Employee classification continues to be major issue

31 Dec

It's important to know who is a contractor and who an employee.

Employee classification continues to be a major subject of debate among those tasked with human resource planning. Even a company as large as Google can make this mistake. It is currently being sued for misclassifying someone as an independent contractor. It's the same old argument, having to do with the way the Internal Revenue Service and the Department of Labor test to see if a worker is a contractor or an employee.

According to Human Resources Executive Online, the worker in question spent 45 hours per week on his project, but Google did not pay for more than 30 hours of work.  He is suing through the San Francisco office of law firm Hinshaw & Culbertson.

"This issue impacts every employer, both public and private, in any [line of] business," says Amy Jensen, a partner in that law firm.

California, where Google's main office is located, has unique laws protecting employees that go above and beyond what federal laws demand. However, the problem with worker classification is nationwide, and no company is exempt from an investigation by the DOL.

Lee Schreter, who is the co-chair of Littler Mendelson, a law firm dealing with employee classification, says that companies need to prepare for emergencies before they happen.

"Employers can plan ahead for this type of litigation and build the necessary evidence today to defend against these claims in the future," said Schreter.

The rules for employee classification
There are ultimately two tests the government can use to see if a worker is an employee or not. One test, by the IRS, looks at behavior, finances and the type of relationship. If the company treats its worker like an employee, pays the person like one and has a contract that refers to its worker as an employee, then the worker is by default an employee and entitled to benefits.

The DOL test looks at six different areas to see if the worker is a contractor or not, but the guiding principles are the same as for the IRS's test.

The penalties for misclassification are severe and involve at the very least a new taxation for employees formerly classified as independent contractors. The DOL might also fine the company for breaking the law, whether intentionally or not.

Special California rules
As an added challenge, California has its own rules governing meals and rest breaks, according to HRE Online. These are dictated by whether an employee has a salary or gets paid hourly wages. Those with wages must receive regular paid breaks. Simply giving an employee a salary will not be enough to make that employee qualify for not receiving paid breaks any longer. The rules are more complex than that.

"If you have a workforce with a lot of standardization, HR folks or in-house counsel should conduct a review of the various job classifications, especially where they have the most employees and/or the ones in the gray area," said Employment Partner Emma Luevano of Mitch Silberberg & Knupp in Los Angeles. "They should make sure they're being classified properly."

The costs misclassification are high, but due diligence can help to mitigate disasters.

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