At Setliff Law we emphasize the importance of ensuring employees are properly classified because though it may seem like a minor detail to be worked out by Human Resources, it has significant implications for employees and the business. Although businesses have become more aware of the risks of incorrectly labeling employees as independent contractors, it remains pervasive. The fields of construction, transportation, healthcare, restaurants, and hospitality have been identified as most susceptible to misclassification due to the varying types of employees and their vulnerability to exploitation. Unfortunately, following COVID, many working in the gig economy fields have started to see this issue as well. As a result, government agencies have started to crack down hard on businesses they believe have violated the rules.
An example of this crackdown is the recent settlement of $3.7 million secured by the Washington D.C. Workers’ Rights and Antifraud Section of the Office of the Attorney General (OAG), the largest recovery in a workers’ rights enforcement action in District history. The OAG sued Power Design (a major construction firm operating in D.C.), general contractor John Moriarty & Associates of Virginia, and multiple labor brokers for allegedly misclassifying hundreds of construction workers as independent contractors rather than employees. The OAG believes the misclassification was done to avoid paying sick leave and payroll taxes. Under the settlement, Power Design will pay $1.7 million to employees, $1.2 million in penalties to DC, and $880,000 in legal fees. The companies also had to change their payroll and contracting practices to prevent future worker misclassification.
The $3.7 million dollar settlement follows another settlement of $3 million with Arise Virtual Solutions, Inc. (Arise), a customer service company that provides a workforce of at-home customer service call workers for client companies. The OAG claimed that Arise failed to pay workers minimum wages, overtime, and paid sick leave by misclassifying them as independent contractors. Arise was required to pay $2 million to its employees, as well as $940,000 to the District. Arise is also barred from doing business in DC.
As seen in the examples above, misclassification often results in workers not receiving minimum wage, overtime pay, or other benefits that they are entitled to as employees, such as unemployment and workers’ compensation. Employers who misclassify workers also avoid paying employment taxes, such as Social Security and Medicare taxes, resulting in a loss of revenue for the government and motivation for agencies to enforce the rules. For example, under DC law, businesses must pay employees a minimum wage of $17.50 per hour, provide overtime pay, allow workers to accrue paid sick leave, and contribute toward their federal and state taxes. Covered employers are also required to maintain certain records regarding employees and it prohibits retaliation against employees who are discharged or discriminated against after, for example, filing a complaint regarding their pay. Businesses don’t have the same responsibilities to their independent contractors, who must pay all their own taxes, are not protected by most labor laws, and do not have access to workers’ compensation or unemployment insurance.
Misclassification is a widespread problem across multiple industries, and while a few bad actors do exploit workers to boost profits or gain unfair competitiveness, some misclassification occurs from a simple misunderstanding of the regulations. As part of law enforcement crackdowns, defendants are also being required to provide multiple contracts allowing agencies to view practices of other companies. Further, in a type of self-regulation/self-preservation, many businesses will not contract with another company suspected of misclassification. This makes mistakes in classification a serious viability consequence for the company that extends beyond law enforcement.
So, how can you be sure you’re not making a multi-million dollar mistake? Start by looking at the rules. The U.S. Department of Labor published a final rule for effect in March of 2024, revising prior guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). It is important to note that the latest Mach 2024 rule rescinds the Independent Contractor Status Under the Fair Labor Standards Act rule (2021 IC Rule). If you have the old rule around the office, trash it to avoid confusion, and make sure you review policies that may have been developed using the old rule as guidance.
The FLSA does not define “independent contractor” but uses the term to refer to workers who are not economically dependent on an employer for work and are in business for themselves. These employees are also commonly referred to as self-employed, and freelancer. The FLSA contains expansive definitions and no longer uses the “core factors” set forth in the 2021 IC Rule, returning instead to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity. The final rule also returns to the longstanding framing of investment as its own separate factor, and the integral factor as one that looks to whether the work performed is an integral part of a potential employer's business rather than part of an integrated unit of production. Other factors such as scheduling, remote supervision, price setting, and the ability to work for others fall under the control factor, exclusivity falls under the permanency factor, and initiative within the skill factor.
Clear and easy to understand? Not exactly. Employee misclassification is a serious issue with far-reaching consequences, so taking a few moments to speak with a firm knowledgeable in this area of law is a wise business move. Setliff Law specializes in employment law and would be pleased to offer guidance as you sort through potential misclassification issues.
If you have questions specific to this article, or if you have questions about employment in general, contact Michael Jacquez (mjacquez@setlifflaw.com) at (804) 377-1262 or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.
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