Navigating The Proper Classification of Employees and Independent Contractors

By Karen Canales-Reyes and Andreas Koutsoudakis

A prevalent issue in the American workforce is the misclassification of employees as independent contractors. Unlike employees, independent contractors are not protected under the Fair Labor Standards Act (FLSA), and likewise are not entitled to minimum wage, overtime, and other benefits provided to employees under the FLSA.[1] Generally, independent contractors work on a temporary and flexible basis, and are paid differently than salaried employees. While seemingly straightforward, classifying a worker as an employee or independent contractor for purposes of the FLSA can be a convoluted process. If done improperly, it can expose employers to legal liability and fines. Over the past few years, New York State and the federal government have increasingly extended their efforts to eliminate the misclassification of workers as independent contractors. They have expanded investigative and enforcement initiatives, infused agencies with additional funds, and explored various legislative measures in an effort to protect workers and shore up lost tax revenue.[2]

To help clarify discrepancies as to whether a worker is an employee or independent contractor, the U.S. Department of Labor (DOL) regularly issues rules which provide guidelines for employers on how to properly classify an individual as an employee or an independent contractor. The DOL’s current proposed rule takes a totality-of-the-circumstances approach and looks at:

(1) the worker’s opportunity for profit or loss;

(2) investments by the worker and the employer;

(3) how permanent the work relationship is;

(4) nature and degree of control;

(5) whether the work is an integral part of the employer’s business; and

(6) skill and initiative.[1]

The proposed rule requires a balancing of each factor, and no one factor is determinative.

Employers will have to be more cognizant about how they categorize their workers if the DOL adopts the new proposed rule. A finding of misclassification can result in expensive penalties, such as unpaid overtime and minimum wage, liquidated damages, and attorneys’ fees. In addition to facing liability with the Department of Labor, employers who misclassify workers may also face consequences with the IRS. The IRS can impose penalties on those who misclassify and even bring criminal charges if they suspect an employer intentionally misclassified its employees. Employers should also be aware that it is not a defense to a misclassification claim that a worker requested to be treated as an independent contractor.

As such, employers should take precautions such as consulting a checklist with an attorney or creating structured guidelines that can be reviewed each time they hire a new worker. Implementing a standardized system will help to clarify the status of all new hires. Employers should also conduct internal routine checks to ensure that workers who they hired as independent contractors have not become employees over time due to a change in the scope of their employment.

Proper classification of workers can be a convoluted and daunting process – but with the help of our experienced Labor & Employment attorneys here at KI Legal, employers will be able to rest assured that they are in full compliance with all federal and state rules.

[1] Exempt and Non-Exempt Employees https://www.nycbar.org/get-legal-help/article/employment-and-labor/exemptemployees/#:~:text=Employees%20who%20are%20exempt%20from,a%20door%2Dto%2Ddoor%20salesperson

[2] Task Force to Combat Worker Exploitation https://www.ny.gov/task-force-combat-worker-exploitation

[3] Department of Labor Proposed Rule https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking

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