Honest Mistake or Risky Decision?

After the recent announcement of a multi-million-dollar settlement involving the misclassification of workers, experts say HR needs to create effective processes to help ensure workers are appropriately classified.

Tuesday, July 14, 2015
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Rumor has it that the U.S. Department of Labor will soon issue new employer rules for classifying workers as either employees or independent contractors. Roughly 10.3 million people in this country work as ICs in all sorts of jobs, from truck drivers to IT specialists, according to the latest figures from the 2010 U.S. Census.

Although the DOL and IRS have posted online tips and tests on how to distinguish between the two types of workers, misclassifications still occur-sometimes intentionally.

Reasons vary, ranging from time constraints-i.e., I need someone now-to budget freezes. ICs cost less than traditional employees because employers don't pay independent contractors' employment taxes and benefits.

Some attorneys and HR consultants believe that workers will file more class-action lawsuits over their employment status and, to avoid losing billons of dollars in uncollected tax revenue, state and federal governments will crack down hard on employers that misclassify workers. Either way, HR should never be on the wrong end of the stick, and needs effective processes in place to help ensure workers are appropriately classified. decisions can be costly for organizations. Indeed, last month, FedEx Ground reached a $228 million settlement in Alexander v. FedEx Ground Package Sys., Inc. in which approximately 2,300 drivers believed they were misclassified as ICs and sued for back pay and benefits.

Last August, the Ninth U.S. District Court of Appeals ruled that ICs who entered into operating agreements in California from 2000 through 2007-and also in Oregon from 1999 to 2009-were indeed employees under those states' laws.

Over recent years, the delivery giant has engaged in other legal battles. It lost cases in Illinois and Massachusetts, settled cases with state attorneys general in Montana and Massachusetts, but won before the IRS and under the state law of Kansas and the federal National Labor Relations Act, according to Mondaq, a global resource for legal, financial and regulatory information.

According to a prepared statement by FedEx:  "...[W]e disagree with the court's interpretation of California state law . . .[T]he contractor agreement that was reviewed by the Court of Appeals is no longer in use. Since 2011, FedEx Ground has contracted only with incorporated businesses that agree to pay all applicable taxes and insurances and treat their drivers as their employees. . . ."

Since then, some states have begun adopting "hyper-aggressive" positions against companies regarding the employment status of their workers, explains Eric Rumbaugh, partner at Michael Best & Friedrich law firm in Milwaukee.

He points to three driving forces behind the government push: the need to collect more tax revenue, because not all ICs pay their fair share of quarterly taxes; the assumption that ICs are being deprived of workplace protections offered to employees; and the influence of organized labor, as ICs can't be unionized.

Still, many ICs don't need or want to be saved. Last May, the U.S. Government Accountability Office published a report called the "Contingent Worker and Alternative Work Arrangement Supplement." It analyzed contingent-worker data from multiple, national survey data sources. Among its findings were that most ICs-85 percent-would not prefer a different type of employment arrangement and more than half-57 percent-were very satisfied with their job.

"One of the things that's buried in this GAO report is that worker satisfaction is actually higher for some ICs [higher wage knowledge workers]", says Rumbaugh, when comparing ICs to traditional employees. "The laws are funneling people into employee relationships that don't make sense in a drive to protect workers who don't want [the protection]."

Rumbaugh expects the new classification rules to be tighter, leaving little wiggle room for workers to be classified as ICs.

Meanwhile, he suggests HR audit a sample of workers to determine if and where its classification system breaks down.

"When you do your audit, you'll find pain points in your system," he says, adding that a common misclassification occurs when hiring managers are confronted with rush projects and can't engage in a lengthy determination process. "Find the underlying reason why people are being misclassified."

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Likewise, when jobs are initially created, HR can target those intended for ICs, train hiring managers on how to distinguish ICs from employees and explain the consequences of misclassifications, adds Mark Scott Bagula, partner at Olins Riviere Coates and Bagula in San Diego.

The focus, he says, should be on control. 

"The more control you have over the work and worker, and manner and means , in which the job is done, the more likely you're going to have yourself an employee," he says.

Still, some HR professionals are risk-takers or pursue less conservative approaches, searching for exceptions to the law. In such scenarios, he says, they need to realize they're making a conscious choice to not only increase company profits in the short run, but also risk losing them.

"I have represented employers where decisions like this have put them out of business," Bagula says.

Some employers centralize their classification function where HR, talent acquisition or procurement make IC determinations.

But everyone must know about the process, as well as understand why it's in place and support it, says Michael Yinger, leader of Aon Hewitt's global recruitment process outsourcing delivery practice in Charlotte, N.C.

"It takes the decision-making out of [employees'] hands and therefore, takes the risk away from the company," he says. However, annual reviews are needed because IC responsibilities can change over time, thus converting their employment status to hourly workers.

"It can turn into [ICs] taking part in the business [performing] usual activities, as opposed to well-defined projects, which keep you out of hot water."

In some cases, Yinger believes companies are not only pushing the envelope, but also their luck. All it takes is a disgruntled employee to blow the whistle.

"[HR] has to be upfront about this, willing to take it on," Yinger says. "HR knows what it needs to do."

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