Worker Classification Errors: A Ticking Time Bomb

Posted by John Cofini on Tue, Jul 31, 2018 @ 06:54 PM

worker-classificationUber can’t catch a break. On July 13, the popular ride-sharing service was ordered by New York State’s Unemployment Insurance Appeal Board to provide unemployment benefits to three drivers and others “similarly situated.” In 2016, the company agreed to a settlement of $84 million to $100 million for hundreds of thousands of California and Massachusetts drivers who were fighting for employee status and applicable benefits. And just last November, the company lost an appeal of a London decision ordering it to pay minimum wage and paid time off to drivers.

But Uber is hardly alone. In 2017, California-based Ecolab was slapped with a whopping $6 million settlement for alleged misclassification of 158 employees. And these are just a handful of the exploding number of employment practices liability (EPL) claims in recent years.

These decisions are rapidly changing the game for employers in today’s growing “1099 economy.”

As federal scrutiny of worker classification continues to heat up, more states are passing laws requiring employers to prove their independent contractors aren’t actually employees. And it’s an issue that cuts across industries as diverse as construction, restaurant delivery, building maintenance, agriculture, and childcare.

It all boils down to how Uncle Sam defines one simple word.

In 2015, the Wage and Hour Division of the U.S. Department of Labor (DOL) concluded that under the definition of “employ” in the Fair Labor Standards Act (FLSA), most workers are employees, not independent contractors. Recent court decisions and evolving federal agency guidelines have only bolstered that position.

For employers, that means the employment practices liability landscape is becoming more fertile all the time for claims, especially wage and hour (W&H) claims. And the financial risks can be staggering. Misclassifying a worker can cost you in so many ways, including:

  • Unpaid tax withholdings
  • Back pay and employee benefits
  • Disability and workers’ comp benefits
  • Federal and state fines and penalties
  • Costly W&H liability settlements

Worker classification errors can literally cost your company millions, and the costs are not just monetary.

Employee misclassifications can ruin you financially. But they also rob workers of rights and benefits. And when done intentionally to reduce labor costs and avoid paying state and federal taxes, they create unfair competition for law-abiding employers.

How do you ensure proper classification? Unfortunately, there’s no single litmus test. For instance, the federal tax law test is different from the test under the FLSA. But the key ingredient is how much control you have over the worker. If you outline the scope of work but have no control over how the person gets the work done, that person is likely an independent contractor. In Uber’s case, the board decided the company’s recruitment, training, and supervision practices required classifying the claimants as employees.

Diffusing the ticking time bomb

This new “sharing economy” isn’t going away anytime soon, so here are some tips to help you manage this risk:

  • Classify cautiously. Know the laws and regulations that apply to your operation.
  • Create a consistent system to decide who is an independent contractor.
  • Always use independent contractor agreements.
  • Require contractors to carry insurance.
  • Document all interactions with independent contractors just as you would with an employee.
  • Get the right insurance.

The right financial protection is crucial. EPL and W&H Liability insurance can help you diffuse the ticking time bomb by making sure you’re covered for defense costs, settlements, judgments, plaintiff attorney fees, and sometimes even civil and statutory penalties. W&H liability insurance also covers claims for actual or alleged violations of the FLSA or similar state laws.

With contract work and EPL claims both on the rise, the risks will only continue to grow. Are you fully protecting your business? See the team at BNC Insurance & Risk Advisors to find out.

Tags: worker classification