Risk & Business Magazine Lovitt & Touché Fall 2015 | Page 31

Intense Focus on Misclassification
Risks Resulting in Exposure to Employers

BY: MAGDALENA OSBORN, VICE PRESIDENT/GENERAL COUNSEL, LOVITT & TOUCHÉ

E

mployers working with volunteers or
independent contractors take heed,
the U.S. Department of Labor’s (DOL)
enforcement against misclassification
is booming. In 2010, President Obama
instituted the “misclassification
initiative,” targeting employers benefiting
from workers who were improperly
labeled as independent contractors
where federal law would consider them
employees. Just last year “wage and hour
division investigations resulted in more
than $79 million in back wages for more
than 109,000 workers in industries such
as the janitorial, temporary help, food
service, day care, hospitality and garment
industries.”1 Arizona’s department of
labor took a keen interest in investigating
misclassification in construction, which
in April of this year yielded $700,000
in back wages, damages, and penalties
assessed against 16 defendants in Arizona
and Utah.2
The misclassification initiative is a joint
effort between the DOL and the Internal
Revenue Service to enhance the ability of
both agencies to assess penalties against
non-compliant employers. The DOL is
also pursuing state partnerships (having
already entered into agreements with
26 states) to coordinate enforcement
and strengthen its ability to address
misclassification. Penalties assessable
against employers include back wages,
back taxes, future tax implications,
attorney fees, and, where plaintiff
proves the employer acted intentionally,
discretionary treble or punitive damages.

of employee benefits and protections.
Many non-profits have also experienced
exposure to substantial penalties
where volunteers would be considered
employees and those individuals were not
put on payroll. Federal law dictates that
volunteers and independent contractors,
who should be classified as employees,
cannot lawfully agree to forego employee
classification.

1 The extent to which the work
performed is an integral part of the
employer’s business

With heated litigation spreading across
all jurisdictions, the DOL recently
clarified its position on employer
compliance using existing law under
the Fair Labor Standards Act (FLSA).3
Employers are directed to follow
definitions already included in the FLSA,
and cautioned that common law or
other statutory classifications are not
controlling. FLSA’s definition of “employ”
is “to suffer or permit to work,” and
when reviewing whether a worker is an
employee or truly independent one must
consider the “economic realities” test
commonly used by courts. Amongst the
economic realities factors, the following
are generally considered by the DOL in
most circumstances:

4 The worker’s skill and initiative

2 Whether the worker’s managerial
skills affect his or her opportunity
for profit or loss
3 The relative investments in facilities
and equipment by the employer and
worker
5 The permanency of the worker’s
relationship with the employer
6 The nature and degree of control by
the employer
Although the FLSA and economic
realities test are nothing new in our legal
landscape, the DOL’s recent guidance is
a strong reminder of the government’s
intense focus on misclassification and
resulting exposure to employers.

Endnotes
1 www.dol.gov/whd/workers/
misclassification/#resources
2 www.dol.gov/opa/media/press/whd/
WHD20150518.htm
3 www.online.wsj.com/public/resources/
documents/InterpretMisclass.pdf

The recession brought with it an increase
in independent contractor jobs as a way
for business owners and individuals
alike to cope with the drastic decline
in the job market. In 2013, 30% of the
workforce (7.7 million people) reported
being self-employed. Estimates indicate
by 2020, 40% of the workforce may
be self-employed. The government is
concerned that this undermines U.S.
economy, results in underpayment of
taxes, and deprives misclassified workers

RISK & BUSINESS MAGAZINETM FALL 2015

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