The federal government has been cracking down on companies' use of independent contractors in recent years. The problem, according to government officials, is that employees receive certain benefits and rights that contractors do not, and companies that skirt the independent contractor rules are taking unfair advantage.
In fact, the Labor Department recently issued new guidance that could make it even more difficult for companies to classify their workers as independent contractors.
"When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as minimum wage, overtime compensation, unemployment insurance benefits, and workers' compensation insurance benefits," David Weil, head of the Labor Department's Wage and Hour division, wrote in a recent statement about the new guidance. "Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers."
Some companies have faced hefty penalties due worker misclassification. Paul Johnson Drywall, a construction labor contractor in Phoenix, Arizona, was forced to pay $556,000 in back wages to 445 current and former employees and $44,000 in civic monetary penalties after a government investigation found that the company had misclassified its workers and disobeyed overtime and recordkeeping rules, according to a government news release.
The threat of being caught has convinced some businesses to take preemptive steps to ensure they are in compliance when classifying their workers.
The Yoga Workshop in Sacramento, California recently changed its ownership structure. Several yoga studios in California have gotten in trouble for classifying their instructors as independent contractors. So Yoga Workshop owner Erin Ross decided to turn her studio into a "yoga co-op," according to the Sacramento Bee. Instead of paying her instructors per class they teach, Ross now charges her instructors $25 to $45 per class. The instructors then schedule and market their own classes and keep the fees they collect from their attendees.
Another Sacramento yoga studio, Yoga Shala, took a very different route: it recently classified all of its yoga instructors as employees and put them on staff, according to the Bee. This will allow the studio to dictate its instructors' hours and continue its business model
Companies in other industries are taking even more creative steps to avoid non-compliance with the applicable laws. Instacart, an Internet-based grocery delivery service, was sued by workers who claimed they were misclassified as contractors when they should be employees. The company recently began allowing its "personal shoppers" to decide whether they want to be classified as employees or contractors.
Companies are wise to be careful about adhering to the applicable regulations and DOL guidance. Misclassification of an individual can result in fines, penalties, and payment of back taxes as well as owed minimum wage or overtime payments for any individuals determined to be employees.
To determine whether a specific worker should be classified as an employee or a contractor, a company needs to consider all aspects of the relationship between the employer and the worker. Read more about how to determine whether a worker may be an independent contractor or an employee.