An ounce of prevention: Conducting a self-audit of your classification practices

When times are hard, employers, like everyone else, look for an edge that will allow them to remain profitable despite the tough economic climate. The temptation to classify workers as independent contractors is strong. Independent contractors are not covered by minimum wage and overtime laws; do not get benefits; are not covered by Workers' Compensation insurance; pay both portions of Social Security and Medicare taxes; are not entitled to unemployment compensation; and are afforded no protection under the discrimination laws. However, some temptations are best avoided, and the potential downside to misclassification – audits, fines and regulatory interference – should cause businesses to classify workers as independent contractors only where they are certain to qualify.

The U.S. Department of Labor announced last spring that it was stepping up enforcement actions under the Fair Labor Standards Act and planning a rule that would require employers to conduct an analysis in writing as to the classification status of independent contractors, to provide a copy to workers and to hold that on file to give to Wage and Hour Division enforcement personnel on request.

In New Hampshire, things are developing rapidly as well. The state currently has a patchwork of regulations and statutes governing this topic. The New Hampshire Department of Labor revised its Independent Contractor test two years ago. Its 12-point test differs significantly from the Department of Employment Security's three-part ABC test which is, in turn, distinct from the New Hampshire Commission for Human Rights' fourpart test that essentially looks to the business' "right to control" the activities of the worker.

Each of these agencies has a different agenda, but each has in common the desire to broaden, rather than narrow, the ranks of employees. On Sept. 17, 2010, Governor Lynch issued Executive Order 2010-3, establishing a Joint Agency Task Force on Employee Misclassification. The stated purpose of the executive order is to ensure that all workers are properly classified so that they can enjoy all the protections to which they are legally entitled. It is apparent that the regulators are marshalling their forces. Businesses that have performed their own audits of their classification practices with the help of experienced employment counsel will be in a far better position to weather an inquiry from the state or federal government.

Daniel Schwarz is a partner in the Portsmouth, N.H. office of Jackson Lewis LLP. His practice includes advising private and public sector employers and educational institutions on all aspects of labor and employment law, including wage and hour, wrongful termination, anti-discrimination/retaliation, covenants against competition and breach of confidentiality. He guides employers in creating employee policies and handbooks; provides advice regarding disciplinary procedures up through and including termination; assists employers in the handling of employee complaints and conducts investigations of claims of workplace harassment.


Categories: Legal Advice