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Worker Misclassification

David C. King

Author – David C. King, President & CEO, Horst Insurance [1]
Posted – August 13, 2015

A recent “Administrative Interpretation” (No. 2015-1) by the U.S. Department of Labor Wage and Hour Division will have a broad reaching impact on every business that uses “independent contractors” to perform certain work or services.  The Administrative Interpretation (AI) process unfortunately requires no public comment period and seldom seeks outside input from the constituencies it impacts.

AI 2015-1 addresses the DOL’s concern over what it believes is widespread abuse by businesses labeling certain workers as “independent contractors” instead of calling them what the DOL believes they, in fact, are – employees.  As you know, Horst Insurance has always maintained concern over this same topic.  We have addressed this issue extensively in the resources we provide our clients and the advice we offer.  However, unlike the new DOL position, we have always felt that the previous “tests” an employer could use to determine the employee vs. independent status was adequate and fair.  Until now, an employer had 16+ tests or indicators to determine if an independent was truly independent.  Clearly the DOL didn’t like those tests and, as the opening paragraph in AI 2015-1 states, it is believed that the current trend is that “some employees may be intentionally misclassified as a means to cut costs and avoid compliance with laws”.

An analysis by The Independent Insurance Agents Association reports that AI 2015-1 will “drastically limit the ability of businesses to classify workers as independent contractors”.  And, the impact of this drastic shift by the DOL doesn’t have to wait for approval or regulations to be written.  Instead, its impact is immediate and will guide DOL investigations and enforcement actions currently underway and into the future unless turned down by future court tests (which could take years).

Our advice – throw out every test you have used in the past to justify “independent status” and consider re-evaluating using the new guidelines, at least for now.  If you don’t, and the DOL shows up at your doorstep, worker misclassification can and will cost you in damages and fines associated with unpaid overtime, failure to remit Social Security Taxes and Unemployment Taxes, as well as all sorts of issues with FMLA, the Affordable Care Act, ERISA and workers’ compensation.  Particularly troubling is a statement from the DOL that they have “entered into memoranda of understanding with many of these states, as well as the Internal Revenue Service”.  This likely means that enforcement actions from the DOL will be communicated to all agencies that might have an interest in each case.

The DOL’s new interpretation relies heavily on three core tests:

  1. Whether the work is an integral part of the business;
  2. Whether the workers’ managerial skills affects his or her opportunity for profit and loss; and
  3. The relative investments of the business and worker.

The DOL is clear that a worker who performs work that is integral to a business is more likely to be an employee, not an independent.  It is also felt that a worker’s managerial skills should also be a factor and whether or not they have the ability to sustain a profit and loss generating business outside of the work they perform for you.  If they can’t run a business for a profit without your work, they are likely an employee.  Finally, if the worker’s investment in their own business is minimal and requires little or no capital investment compared to your own capital requirements, it is likely that the worker is an employee.

While AI 2015-1 does contain some language similar to several “old” tests you could perform, troubling is the fact that most hold-over tests have been purposefully minimized.  Remember the old question of “control” – who is controlling the workers, well the DOL still instructs its field investigators to consider this a factor, but they make clear that “the mere opportunity for control is not a compelling factor for classifying a worker as an independent contractor”.  And, the old “opportunity for work elsewhere” test also remains, even though the DOL makes clear their opinion that an “independent” who works primarily for a single business is likely an employee.

Forgetting all the IRS, ACA and ERISA issues this new interpretation creates, let me close with a strong reminder of why this issue has always been an area of concern for the team at Horst.  If an independent contractor is deemed to actually be an employee, whether by DOL ruling or in workers’ compensation court, their injuries while working for you can and will be paid under your workers’ compensation policy!  Furthermore, and especially under AI 2015-1, the chances of your workers’ compensation year-end audit resulting in assessments for every uninsured “independent contractor” rises dramatically.  Workers’ compensation carriers do not want to pay claims to your injured independents as they have not collected premium to cover such exposure.  Their only solution, confirm that you have certificates of insurance on every independent, and those certificates of insurance MUST show that workers’ compensation and general liability coverage is in place.  Without a certificate in hand, we believe most carriers will be more aggressive at penalizing you by adding the “cost” of independents to your payroll amounts in order to cover what has likely just become a huge additional claim exposure under AI 2015-1.