Despite the many articles that have been published on the issue of independent contractor (IC) classification, and the increased efforts of the Federal and State governments to enforce Department of Labor (DOL) and Internal Revenue Service (IRS) classification regulations (and recover lost tax revenues), frequent violations and related civil lawsuits continue to occur. But, not all employers caught for misclassification do so because they want to cheat the government or their workers. Many times, faulty industry practices are established – and everyone follows the same approach until they are found to be in violation of regulatory requirements.
The hospitality industry is emerging as the poster child for unintentional misclassification of workers as independent contractors. In 2010, when the Federal Government announced additional funding to ferret out worker classification abuses, the Secretary of Labor specifically called out targeted industries that employ large numbers of low wage earners, including hospitality, construction, janitorial work, food service and home health care.
The sharp increase in the percentage of workers in the hospitality industry classified as independent workers, as well as frequent violations in classifying workers as exempt vs non-exempt, has caught the intention of government agencies. When investigating potential abuses, the government tends to simultaneously audit for both types of classification abuses, reviewing tip credits, tip pools, pay deductions for uniforms, off-the-clock work, meal breaks, exempt status of first level managers, and the use of commission-only sales reps.
Employment regulations are often complicated, and classification of independent contractors is one of the most complex. Because two federal agencies focus on IC classification – one focused on proper payment to workers, and the other concerned about complete collection of federal and state revenues – multiple tests for IC compliance exist. While companies don’t have to meet every aspect of each test, results are situational and subject to interpretation. In general, the following definition applies.
Independent contractors are free to choose who they work for, and typically serve more than one client simultaneously. They work under their own supervision and according to their own schedule, using their own tools and resources. They are generally paid on a time and materials or completed deliverables basis, and do not receive a salary. They work under a Statement of Work, which specifies the deliverables and length of engagement.
In the hospitality industry, a worker may appear to meet all of these conditions, yet still be classified by the government as an employee. The Hospitality sector has seen many class action suits being settled in favor of reclassification as employees, with the employers paying back wages to hundreds of workers who were paid on a straight time or per-room basis. These workers received no minimum wage protection, overtime pay, unemployment insurance or protection under the Family and Medical Leave Act policy.
Representative cases of misclassification:
All employers in the hospitality sector should regularly audit their worker classifications and make necessary changes to their practices. A written contractual agreement addressing every point of the IRS test should be established with every independent contractor. Hiring managers should receive regular training on classification “do’s and don’ts”. When an employer does not have a record of the hours worked by the ‘misclassified’ employees, the employer’s liability will not be limited to unpaid minimum wages alone but also for recordkeeping violations. For calculating back pay; the court may go back for two years if the misclassification was not willful. But for willful violations, the back pay may be calculated for three years, and even doubled. Is there any need to say more?
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