Avoiding Worker Misclassification | DCR Workforce Blog

Avoiding Worker Misclassification

Whichever way we turn, we get the Analysts cautioning us on maintaining regulatory compliance when using Contingent Workforce followed by dire warnings of doomsday – almost on the lines of what Hollywood would call ‘The Day the Earth stood Still’! Worker Misclassification is important for regulatory compliance and requires a lot of attention and careful planning to ensure compliance as well as to avoid unpleasant consequences and monetary losses (due to liabilities incurred on back pay, tax/benefit/labor law infraction liabilities) as it could wipe out the fruits of years of toil, and the company’s reputation among other things.

A case in point would be the way Microsoft had classified about 1000 employees as independent workers. But, an IRS audit determined that this was a misclassification and termed them common employees following which Microsoft accepted the ruling and complied by paying employment taxes and even helped these employees to claim the taxes paid by them. Though all these workers were made to sign employment agreements waiving any rights to benefits, a class action suit was filed and the court granted eligibility to ‘all those who meet the definition of employees of Microsoft under common law’ to participate in the company’s savings plan and stock options. After several failed attempts to have the ruling set aside, Microsoft had to settle the case at $97 million – no small change, that!

It is important to follow a proper vetting process before classifying any worker as an Independent Contractor. Most employee classifications are based on IRS’s 20 common law factors test and the Darden Factors defined by the Supreme Court. The focus lies upon who controls the work process, and their authority to involve others in the work, whether specialized skills are required and the worker’s level of investment and return from the work process. With contingent work force, there is a definite haziness in the classification because the staffing agency handles all employment matters including taxes and benefits; while the client controls the work-related matters including supervision.

It helps to anticipate and prepare for the various queries and audits, which could be followed by penalties and punishments over issues like payroll taxes, health and retirement plans and other benefits.  A diligent approach to the formulation of the contract and the terms governing it along with identifying and allotting the responsibilities to meet all the liabilities under regulatory requirements can ensure survival through such audits and scrutiny. Any other issues of omission and commission may also be spelt out in clear terms in the contract – like benefits, employee stock options, pension/savings schemes and such. Staying alert for news of rulings and decisions as well as new legal provisions is also crucially important to stay ahead of any trouble that may come courting!

As more and more employers are trying to save costs using contingent workers, regulatory bodies are also gearing up to ensure that there are no violations. The ever-vigilant Internal Revenue Service, the Department of Labor and the State bodies overseeing unemployment insurance and workers’ compensation are all gearing up to enforce the various rules – through stepped up audit activities.

To meet the stringency of such audit evaluations, it is better to ensure that there are no conflicts even during the initial stages of hiring and on-boarding. The interview stage itself clearly classifies the person as a Staffing Agency Employee – a term which accurately defines the relationship. Any formal interview shall be conducted by the agency – while the client may evaluate the person on skills. All rate increases and work-related communication, schedule/duration, performance as well as any invitations to team events at the client’s location are to be conveyed through the staffing agency and not directly.

As always in such matters, it is better to be safe than sorry!

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.