Employee Classifications Being Closely Examined

By Katie Fischer, PHR, HR Generalist, Human Resources, Iowa Bankers Association

Group of unidentifiable business peopleThe misclassification of employees as independent contractors is gaining attention from federal and state  authorities as they partner up under the Department of Labor’s Misclassification Initiative.

In 2011, the Department of Labor (DOL) signed a Memorandum of Understanding (MOU) with the IRS, allowing the agencies to work together and share information to reduce incidence of misclassification of employees. Earlier this year, Iowa became the 14th state to create a state level partnership between the DOL’s Wage and Hour Division and Iowa Workforce Development with the intent to ‘protect the rights of employees by preventing their misclassification as independent contractors by employers.’

When the DOL and Iowa Workforce Development announced their agreement to work together, Mary Beth Maxwell, acting deputy administrator of the Wage and Hour division commented, “This memorandum of understanding sends a clear message: We’re standing united to end the practice of misclassifying employees.”

Independent Contractor or Employee?

The IRS and DOL look at several aspects of the employment relationship when determining employee or independent contractor status including, but not limited to, the amount of control that the employee has over how the work is completed, how and what types of compensation are provided to the worker, and any written contracts or employee benefits provided.

Why the initial attention on independent contractors?

Independent contractors are estimated to make up 7.5 percent of the U.S. workforce and improperly classifying them creates two significant issues – it leads to substantial revenue loss for the government through lack of payments in unemployment, Social Security, Medicare, and other employment taxes; and it denies those who should be classified as employees from having access to benefits, and receiving unemployment and overtime pay.

Agencies are Taking Action

This spring, the IRS announced an expansion to its amnesty program to allow eligible employers the  opportunity to correct the status of misclassified workers a lower cost option. While this provides an opportunity for the employer to resolve the issue with the IRS, it may open the door for a more comprehensive examination by the DOL because of the MOU that is in place.

While the initial focus of the Misclassification Initiative is on correcting misclassification of independent contractors, the DOL is taking steps to educate employees on what their employment status means through their ‘Know Your Rights’ campaign, which covers exempt and non-exempt status among other areas. This campaign provides easy access to information for employees to familiarize themselves with employment laws and their rights under the Fair Labor Standards Act. There’s even a DOL Timesheet app for iPhones to help employees calculate their pay and understand how to file a complaint if they aren’t being compensated properly.

Educating Consumers about Employment Violations ?

Taking this a step even further, the DOL just announced on July 9 that in conjunction with the 75th anniversary of the Fair Labor Standards Act, they’re launching a smartphone app contest to develop a tool for consumers to use. The goal is to empower the public with information on how employers treat their workers so they can make more informed choices.

As the employment classification landscape gains complexity and publicity, it’s important for all employers to understand and apply the laws consistently. Visit www.dol.gov/whd/ or www.irs.gov for additional information on employment status definitions, or contact a member of the IBA human resources team.

Katie Fischer, PHR, is an HR Generalist at Iowa Bankers Association and can be reached at (515) 286-4252 or kfischer@iowabankers.com.

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