Small business owners may classify their employees in a certain manner for a number of reasons. For example, employing independent contractors often frees up some capital in the form of benefits and other employer responsibilities. However, many states have regulations regarding the classification of employees, and doing so incorrectly could open your business up to penalties and other potential consequences. Minneapolis based attorney Nancy Vollersten of Lindquist and Vennum LLP is an expert in employment law. Here, she offers advice on how to correctly classify your employees.
In what instances is it appropriate to classify an employee as an independent contractor?
An independent contractor is a worker over whom the company exercises little control over the method and manner in which the worker performs his or her job. Several tests are applied to determine whether a worker is actually an employee, including whether there is a mutual written agreement, whether the parties are at risk for non-performance, how the worker is paid for his or her services, among other factors. Independent contractors are generally responsible for paying their own workers compensation, liability insurance, and taxes. The federal government, specifically the Department of Labor and the IRS, as well as many states, are participating in a misclassification initiative under which they are aggressively seeking out employers who have failed to properly classify workers, auditing and fining them. Since the requirements for exempt status or non-employee status are very precise, employers should obtain legal advice before assuming that federal and state employment laws do not apply to their workers.
Why do many small business owners inappropriately classify their employees?
Many businesses, large and small, misclassify their workers either out of ignorance of the law, and its new interpretations, or on the mistaken belief that they can mutually agree with the worker not to apply the law. Workers often believe that being exempt confers a certain status and resent the record-keeping restrictions that come with being non-exempt. Some business owners believe that they can control their costs better if they pay by the job rather than by the hour, and can avoid costly overtime.
What are some of the potential consequences of having employees classified incorrectly?
Governmental agencies may audit companies, find misclassification and hold companies responsible for back payment of employment taxes, minimum wages, overtime pay, unemployment benefits and contribution to benefit or pension plans, in addition to fines, interest and penalties. Noncompliance can be very costly, and companies may not reach private settlements directly with employees to waive these claims.
How can a new entrepreneur ensure that their employees are classified correctly?
The best way to ensure proper classification is to seek advice from your legal advisor, providing detailed description of the worker’s actual duties. Classification cannot be made by job titles alone, nor is there any website that offers definitive information. Obtaining the correct information up front is much less expensive than defending an unwanted government audit.
Nancy Vollertsen is a Minneapolis based lawyer who often represents employers and executive-level clients. She regularly provides counsel on employment-related issues, including FMLA, ADA, and FLSA, prevention and defense of discrimination claims, employee discipline and termination, and other claims and litigation issues. Nancy is also a recognized speaker on employment law and regularly speaks to companies, trade associations, human resources professionals and employment lawyers throughout the country. She has shared her expertise, writing many articles on employment law topics, and she co-authored An Employer’s Guide to Employment Law Issues in Minnesota.
This article was written by Alaina Brandenburger for Small Business Pulse