MISCLASSIFICATION CAN BE COSTLY
Worker misclassification is nothing new. However, there has been a greater focus in recent years on outreach and enforcement at the state and federal level to address misclassification.
During the 2019 legislative session the Task Force on Employee Misclassification was created for the purpose of reducing employee misclassification. With that included a requirement that the Labor Commissioner, Division of Industrial Relations, Employment Security Division of the Department of Employment, Training, and Rehabilitation, Department of Taxation, and Attorney General communicate with each other regarding suspected misclassification.
Earlier this year, a court entered a $7.2 million judgment against a medical staffing agency for intentionally misclassifying over 1,000 workers. Last November, the Department of Labor (DOL) found the owners of a Las Vegas telemarketing company personally liable for more than $1.4 million in back wages and liquidated damages for misclassifying workers.
With the potentially costly consequences of misclassification it is in every employers best interest to review their worker classifications to ensure they are in compliance with the law.
Workers are either employees or independent contractors. Employees are subject to the Fair Labor Standards Act (FLSA) and state law regarding the payment of minimum wage and overtime unless otherwise exempt. Additionally, employers are expected to withhold and pay income, social security, Medicare, and unemployment taxes on wages paid to employees. Independent contractors are not employees and therefore not subject to the FLSA and state law on minimum wage or overtime and responsible for taxes on their earnings.
Both state and federal law define employee fairly broadly. However, whether a worker is properly classified as an employee or independent contractors depends on several factors. No one factor is determinative.
Under a final rule promulgated in early 2021 under the Trump Administration*, economic dependence is the ultimate inquiry in the determination whether someone was an employee or independent contractor. According to the rule, an employee, as a matter or economic reality, is an individual who is economically dependent on the employer for work. An independent contractor is not as they are in business for themselves.
In determining the amount of economic dependence — and therefore the status as an employee or independent contractor — the rule establishes two core factors, which are deemed most probative in the determination, and other factors, which are less so.
- The nature and degree of control over the work
- The individual’s opportunity for profit or loss
- The amount of skill required for the work
- The degree of permanence of the working relationship between the individual and the potential employer
- Whether the work is part of an integrated unit of production
- Additional factors to the extent they clarify whether an individual is in business for themselves vs. economically dependent on the potential employer
Under Nevada law, an independent contractor is defined as a self-employed person who agrees with a client to do work for the client, for a certain fee, according to the means or methods of the self-employed person and not subject to supervision or control of the client exception as to the results of the work. An individual will be presumed to be an independent contractor under Nevada law if the things are true.
- The person possesses or has applied for an employer identification number or social security number or have filed an income tax return for a business or earnings from self-employment with the IRS in the previous year
- The person is required by contract with the principal to hold any necessary state business license or local business license and to maintain any necessary occupational license, insurance, or bonding in order to operate in the state
- The person additionally satisfies three or more of the following:
- the person has control and discretion over the means and manner of the performance of any work and the result of the work
- the person has control over the time the work is performed
- the person is not required to work exclusively for one principal unless required by law or contract
- the person is free to hire employees to assist with the work
- the person contributes a substantial investment of capital in the business of the person (i.e. purchase or lease of tools and equipment)
It’s important that employers review the factors above to ensure they have classified their workers properly, especially those classified as independent contractors. It can be a very costly mistake if they are not.
*On March 14, 2022 a district court in the Eastern District of Texas vacated the Department’s Delay Rule, Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Delay of Effective Date, 86 FR 12535 (Mar. 4, 2021), and the Withdrawal Rule, Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Withdrawal, 86 FR 24303 (May 6, 2021). The district court further stated that the Independent Contractor Rule, Independent Contractor Status Under the Fair Labor Standards Act, 86 FR 1168 (Jan. 7, 2021), became effective as of March 8, 2021, the rule’s original effective date, and remains in effect.
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