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Time is Money: Facing Wage and Hour Issues -- Misclassifying Independent Contractors: Are You My Employee?

Recently, I saw an advertisement on LinkedIn from a law firm representing employees of ExxonMobil. The advertisement was trying to get more employees to join a class action lawsuit against the Company claiming that employees were improperly classified as independent contractors.

Something the lawyer said in the ad stood out to me: “Independent contractors are misclassified all the time.”

Unfortunately, the lawyer is right, the process of classifying workers as independent contractors is difficult, and we frequently see employers unintentionally misclassify workers who should be employees as independent contractors. And, as if the factors alone are not complex enough, the Federal agencies that establish these factors change them frequently, which only creates more confusion.

Agencies Working Hand-in-Hand to Crack Down on Misclassifications

In addition to the exposure to litigation, the Department of Labor and the Internal Revenue Service ended 2022 with a Memorandum of Understanding stating that they will increase and streamline the referral of independent contractor misclassification cases to each other. Both agencies have a special interest in these misclassifications because a misclassification not only impacts the benefits and compensation the employee receives, but it also impacts the taxes that the Federal government receives. With the increase in litigation and agency oversight, businesses must be extremely cautious when classifying a worker as an independent contractor.

Factors for Independent Contractor Status

Unfortunately for employers, the factors for determining whether a worker is an independent contractor or an employee depends on the agency you ask and the current White House administration.

DOL Factors

As a perfect example, the Department of Labor is expected to finalize soon a proposed change to the independent contractor factors to revert the factors to before the 2021 rule change issued during the end of the Trump administration.

The factors to be considered will be the same as they are now under the new test: (1) the nature and degree and control over the work; (2) the worker’s opportunity for profit or loss; (3) the worker’s investment in equipment or materials required for their task; (4) the amount of skill required for the work; (5) the degree of permanence of the working relationship between the worker and the potential employer; and, (6) whether the work is part of an integrated unit of production. However, the new rule will restore the totality-of-the-circumstances analysis and rescind the Trump Administration approach of giving greater weight to the first two factors. Practically speaking, the totality-of-the-circumstances approach has historically made it more difficult for employers to classify workers as independent contractors.

IRS Factors

In addition to the currently uncertain Department of Labor framework, the IRS provides a three-pronged test for the classification of a worker as an independent contractor or employee:

  1. Does the company have the right to control what the worker does and how the worker performs the job?
  2. Are the financial aspects of the work controlled by the Company? (i.e., the method of payment, whether expenses are reimbursable, and who provides tools)
  3. How does the relationship appear under the circumstances? (i.e. are there employee-type benefits like health insurance and vacation time? Will the relationship continue beyond the current job?).

These factors are a re-packaging of the former 20-factor test established by the IRS. If all three of these questions point to the employer controlling the worker’s job, the financial aspects, and the relationship, then the worker is likely an employee according to the IRS.

Consequences for Misclassifying Employees as Independent Contractors

The consequences of a misclassification of an employee as an independent contractor can be severe. The misclassification could lead to violations of the Federal wage and hour laws, which can make employers subject to back pay, double damages, civil penalties, and attorney’s fees, depending on whether it is discovered through a DOL Audit (we discuss how to reduce a DOL Audit here) or litigation. Additionally, Federal tax laws can make the employer subject to back taxes and monetary penalties.

When to Act? The Sooner, The Better

The sooner that the Company can assess whether its independent contractors are properly classified as employees, the better off the Company will be. This is because with each pay period that an employee is misclassified, the risk continues to grow and so do the possible penalties. Employers should not wait to correct these issues—because Federal agencies and threats of litigation are not waiting.

Time is Money: Facing Wage and Hour Issues -- Misclassifying Independent Contractors: Are You My Employee?

Recently, I saw an advertisement on LinkedIn from a law firm representing employees of ExxonMobil. The advertisement was trying to get more employees to join a class action lawsuit against the Company claiming that employees were improperly classified as independent contractors.

Something the lawyer said in the ad stood out to me: “Independent contractors are misclassified all the time.”

Unfortunately, the lawyer is right, the process of classifying workers as independent contractors is difficult, and we frequently see employers unintentionally misclassify workers who should be employees as independent contractors. And, as if the factors alone are not complex enough, the Federal agencies that establish these factors change them frequently, which only creates more confusion.

Agencies Working Hand-in-Hand to Crack Down on Misclassifications

In addition to the exposure to litigation, the Department of Labor and the Internal Revenue Service ended 2022 with a Memorandum of Understanding stating that they will increase and streamline the referral of independent contractor misclassification cases to each other. Both agencies have a special interest in these misclassifications because a misclassification not only impacts the benefits and compensation the employee receives, but it also impacts the taxes that the Federal government receives. With the increase in litigation and agency oversight, businesses must be extremely cautious when classifying a worker as an independent contractor.

Factors for Independent Contractor Status

Unfortunately for employers, the factors for determining whether a worker is an independent contractor or an employee depends on the agency you ask and the current White House administration.

DOL Factors

As a perfect example, the Department of Labor is expected to finalize soon a proposed change to the independent contractor factors to revert the factors to before the 2021 rule change issued during the end of the Trump administration.

The factors to be considered will be the same as they are now under the new test: (1) the nature and degree and control over the work; (2) the worker’s opportunity for profit or loss; (3) the worker’s investment in equipment or materials required for their task; (4) the amount of skill required for the work; (5) the degree of permanence of the working relationship between the worker and the potential employer; and, (6) whether the work is part of an integrated unit of production. However, the new rule will restore the totality-of-the-circumstances analysis and rescind the Trump Administration approach of giving greater weight to the first two factors. Practically speaking, the totality-of-the-circumstances approach has historically made it more difficult for employers to classify workers as independent contractors.

IRS Factors

In addition to the currently uncertain Department of Labor framework, the IRS provides a three-pronged test for the classification of a worker as an independent contractor or employee:

  1. Does the company have the right to control what the worker does and how the worker performs the job?
  2. Are the financial aspects of the work controlled by the Company? (i.e., the method of payment, whether expenses are reimbursable, and who provides tools)
  3. How does the relationship appear under the circumstances? (i.e. are there employee-type benefits like health insurance and vacation time? Will the relationship continue beyond the current job?).

These factors are a re-packaging of the former 20-factor test established by the IRS. If all three of these questions point to the employer controlling the worker’s job, the financial aspects, and the relationship, then the worker is likely an employee according to the IRS.

Consequences for Misclassifying Employees as Independent Contractors

The consequences of a misclassification of an employee as an independent contractor can be severe. The misclassification could lead to violations of the Federal wage and hour laws, which can make employers subject to back pay, double damages, civil penalties, and attorney’s fees, depending on whether it is discovered through a DOL Audit (we discuss how to reduce a DOL Audit here) or litigation. Additionally, Federal tax laws can make the employer subject to back taxes and monetary penalties.

When to Act? The Sooner, The Better

The sooner that the Company can assess whether its independent contractors are properly classified as employees, the better off the Company will be. This is because with each pay period that an employee is misclassified, the risk continues to grow and so do the possible penalties. Employers should not wait to correct these issues—because Federal agencies and threats of litigation are not waiting.

Time is Money: Facing Wage and Hour Issues -- Misclassifying Independent Contractors: Are You My Employee?

Recently, I saw an advertisement on LinkedIn from a law firm representing employees of ExxonMobil. The advertisement was trying to get more employees to join a class action lawsuit against the Company claiming that employees were improperly classified as independent contractors.

Something the lawyer said in the ad stood out to me: “Independent contractors are misclassified all the time.”

Unfortunately, the lawyer is right, the process of classifying workers as independent contractors is difficult, and we frequently see employers unintentionally misclassify workers who should be employees as independent contractors. And, as if the factors alone are not complex enough, the Federal agencies that establish these factors change them frequently, which only creates more confusion.

Agencies Working Hand-in-Hand to Crack Down on Misclassifications

In addition to the exposure to litigation, the Department of Labor and the Internal Revenue Service ended 2022 with a Memorandum of Understanding stating that they will increase and streamline the referral of independent contractor misclassification cases to each other. Both agencies have a special interest in these misclassifications because a misclassification not only impacts the benefits and compensation the employee receives, but it also impacts the taxes that the Federal government receives. With the increase in litigation and agency oversight, businesses must be extremely cautious when classifying a worker as an independent contractor.

Factors for Independent Contractor Status

Unfortunately for employers, the factors for determining whether a worker is an independent contractor or an employee depends on the agency you ask and the current White House administration.

DOL Factors

As a perfect example, the Department of Labor is expected to finalize soon a proposed change to the independent contractor factors to revert the factors to before the 2021 rule change issued during the end of the Trump administration.

The factors to be considered will be the same as they are now under the new test: (1) the nature and degree and control over the work; (2) the worker’s opportunity for profit or loss; (3) the worker’s investment in equipment or materials required for their task; (4) the amount of skill required for the work; (5) the degree of permanence of the working relationship between the worker and the potential employer; and, (6) whether the work is part of an integrated unit of production. However, the new rule will restore the totality-of-the-circumstances analysis and rescind the Trump Administration approach of giving greater weight to the first two factors. Practically speaking, the totality-of-the-circumstances approach has historically made it more difficult for employers to classify workers as independent contractors.

IRS Factors

In addition to the currently uncertain Department of Labor framework, the IRS provides a three-pronged test for the classification of a worker as an independent contractor or employee:

  1. Does the company have the right to control what the worker does and how the worker performs the job?
  2. Are the financial aspects of the work controlled by the Company? (i.e., the method of payment, whether expenses are reimbursable, and who provides tools)
  3. How does the relationship appear under the circumstances? (i.e. are there employee-type benefits like health insurance and vacation time? Will the relationship continue beyond the current job?).

These factors are a re-packaging of the former 20-factor test established by the IRS. If all three of these questions point to the employer controlling the worker’s job, the financial aspects, and the relationship, then the worker is likely an employee according to the IRS.

Consequences for Misclassifying Employees as Independent Contractors

The consequences of a misclassification of an employee as an independent contractor can be severe. The misclassification could lead to violations of the Federal wage and hour laws, which can make employers subject to back pay, double damages, civil penalties, and attorney’s fees, depending on whether it is discovered through a DOL Audit (we discuss how to reduce a DOL Audit here) or litigation. Additionally, Federal tax laws can make the employer subject to back taxes and monetary penalties.

When to Act? The Sooner, The Better

The sooner that the Company can assess whether its independent contractors are properly classified as employees, the better off the Company will be. This is because with each pay period that an employee is misclassified, the risk continues to grow and so do the possible penalties. Employers should not wait to correct these issues—because Federal agencies and threats of litigation are not waiting.

Time is Money: Facing Wage and Hour Issues -- Misclassifying Independent Contractors: Are You My Employee?

Recently, I saw an advertisement on LinkedIn from a law firm representing employees of ExxonMobil. The advertisement was trying to get more employees to join a class action lawsuit against the Company claiming that employees were improperly classified as independent contractors.

Something the lawyer said in the ad stood out to me: “Independent contractors are misclassified all the time.”

Unfortunately, the lawyer is right, the process of classifying workers as independent contractors is difficult, and we frequently see employers unintentionally misclassify workers who should be employees as independent contractors. And, as if the factors alone are not complex enough, the Federal agencies that establish these factors change them frequently, which only creates more confusion.

Agencies Working Hand-in-Hand to Crack Down on Misclassifications

In addition to the exposure to litigation, the Department of Labor and the Internal Revenue Service ended 2022 with a Memorandum of Understanding stating that they will increase and streamline the referral of independent contractor misclassification cases to each other. Both agencies have a special interest in these misclassifications because a misclassification not only impacts the benefits and compensation the employee receives, but it also impacts the taxes that the Federal government receives. With the increase in litigation and agency oversight, businesses must be extremely cautious when classifying a worker as an independent contractor.

Factors for Independent Contractor Status

Unfortunately for employers, the factors for determining whether a worker is an independent contractor or an employee depends on the agency you ask and the current White House administration.

DOL Factors

As a perfect example, the Department of Labor is expected to finalize soon a proposed change to the independent contractor factors to revert the factors to before the 2021 rule change issued during the end of the Trump administration.

The factors to be considered will be the same as they are now under the new test: (1) the nature and degree and control over the work; (2) the worker’s opportunity for profit or loss; (3) the worker’s investment in equipment or materials required for their task; (4) the amount of skill required for the work; (5) the degree of permanence of the working relationship between the worker and the potential employer; and, (6) whether the work is part of an integrated unit of production. However, the new rule will restore the totality-of-the-circumstances analysis and rescind the Trump Administration approach of giving greater weight to the first two factors. Practically speaking, the totality-of-the-circumstances approach has historically made it more difficult for employers to classify workers as independent contractors.

IRS Factors

In addition to the currently uncertain Department of Labor framework, the IRS provides a three-pronged test for the classification of a worker as an independent contractor or employee:

  1. Does the company have the right to control what the worker does and how the worker performs the job?
  2. Are the financial aspects of the work controlled by the Company? (i.e., the method of payment, whether expenses are reimbursable, and who provides tools)
  3. How does the relationship appear under the circumstances? (i.e. are there employee-type benefits like health insurance and vacation time? Will the relationship continue beyond the current job?).

These factors are a re-packaging of the former 20-factor test established by the IRS. If all three of these questions point to the employer controlling the worker’s job, the financial aspects, and the relationship, then the worker is likely an employee according to the IRS.

Consequences for Misclassifying Employees as Independent Contractors

The consequences of a misclassification of an employee as an independent contractor can be severe. The misclassification could lead to violations of the Federal wage and hour laws, which can make employers subject to back pay, double damages, civil penalties, and attorney’s fees, depending on whether it is discovered through a DOL Audit (we discuss how to reduce a DOL Audit here) or litigation. Additionally, Federal tax laws can make the employer subject to back taxes and monetary penalties.

When to Act? The Sooner, The Better

The sooner that the Company can assess whether its independent contractors are properly classified as employees, the better off the Company will be. This is because with each pay period that an employee is misclassified, the risk continues to grow and so do the possible penalties. Employers should not wait to correct these issues—because Federal agencies and threats of litigation are not waiting.

Time is Money: Facing Wage and Hour Issues -- Misclassifying Independent Contractors: Are You My Employee?

Recently, I saw an advertisement on LinkedIn from a law firm representing employees of ExxonMobil. The advertisement was trying to get more employees to join a class action lawsuit against the Company claiming that employees were improperly classified as independent contractors.

Something the lawyer said in the ad stood out to me: “Independent contractors are misclassified all the time.”

Unfortunately, the lawyer is right, the process of classifying workers as independent contractors is difficult, and we frequently see employers unintentionally misclassify workers who should be employees as independent contractors. And, as if the factors alone are not complex enough, the Federal agencies that establish these factors change them frequently, which only creates more confusion.

Agencies Working Hand-in-Hand to Crack Down on Misclassifications

In addition to the exposure to litigation, the Department of Labor and the Internal Revenue Service ended 2022 with a Memorandum of Understanding stating that they will increase and streamline the referral of independent contractor misclassification cases to each other. Both agencies have a special interest in these misclassifications because a misclassification not only impacts the benefits and compensation the employee receives, but it also impacts the taxes that the Federal government receives. With the increase in litigation and agency oversight, businesses must be extremely cautious when classifying a worker as an independent contractor.

Factors for Independent Contractor Status

Unfortunately for employers, the factors for determining whether a worker is an independent contractor or an employee depends on the agency you ask and the current White House administration.

DOL Factors

As a perfect example, the Department of Labor is expected to finalize soon a proposed change to the independent contractor factors to revert the factors to before the 2021 rule change issued during the end of the Trump administration.

The factors to be considered will be the same as they are now under the new test: (1) the nature and degree and control over the work; (2) the worker’s opportunity for profit or loss; (3) the worker’s investment in equipment or materials required for their task; (4) the amount of skill required for the work; (5) the degree of permanence of the working relationship between the worker and the potential employer; and, (6) whether the work is part of an integrated unit of production. However, the new rule will restore the totality-of-the-circumstances analysis and rescind the Trump Administration approach of giving greater weight to the first two factors. Practically speaking, the totality-of-the-circumstances approach has historically made it more difficult for employers to classify workers as independent contractors.

IRS Factors

In addition to the currently uncertain Department of Labor framework, the IRS provides a three-pronged test for the classification of a worker as an independent contractor or employee:

  1. Does the company have the right to control what the worker does and how the worker performs the job?
  2. Are the financial aspects of the work controlled by the Company? (i.e., the method of payment, whether expenses are reimbursable, and who provides tools)
  3. How does the relationship appear under the circumstances? (i.e. are there employee-type benefits like health insurance and vacation time? Will the relationship continue beyond the current job?).

These factors are a re-packaging of the former 20-factor test established by the IRS. If all three of these questions point to the employer controlling the worker’s job, the financial aspects, and the relationship, then the worker is likely an employee according to the IRS.

Consequences for Misclassifying Employees as Independent Contractors

The consequences of a misclassification of an employee as an independent contractor can be severe. The misclassification could lead to violations of the Federal wage and hour laws, which can make employers subject to back pay, double damages, civil penalties, and attorney’s fees, depending on whether it is discovered through a DOL Audit (we discuss how to reduce a DOL Audit here) or litigation. Additionally, Federal tax laws can make the employer subject to back taxes and monetary penalties.

When to Act? The Sooner, The Better

The sooner that the Company can assess whether its independent contractors are properly classified as employees, the better off the Company will be. This is because with each pay period that an employee is misclassified, the risk continues to grow and so do the possible penalties. Employers should not wait to correct these issues—because Federal agencies and threats of litigation are not waiting.

Time is Money: Facing Wage and Hour Issues -- Misclassifying Independent Contractors: Are You My Employee?

Recently, I saw an advertisement on LinkedIn from a law firm representing employees of ExxonMobil. The advertisement was trying to get more employees to join a class action lawsuit against the Company claiming that employees were improperly classified as independent contractors.

Something the lawyer said in the ad stood out to me: “Independent contractors are misclassified all the time.”

Unfortunately, the lawyer is right, the process of classifying workers as independent contractors is difficult, and we frequently see employers unintentionally misclassify workers who should be employees as independent contractors. And, as if the factors alone are not complex enough, the Federal agencies that establish these factors change them frequently, which only creates more confusion.

Agencies Working Hand-in-Hand to Crack Down on Misclassifications

In addition to the exposure to litigation, the Department of Labor and the Internal Revenue Service ended 2022 with a Memorandum of Understanding stating that they will increase and streamline the referral of independent contractor misclassification cases to each other. Both agencies have a special interest in these misclassifications because a misclassification not only impacts the benefits and compensation the employee receives, but it also impacts the taxes that the Federal government receives. With the increase in litigation and agency oversight, businesses must be extremely cautious when classifying a worker as an independent contractor.

Factors for Independent Contractor Status

Unfortunately for employers, the factors for determining whether a worker is an independent contractor or an employee depends on the agency you ask and the current White House administration.

DOL Factors

As a perfect example, the Department of Labor is expected to finalize soon a proposed change to the independent contractor factors to revert the factors to before the 2021 rule change issued during the end of the Trump administration.

The factors to be considered will be the same as they are now under the new test: (1) the nature and degree and control over the work; (2) the worker’s opportunity for profit or loss; (3) the worker’s investment in equipment or materials required for their task; (4) the amount of skill required for the work; (5) the degree of permanence of the working relationship between the worker and the potential employer; and, (6) whether the work is part of an integrated unit of production. However, the new rule will restore the totality-of-the-circumstances analysis and rescind the Trump Administration approach of giving greater weight to the first two factors. Practically speaking, the totality-of-the-circumstances approach has historically made it more difficult for employers to classify workers as independent contractors.

IRS Factors

In addition to the currently uncertain Department of Labor framework, the IRS provides a three-pronged test for the classification of a worker as an independent contractor or employee:

  1. Does the company have the right to control what the worker does and how the worker performs the job?
  2. Are the financial aspects of the work controlled by the Company? (i.e., the method of payment, whether expenses are reimbursable, and who provides tools)
  3. How does the relationship appear under the circumstances? (i.e. are there employee-type benefits like health insurance and vacation time? Will the relationship continue beyond the current job?).

These factors are a re-packaging of the former 20-factor test established by the IRS. If all three of these questions point to the employer controlling the worker’s job, the financial aspects, and the relationship, then the worker is likely an employee according to the IRS.

Consequences for Misclassifying Employees as Independent Contractors

The consequences of a misclassification of an employee as an independent contractor can be severe. The misclassification could lead to violations of the Federal wage and hour laws, which can make employers subject to back pay, double damages, civil penalties, and attorney’s fees, depending on whether it is discovered through a DOL Audit (we discuss how to reduce a DOL Audit here) or litigation. Additionally, Federal tax laws can make the employer subject to back taxes and monetary penalties.

When to Act? The Sooner, The Better

The sooner that the Company can assess whether its independent contractors are properly classified as employees, the better off the Company will be. This is because with each pay period that an employee is misclassified, the risk continues to grow and so do the possible penalties. Employers should not wait to correct these issues—because Federal agencies and threats of litigation are not waiting.