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Be Careful How You Classify Workers

DesignerWhat exactly is an independent contractor? The government’s new interpretation has several ramifications for floral business owners.

The U.S. Department of Labor (DOL) has quickly followed its proposed rule to expand the number of workers eligible for overtime pay, with a new interpretation of who can be classified as an independent contractor. If you fail to comply with the new definition and misidentify workers, you could become a target for DOL investigations and vulnerable to lawsuits.

On July 16 the DOL Wage & Hour Division Administrator issued “Administrator’s Interpretation No. 2015-1” (AI) on the application of the Fair Labor Standards Act (FLSA) for identification of workers who are misclassified as independent contractors.

The AI states DOL’s unequivocal opinion that “most workers are employees.” This may sharply limit many businesses’ use of independent contractors, transforming these workers into W-2 employees covered by Social Security, Medicare, benefits, FMLA and other rights. The new interpretation could lead to more private litigation as well as increased DOL investigations and enforcement actions.

To determine whether a worker is an employee or an independent contractor, the DOL will evaluate the worker’s “economic independence.” Is the worker truly in business for him or herself, or does he or she rely on the employer for whom he or she provides services?

Reclassifying workers as employees rather than independent contractors has many effects, including compliance with the FLSA (record keeping, minimum wage and overtime), tax withholding, payroll taxes for Social Security/Medicare, unemployment compensation and workers’ compensation. There’s also inclusion in group health insurance plans and ACA issues, ERISA-covered retirement plans, eligibility for FMLA, leave and other benefits, calculation of leave entitlement, eligibility for meal and rest breaks, reimbursement for business expenses, immigration compliance, plus statutes such as Title VII, ADEA, the ADA, other anti-discrimination laws, and a host of state and local laws that traditionally do not cover independent contractors.

One significant issue that will require ongoing analysis is that, even if employers change their use of independent contractors, the risk of various liabilities from prior practices still remains.

For business owners concerned that some in their workforce will now be deemed employees, the safest course of action is to work with legal counsel to determine the proper course of action.

SAF members can contact attorney Paula Calimafde (Kal-i-MAF-da) for a free 15-minute consultation on this and other small business legal matters. She can be reached at (301) 951-9325. Be sure to mention your SAF membership.

For a more in-depth explanation of this decision, see the latest Week in Review newsletter.

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