WORKER CLASSIFICATION

Employee misclassification is getting to be a big deal for the government and a bum deal for businesses. Back in 2000, Microsoft paid $97 million, plus legal fees, in a benefits dispute with its long-term temps. More recently, FedEx shelled out $228 million. And then there’s Uber, which just lost in a dispute over whether drivers were independent contractors (as Uber maintained) or employees (as the law determined). In short, this stuff matters.

Here are ten moves that increase your likelihood of ending up in hot, expensive water.

 

1. Letting contractors decide how they get paid

Businesses have the burden of responsibility here. Do your due diligence with each worker to determine their status and whether they should be paid via W2 or 1099.  Our worker classification quiz can help you identify your workers. When in doubt, engage someone with the expertise to guide you through it.

 

2. Doing something the way you’ve always done it

Similar to the above, if the law says it’s not okay, you will be held accountable—no matter how long you’ve done it without problems.

 

3. Not making sure workers are properly insured

When stuff goes wrong, you’ll be glad you took the extra effort. That goes double when there’s a lot of expensive gear around, which tends to happen frequently in the media industry.

 

4. Thinking you can eliminate risk by hiring an agency

Engaging a partner company with the right expertise is hugely beneficial and will help ensure that your business is on the up and up. But, the co-employment risk still exists. It’s still in both you and their best interest to know and implement the rules around worker classification.

 

5. Following the industry norm

Take a lesson from sibling dynamics here: The kid who gets caught doing the crime does the time—even if the sibling does it all the time undetected. Just because you or and you’re associates haven’t been caught with misclassified workers doesn’t mean you won’t be eventually. 

 

6. Downplaying the hype

The government has a lot of money at stake here. It’s in the news a lot for a reason and it’s not going away. Don’t ignore the rules because the government isn’t ignoring them either. 

 

7. Assuming day rates are compliant with the law

Although common in the video production industry, day rates aren’t always as simple to apply as they seem. It takes a lot of time and a complex system to monitor day rates and other compliance loopholes in every city and state.

 

8. Overlooking details of exempt vs. non-exempt

Workers are often called exempt when they should actually be paid hourly according to federal, state, and (sometimes) local law. Again, it’s hard to keep track of. Either invest in doing worker classification right the first time or cut a check to the IRS. 

 

9. Thinking this process is clear cut

The government provides guidance, but rules are ever-changing and never 100 percent clear. Asking a few questions and counting the checkmarks in the 1099 or W2 columns isn’t enough to ensure you classify someone correctly. If you are not an expert, you really need a partner. Engaging someone with specific industry experience who has endured audits is invaluable.

 

10. Forgetting that courts often rule on the side of the worker

The system is heavily weighted on behalf of the worker and the burden remains on the employer to do things right.

Yes, it’s important. Yes, it can be a pain. But there’s no need to cut the cord on independent contractors. Keep your worker classification processes at the front of your business priorities or hire a team that can handle your contingent workforce from onboarding through payrolling. 

 

Interested in learning more about worker classification? You’re in luck, we’ve got a whole series here.

 

About PayReel

Producing multimedia content and executing live events is chaotic. At PayReel, we make sure our clients are able to hire who they want when they want and that everyone is paid properly. Leave the details up to the PayReel team so you can focus on pulling off a flawless production. Contact us anytime at 303-526-4900 or by emailing us here.

Relax. We got it.

 

With the rise of the sharing economy, workplace compliance issues are surfacing at an alarming rate. Uber and similar enterprises have been at the forefront of news on the subject of late, but the IRS is expanding its attention. And when the IRS pays more attention to this topic, companies need to do the same or risk costly, damaging, and time-consuming consequences.

Here are five reasons you can’t ignore the rules:

1. Because the government isn’t ignoring it:

For years, government regulations have been lax, leading to the equivalent of a jaywalker’s attitude among businesses. The thought is that it’s okay to ignore the unnecessarily-restrictive law as long as you look both ways.

But as independent contractors rise in prevalence, the financial stakes for the government get higher. In response, government agencies have been ramping up their focus on the subject, not ratcheting down.

According to this white paper, in addition to the Internal Revenue Service (IRS) and U.S. Department of Labor’s attention to the matter, state task forces have been formed to “crackdown on businesses that do not pay unemployment insurance and workers’ compensation premiums or that withhold taxes for workers whom states claim to be employees and not independent contractors.”

2. Consequences are Expensive

There’s big money at stake. In addition to potential back pay for benefits, you’re looking at a per employee fine and potential legal fees, too. FedEx knows: They just shelled out $228 million in a mislabeling case. You can ask Microsoft who paid $97 million, plus millions in legal fees in a benefit dispute with its long-term temps, too. And most recently, there’s Uber which just lost in a dispute over whether drivers were independent contractors (as Uber said) or employees (as the law determined).

3. Here come the lawyers

Where the money goes, the lawyers follow.

According to the same source, it’s not just the government in the game, “Class action lawyers continue to target some of those same types of companies, seeking unpaid employee benefits, expenses and overtime for workers who are not treated as employees.”

Just when you thought government scrutiny was driving you crazy enough.

5. Because “We didn’t mean to” doesn’t hold up in court

When you knowingly misclassify employees as independent contractors, it’s called wage theft. When you do it accidentally, it’s called wage theft.

Yes, the rules are confusing. And like many things government, oh what a tangled web the federal and state laws weave. Some laws are interpreted differently from state to state and some tests used to determine status are subjective.

But there are some consistent contributing factors. For 20 relevant factors in considering status (straight from the horse’s mouth), see the IRS’s Present Law and Background Relating to Worker Classification for Federal Tax Purposes. It’s a good place to start.

5. Consequences to Credibility

In addition to the financial burdens and time-sucking nature of it all, your credibility is on the line. Getting audited is a PR nightmare and depending on the industry or nature of the client company’s business, the press would love to expose a company’s misclassification and actual or perceived abuse of labor laws.

Getting the government, lawyers, and media on your case is a guaranteed trifecta of pain.

It can be overwhelming, but even the chief misclassification enforcement officer of the federal government (Dr. David Weil, Administrator of the Labor Department’s Wage and Hour Division) recognizes there is a legitimate place for independent contractors, saying “the use of independent contractors [is] not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy.”

The best way to stay in the clear is to stay in the know. So get smart and there’s no need to burn your W9s and run for the hills.

See our intro post for a nutshell version of what worker classification is and why it matters to the IRS.

Need more?

Worker Classification: What’s the Problem And Why Should You Care?

Classifying Employees and Independent Contractors (A Cheat Sheet/Resource List)

About PayReel:

PayReel’s clients, who are some of the biggest companies in the world, are constantly immersed in the chaos of producing multimedia content or executing live events. PayReel makes sure they have the right contractors at the right time in the right place, and that everyone gets paid properly. And, most importantly, they handle every last detail perfectly while making sure their clients think nothing of it, so they can get back to doing what they do best.

Employee misclassification (noun):

1. The kiss of death for companies.

See also: Number one on the IRS’s list of least favorite things.

The National Conference of State Legislatures provides an alternative description here: “Employee misclassification is the practice of labeling workers as independent contractors, rather than employees.”

As the shared economy blossoms and remote work becomes the new normal, independent contractors are on the rise. This is great for businesses and certainly for workers, too.

Businesses like using independent contractors because they’re affordable (no need to pay for health insurance, 401Ks, and other benefits) and they can hire à la carte for just the services they need, whenever they need them. Likewise, many workers prefer the autonomy of contracting, including flexibility in their schedules and the ability to work with a variety of companies on a variety of projects.

For the same reasons though, the IRS finds the rising trend troublesome. For employees, businesses are equipped to make sure they stay in line with labor laws, benefits, worker’s comp, unemployment insurance, and of course, tax withholding. Independent contractors, on the other hand, can operate in the wild, wild west of legal lands. They may or may not pay taxes properly, they may overstate their deductions, and they are just harder to keep tabs on (all of which are among the IRS’s least favorite things).  

There are legitimate independent contractors and businesses who employ them properly, but misclassifying an employee as an independent contractor can be incredibly damaging, costly, and time-consuming. Just ask Uber and FedEx.

If you haven’t paid attention to it yet, it’s time.

Need more?

Worker Classification: What’s the Problem And Why Should You Care?

Worker Classification: Five Reasons Small Businesses Can’t Ignore Compliance Rules

Classifying Employees and Independent Contractors (A Cheat Sheet/Resource List)

About PayReel:

PayReel’s clients, who are some of the biggest companies in the world, are constantly immersed in the chaos of producing multimedia content or executing live events. PayReel makes sure they have the right contractors at the right time in the right place, and that everyone gets paid properly. And, most importantly, they handle every last detail perfectly while making sure their clients think nothing of it, so they can get back to doing what they do best.