June 2010

A Polsinelli Shughart Labor and Employment Update:

Employee Misclassification: Workers' Status Under a Microscope

The U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) have committed to cracking down on employers who misclassify employees as independent contractors. The DOL and IRS have hired hundreds of investigators with the specific duty of auditing whether independent contractors should be reclassified as employees, and whether employees designated as exempt from overtime requirements should be reclassified as non-exempt.

The implications of employee misclassification as an independent contractor can be far-reaching and expensive for employers. These implications include:

• Erroneous classification of workers as independent contractors can give rise to payment of back-employment and unemployment taxes, as well as unpaid overtime, going back at least two years, with a potential three-year penalty if the employer's conduct is deemed to have been "willful"
     
• Denial of employee status can result in liability for employers relating to their retirement, 401(k), and welfare benefit plans, including requiring the employer to make retroactive plan-matching and non-elective contributions

• Categorizing employees as exempt when they should be non-exempt can result in substantial overtime payments, as well as other penalties
  

Because the Fair Labor Standards Act (FLSA) and IRS rules apply to even the smallest of employers, no business is immune from a potential audit. Employers should consider undertaking a workforce review, including:

• Duties and responsibilities of independent contractors, including the extent to which they are an integral part of the employer's business, whether they are able to work for other employers, and whether they have an opportunity for profit and loss (the "economic realities" test)
     
• Job descriptions and actual day-to day-responsibilities of employees classified as "exempt" to ensure that the designation is correct. A few years ago the DOL revised its regulations dealing with the administrative, executive, and professional exemptions, and employers who did not review their exempt employee classifications at that time would be wise to do so now.
  

Additionally, the recently introduced Employee Misclassification Prevention Act would amend the FLSA and Social Security Act (SSA) to require employers to provide written notice to each individual hired as to their status (as a contractor or employee), and would be required to maintain records for each contractor hired. Failure to comply with these notice requirements will lead to a presumption of employee status which can be rebutted only by "clear and convincing" evidence.

For More Information

If you have any questions about these issues, or would like assistance in reviewing your employees' status, contact:

• Karen Glickstein | 816.395.0638 | kglickstein@polsinelli.com
• Dona Nutini | 602.650.2087 | dnutini@polsinelli.com

About Polsinelli Shughart PC

With more than 500 attorneys, Polsinelli Shughart PC is a national law firm that is a recognized leader in the areas of business litigation, financial services, bankruptcy, real estate, business law, labor and employment, construction, life sciences and health care. Serving corporate, institutional and individual clients regionally, nationally and worldwide, Polsinelli Shughart is known for successfully applying forward-thinking strategies for both straightforward and complex legal matters. The firm can be found online at www.polsinelli.com.