Employee Misclassification: Costly Mistakes for Employers

Are your employees properly classified? Two areas of misclassification that trip up employers and can cause costly problems down the road are misclassifying employees who are entitled to overtime, and misclassifying employees as independent contractors.

Overtime – Exempt v. Non-Exempt.

With certain exceptions, the Fair Labor Standards Act (FLSA) requires employers to pay overtime to employees who work more than 40 hours per week. The FLSA provides exemptions from the overtime requirement for employees in legitimate “executive,” “administrative,” and “professional” positions. To qualify for one of these exemptions, the employee must meet certain salary requirements and certain duties tests. Employees who are entitled to overtime are referred to as “non-exempt”; employees who are not subject to overtime are referred to as “exempt.” The Department of Labor enforces the FLSA.

Employers should know that when it comes to qualifying for an exemption, titles are meaningless as far as the DOL is concerned. If the employee’s job functions don’t meet the duties test, the employee is not exempt. And a carefully crafted job description that doesn’t match the employee’s actual duties isn’t going to cut it either. Likewise, if the employee’s salary does not meet the salary test, the employee is not exempt.

If a DOL audit determines that employees were misclassified as exempt, back wages in unpaid overtime can be a killer to the employer’s bottom line. Before classifying employees as exempt under the FLSA, make darn sure they qualify for the exemption.

Employee v. Independent Contractor.

Here’s how this one usually works: An employer terminates the services of an individual engaged as an independent contractor. The individual files for unemployment. The employer disavows any employment relationship based on the independent contractor status. This triggers an audit by the Texas Workforce Commission. And these days, as often as not, the individual, and any other similarly situated individuals, are found to have been misclassified. The employer is hit with back taxes, penalty and interest by the TWC; and possibly by the IRS, as well, through a corresponding audit. And if it is determined that misclassified employees worked more than 40 hours a week and were entitled to overtime? The DOL just jumped into the fray.

In an interpretive bulletin put out by the DOL under Obama regarding the misclassification of employees as independent contractors, the agency took an aggressive stance on the issue, concluding, “In sum, most workers are employees under the FLSA’s broad definitions.” The DOL under Trump has backed off a little, but employers are on notice. If you have individuals classified as independent contractors, or if you are thinking of engaging individuals as independent contractors, make darn sure they qualify for the classification.

By |2019-01-04T13:46:37+00:00July 2nd, 2015|HR, Human Resources|0 Comments

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