Are You Putting Your Employees in the Right Box?

Along with regular employees, many districts have contractors, volunteers, and elected officials among the ranks of their employees, and misclassifying them can often run afoul of federal law.

According to the Department of Labor (DOL), an increasing number of today’s workplaces are intentionally misclassifying employees as independent contractors as a means to cut costs and avoid compliance with labor laws.1

Companies who misclassify employees avoid paying payroll taxes, unemployment insurance, workers’ compensation insurance and overtime. They also don’t contribute to Social Security or Medicare. Unions say misclassification of workers is a way companies thwart organizing because independent contractors are not protected by the National Labor Relations Act. In essence, such employers are shifting the cost of doing business onto their workers.

State-level studies show that between 10 and 20 percent of employers misclassify at least one worker as an independent contractor, according to a report by the Economic Policy Institute. Studies also show the practice has been on the rise since the 1990s and is more prevalent in industries like construction, where the cost of workers’ compensation insurance is already high and rising.2

The practice of subcontracting work to companies who, in turn, also subcontract apparently has made it easier for misclassification to occur. “Misclassified workers can now be found in almost every sector of the economy, working for small companies to publicly traded multinational corporations,” the EPI report said.

In July, the DOL’s Wage and Hour Division issued an important Administrator’s Interpretation (AI) that provided guidance on the question of who is properly considered an “employee” and is thus covered by the Fair Labor Standards Act.

The DOL believes most work should be performed by employees, so businesses should be cautioned to use independent contractors sparingly.

According to the DOL’s guidance, factors to be considered under this test, which is now being used by courts to evaluate this issue, are:

  • The extent to which the work performance is an integral part of the employer’s business
  • The worker’s opportunity for profit or loss depending on his or her managerial skill
  • The extent of the relative investments of the employer and the worker
  • Whether the work performed requires special skills and initiatives
  • The permanency of the relationship, and
  • The degree of control exercised or retained by the employee

While it may seem like classifying employees as contractors could potentially save your district money, doing so may violate the DOL’s Fair Labor Standards Act. Applying the factors above can help assure that your district stays in compliance with federal law.

Similarly, districts should be mindful of which employees are designated as volunteers. Check out this article for guidance on employees and volunteers.

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