iIn May of this year, the U.S. Department of Labor (DOL) recovered more than $1 million in back wages and damages from a Kentucky-based company for misclassifying 196 employees as independent contractors. The action against Bowlin Group, LLC, a company which installed equipment for Insight Communications throughout Kentucky and Ohio, was part of DOL’s “Misclassification Initiative,” begun in 2011.
DOL’s Wage and Hour Division is working with the Internal Revenue Service (IRS), other federal agencies, such as the Occupational Safety and Health Administration (OSHA), and state wage and hour regulators to identify employers who are misclassifying employees. Kentucky’s regulators are also focused on reducing the incidence of employee misclassification. Are your workers properly classified? Failure to do so could subject you to liability for additional wages, taxes, and other costs.
In Kentucky, wage and hour issues are governed by both federal and state law. Kentucky’s Labor Cabinet has concurrent jurisdiction with DOL over most employees in the Commonwealth. Kentucky’s law complements the federal Fair Labor Standards Act (FLSA), which preempts state law where the federal law offers greater benefits to employees. In determining whether a worker is an employee under the FLSA and Kentucky law, the business must apply a standard known as the “economic reality test.” The factors are:
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The degree of the alleged employer’s control over the manner in which the work is performed;
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The worker’s opportunity for profit or loss;
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The worker’s investment in equipment or materials required for the task;
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Whether the service rendered requires a special skill;
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The degree of permanence of the working relationship; and
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Whether the service rendered is an integral part of the alleged employer’s business.
The consequences of misclassification can be substantial. Liability can even flow up to a business that hires another entity to provide labor. If two or more employers share control – whether direct or indirect – a joint employment relationship exists. Federal and state laws provide for liquidated (double) damages for violations of wage and hour laws under certain circumstances. Employees also have private causes of action, so an employer could end up paying attorneys fees. Employers who misclassify employees will also incur tax (Social Security and Medicare), workers’ compensation, and unemployment insurance costs.
By far, allegations of misclassification are the dominant wage and hour claims made today. State and federal regulatory agencies are particularly focused on these because of the perceived economic impact upon individuals. To avoid any problem, businesses should examine the jobs performed by all workers and apply the “economic reality test.” Some factors may indicate that an employment relationship exists, while others may not. There is no magic to the analysis; the key is to look at the entire relationship and concentrate on the degree of control exercised. Above all, the business should carefully document how each evaluation was conducted. When in doubt about any case, the business should seek the advice of a professional.
