Staffing Management

Worker misclassification leads to $358K penalty for home health care provider

By Rick Bell

Apr. 29, 2021

Fifty workers were misclassified as independent contractors by an Oliver Springs, Tennessee, home health care service provider and received $358,675 in back wages to resolve overtime violations found in a U.S. Department of Labor investigation.

The department’s Wage and Hour Division determined Servant’s Quest, which provides at-home health care services for the ill and elderly, violated Fair Labor Standards Act requirements by failing to pay overtime to caregivers that the employer misclassified as independent contractors rather than employees.

According to a Labor Department statement, the employer then paid the misclassified workers straight-time wages for the hours they worked in excess of 40 in a workweek under the pretense that as independent contractors, overtime rules didn’t apply to these workers.

“The misclassification of employees as independent contractors cheats workers out of wages and benefits they are entitled to under the law, hurts other employers who play by the rules and subsequently hurts our economy,” said Acting Wage and Hour Division District Director Kenneth Stripling in Nashville, Tennessee.

Determining worker misclassification

While there aren’t a lot of facts in the Labor Department’s statement to draw specific lessons from this case, Aimee Delaney, a partner in the Chicago office of law firm Hinshaw & Culbertson, said employers should evaluate whether it has employees on payroll that are performing the same work and function as the independent contractor. A good follow-up to that question is will the independent contractor be performing the main work of the business.

“Answering these questions in the affirmative is usually a sign of trouble,” Delaney said. “So if I run a home health business and have a staff of 25 home health workers but want to bring on three more as independent contractors, you are probably well on your way to misclassification.”

Delaney said the home care and home health industry can suffer from labor shortages. While trying to use independent contractors to address a shortage of workers may be tempting, it can also be risky, she said.

“Staffing agencies would be a better resource in that scenario, as it avoids the misclassification issue,” Delaney said. “You may not be able to avoid a joint employer issue, but at least you should avoid the misclassification issue.

Misclassification leads to financial losses

According to the Labor Department, employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds.

Many employers erroneously classify workers who should be employees as independent contractors because of the opportunity for significant tax savings. One study projected that rampant misclassification and off-the-books employment in the construction industry cost Nevada nearly $50 million in revenue in 2018, including $31.1 million less for the workers’ compensation fund and $11.8 million less for the unemployment insurance fund.

 Delaney provided her insights into employee misclassification issues and compliance in this Q&A with Workforce.com.

Workforce.com: What exactly is employee misclassification?

Aimee Delaney: Misclassification is a term that is used when an employer incorrectly identifies an individual or position as an independent contractor when the individual is really an employee. Independent contractors are not subject to state and federal wage laws, which means they are not entitled to overtime if they work over 40 hours in a week. An employer does not have to pay the employer portion of payroll taxes and does not make withholdings for an independent contractor. An independent contractor is also not entitled to benefits such as workers’ compensation or unemployment benefits from the organization that the individual contracts with. These circumstances can motivate employers to try to classify individuals or positions as independent contractors when, in reality, the individual is an employee and thus, misclassified. Misclassification does not require bad intent to be a violation, so even if it was an honest mistake it can still present a violation of law.

Workforce.com: How do employers typically classify a permanent employee versus an independent contractor? 

Delaney: With the advancement of the gig economy, a business model that relies on independent contractors is certainly something that has grown. 

However, under most circumstances, an employer’s workforce will be composed of employees and not independent contractors. This is a function of the various tests that get used to determine when someone is a true independent contractor. The normal model used by most employers still relies on having a significant amount of control and authority over the individual, requires the individual to devote their full time and attention to the employer, does not allow for the employee to be working for other organizations at the same time and some of the other core concepts that determine whether someone is an employee. 

An employer will typically only have an independent contractor for some type of special project that falls outside of the normal business conducted by the operation. For example, a law firm may need to upgrade its document management system and retain a third party vendor as an independent contractor to complete the project. The contractor is not performing the work of the law firm, the law firm does not exercise control or supervision over the vendor and only controls the ultimate product. This concept is also separate from the concept of temporary staffing, which relies on the use of temporary workers that are employed by a third party. 

Also read: Ease compliance concerns with workforce management software

Workforce.com: What is the advantage for employers to classify their workforce as independent contractors? 

Delaney: There is no advantage to employers if the classification is not correct, because the risk and liability will generally outweigh any benefit. If the classification is appropriate, the advantage is often a lower cost with a known end date. As noted above, independent contractors are not subject to state and federal wage laws, so they are not subject to the minimum wage and overtime requirements. An employer does not have to pay the employer portion of payroll taxes and does not make withholdings for an independent contractor. An independent contractor is also not entitled to benefits such as health or welfare benefits, workers’ compensation or unemployment benefits.

Workforce.com: What should employers know about defining their workforce to avoid misclassification? 

Delaney: Employers must be aware of the key concepts and tests that are applied to determine whether independent contractor status is appropriate. 

These are the tests that will get used by the Labor Department, the EEOC, the IRS, etc. In some form or fashion, these tests all look to the level of control exercised by the organization over the individual and the economic realities of the relationship. If you rely on the use of independent contractors, you will want to audit that use to determine whether the criteria is being satisfied and, if not, whether and how the individual should be classified as an employee. You will then also need to assess whether there are any overtime wages owed for the time that the individual was misclassified.

Also read: What employers and HR should expect from new Labor Secretary Marty Walsh

Workforce.com: Is employee misclassification a growing trend in wage and hour/overtime violations? If so, why is that?

Delaney: Misclassification is an issue that has been and will continue to be on the enforcement agenda for state and federal departments of labor. When misclassification occurs, it is viewed by these agencies as denying workers of wages and benefits that they would otherwise be entitled to under the law. 

It is also important to note that prior to the change in administration, the Labor Department had issued a final rule on Jan. 7, 2021, that was going to revise the test used to determine independent contractor status. The test was viewed as being more employer friendly and was going to take effect March 4, 2021. However, on Jan. 20, 2021, the day the Biden administration took office, a freeze was placed on all regulatory changes pending review by the new administration. On March 11, 2021, the Labor Department announced a proposed new rule to rescind the rule issued on Jan. 7, 2021. That should be a clear indication to employers of how the current administration intends to approach and enforce misclassification, which should incentivize employers to review their practices for compliance. 

Book my demo today to avoid costly penalties and ensure simplified and automated compliance to federal, state, and local labor regulations with Workforce.com’s powerful wage and hour compliance platform.

Rick Bell is Workforce’s editorial director. For comments or questions email editors@workforce.com.

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