to help employers determine whether workers are employees or independent contractors. The DOL sees a lot of worker misclassification out there, particularly when employers label workers as “independent contractors” rather than full-time employees, or even classify an employee wrongfully as “owner” or “partner” of a business to avoid the classification game altogether.
Shortly after the DOL’s warning that “most workers are employees under the FLSA,” TLNT reported that two senators, Bob Casey, D-PA, and Al Franken, D-MN, had proposed a bill, the Payroll Fraud Prevention Act of 2015, to crack down on worker misclassification by means of amendments to the Fair Labor Standards Act. One of the main tenets of the senators’ bill would be to provide written notice to workers regarding their classification
The bill is unlikely to pass given the divided
What to Do
Even if your company isn’t participating in the Uber-
As always, if you are unsure about the categorization of your employees, consult with your legal counsel and review the DOL guidelines as well as the “Administrator’s Interpretation” for your exact situation. Every company is different. That said, here are some steps to making sure your classifications are spic and span as your company scales up. When your startup hits the big time and makes the contractor employee switcheroo, you’ll be more than ready.
1. Start early.
Dan McCoy, the co-chair of the employment practices group at Fenwick & West in California, recently gave a fantastic interview in Forbes with Adriana Gardella regarding worker misclassification. Among his biggest pieces of advice was to start clarifying your classifications early on.
“Even if you decide to stay with contractor status for workers, at least address the issue with your board and investors,” he said.
Not only that, if you do decide to reclassify a population of your workers, do it when the company is smaller. McCoy suggests
2. Familiarize yourself with what employees receive and contract workers do not.
Employees are entitled to certain protections that contract workers do not receive. This includes but is not limited to:
- Minimum Wage
- Family and Medical Leave
- Unemployment Insurance
- Workers’ Compensation
- Health Benefits. Under the Affordable Care Act (ACA), however, employees that work for an Applicable Large Employer (ALE) for more than 30 hours a week are entitled to healthcare benefits.
Knowing the specific protections guaranteed for employees at your own company is what classification is all about.
3. Understand how the DOL delineates between contractors and employees: Are your workers economically dependent on the employer (and thus an employee) or are they in business for themselves (and thus an independent contractor)?
The DOL’s “Administrator's Interpretation” lays out what employers need to consider when classifying workers. It essentially boils down to the question of economic dependence, what the DOL calls the “economic realities” test. Classifications can be complex, but it doesn’t hurt to familiarize yourself with the six areas of the “economic realities” test. Here they are, plus summaries of the real-world examples provided by the DOL for understanding each concept.
A. Is the employee’s work an integral part of the employer’s business?
Example: If a construction company frames residential homes, carpenters are integral to that business and thus likely to be employees.
However, if a software
B. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss
In contrast, a different worker may provide
C. How does the worker’s relative investment compare to the employer’s investment?
Example: A cleaning company may employ a worker who likes to bring a few of her own cleaning supplies to certain jobs, but the company also provides her a vehicle, insurance, and most equipment and supplies. She would be an employee.
An independent contractor, however, may provide cleaning services and sometimes work for a cleaning company, but she rents space to store her materials and a vehicle that she can only use for work. Couple that with her regularly marketing herself and she’s likely an independent contractor.
D. Does the work performed require special skill and initiative
But, a highly skilled carpenter who makes made-to-order cabinets for many construction companies—and also markets herself and decides what jobs to take—could be a contractor.
E. Is the relationship between the worker and the employer permanent or indefinite
Another editor may work on a gig basis with fifteen other publishing houses over several years, negotiating jobs and turning down others. She is likely an independent contractor.
F. What is the nature and degree of the employer’s control
A separate nurse registry may instead send client listings to a registered nurse, but let the nurse set his own wage range and work whenever he pleases. That nurse would not be considered an employee.
4. Use an online platform to handle payroll tax withholdings.
One of the reasons startups reach for the contractor status instead of employee classification is to avoid payroll complications like tax withholdings or workers’ compensation. But, that’s one liability that can catch up with a company. As McCoy told Forbes, a taxing authority might approach a company saying they owe a misclassified contractor payroll taxes. “The company can owe the tax, penalties for failing to pay the tax promptly, and interest,” he said.
But, companies don’t need to be afraid of payroll complications around employees. A full-service payroll system can take care of that, especially your automated tax filings. As goes with classifications, a bandaid solution now can mean major repercussions down the line. Instead, set yourself up for success with the proper classifications and a payroll platform that can handle what you need.
Once you have contractor and employee classifications sorted, here's how to correctly classify exempt and nonexempt employees.
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