Our Human Resources Blog

Earlier this month, the US Department of Labor announced they entered into a cooperative agreement with the IRS and officials in 11 states in an effort to “end the business practice of misclassifying employees in order to avoid providing employment protections”.

The states participating include Connecticut, Maryland, Massachusetts, Minnesota, Michigan, Utah and Washington, as well as state labor officials in Hawaii, Illinois, Montana and New York’s Attorney General. 

The IRS claims to loose billions of dollars each year in unpaid taxes from misclassification, with a substantial portion of these losses stemming from underpayments or non-payments by independent workers. These revenue losses have highly motivated the IRS in the last few years to make certain that businesses are not misclassifying their employees. Many states have also taken aggressive stances against misclassification, as it prevents them from collecting millions of dollars in state tax revenue each year- unemployment, income & payroll taxes, along with workers compensation are all negatively affected. 

Knowing if employees are correctly classified can be very confusing. There are no hard and fast rules, and every situation is different.  According to the Federal Labor Standards Act, in general -"an employee, as distinguished from an independent contractor who is engaged in a business of his own, is one who follows the usual path of an employee and is dependent on the business that he serves."  FLSA also suggests the following questions be considered.

• The extent to which the worker's services are an integral part of the employer's business?
• The permanency of the relationship?
• The amount of the worker's investment in facilities and equipment?
• The nature and degree of control by the principal?
• The worker's opportunities for profit and loss?
• The level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise?

For additional information please go to the DOL Fair Labor Standards Act