In a continuation of the summer of change for employers in the United States, the Department of Labor has issued new guidance for businesses to understand how to correctly classify employees and independent contractors. In their words, "Misclassification of employees as independent contractors is found in an increasing number of workplaces," and because of this, the new guidelines may make it seem as if it's harder than ever to justify an independent contractor designation. This perception is accurate, and intentionally so - the government wants businesses to stop skirting taxes and liability that they should rightfully be taking on, and has done so by removing some of the ambiguity present in previous guidance.
Bearing this in mind, I thought it a great time to provide a few reminders to employers when considering how to classify workers.
1. Wanting a job to be a contractor position is not sufficient reasoning.
Frankly, it's not even a factor. There are plenty of great reasons that companies may want to make more of their labor population contractors. There is a lower tax bill, lower worker's compensation costs, and less risk of having to bear unemployment liability when they are no longer needed. Some employees even prefer it, although I only know a few. My repeated advice is that the classification of the individual is a function of the role and the relationship of the worker to the business.
2. It's much safer to classify someone as an employee.
From the perspective of the Department of Labor, to err on the side of caution is to consider the worker an employee, as it affords better protections and puts more money in state and federal coffers. If you later find out that the relationship was truly as an independent contract it's more easily rectified, but the idea of that happening is unlikely when you consider what a proper evaluation of a job entails. The guidance issued yesterday states that a worker that is "economically dependent" on a company (not in business for themselves) is not an independent contractor.
3. The advice of a qualified professional is invaluable.
You could chalk this up to a plug for my professional field, but decisions like these should not be considered lightly if you are choosing to designate workers as contractors. The result of a misclassification can be costly, including back taxes, triggered audits and penalties. Get an experienced HR practitioner or employment attorney to give you their opinion. I often tell business owners, you can pay up front or you can pay later, but paying later is usually more expensive.
4. Proper classification is good for your business.
This issue falls into a category that we often call "hygiene factors." You can offer fun perks, have great managers and a welcoming environment, but if an employee feels they aren't getting the very basics out of a job - including proper pay for work performed - your employee engagement, and therefore your productivity, will always be capped. Taking the time to invest in your workers and ensuring the infrastructure of your human capital management is sound will pay dividends in the future.
With this new guidance, take the time to review your worker population and consider whether an internal review might not be a bad project. It is not an outlandish idea that new scrutiny of these rules could mean a growing trend of audits for businesses.