United States: Labor And Employment Law Weekly Update (Week Of March 1, 2010)

Classification of Workers: More Incentive to Get It Right

Classifying individuals as independent contractors or employees has always been tricky. The desire to reduce employment expenses led some employers to utilize more independent contractors rather than hiring additional employees. Now, the Obama administration has stepped in to curb what it believes to be an abuse of employers classifying workers as independent contractors rather than employees.

While the scope of the problem is hard to quantify, the U.S. Department of Labor estimates 30 percent of employers misclassify workers. President Obama's Fiscal Year 2011 budget (released on February 1, 2010) sets aside money to establish a proposal jointly administered by the Departments of Labor and Treasury to crack down on employers misclassifying individuals as employees rather than independent contractors. The goal is to recoup up to $7 billion in unpaid employment taxes over the next 10 years. The specific enforcement efforts include allocating $25 million to hire 100 more enforcement personnel. The IRS also plans to increase its audits of companies to ensure compliance with the law. Likewise, many states also have increased enforcement efforts by imposing penalties for misclassifying workers.

What should an employer do? The general rule is to determine whether the independent contractor is truly independent or doing work for an employer that would be normally be done by an employee. Key characteristics of an independent contractor include:

The list is not exhaustive. Perhaps the best way to approach the issue is for employers to ask three simple questions: First, is the work the independent contractor is performing something I routinely or regularly need in my business? Second, if I did not utilize an independent contractor to do the work, would I have to hire an employee to do it? Third, if challenged, what rationale can I give for utilizing an independent contractor rather than an employee other than the cost was lower (presumably because employment taxes or benefits were not being paid)?

We do not want to suggest it is inappropriate to use independent contractors. However, given the increased budget to search out and enforce violations, now is a good time to take a look at your use of independent contractors to ensure those individuals are properly classified.

Are Your Personnel Decisions Sufficiently Supported and Properly Documented?

With the increase in employee terminations as a result of the poor economy, it is important to remember that the reasons for termination decisions must be sufficiently supported and properly documented. Employee terminations, including those driven solely by the economy and unrelated to poor performance, must be well documented.

It is tempting for managers to simply state that a person was terminated as part of an economically motivated reduction-in-force (RIF), e.g., "I had to let someone go." However, the specific reason why a person is selected for termination must still be articulated. Was the person's position or department eliminated? If so, why? Was the person compared to other employees in determining who would be terminated and who would stay? If so, why was this person selected instead of the other employees? Was prior performance a factor in the decision? Are the performance issues properly documented in performance reviews or elsewhere? Was the selection decision based on skill set or credentials, unrelated to performance? What skills or credentials did the person selected lack in comparison to others?

Has the company conducted a disparate impact analysis, prior to the terminations, to determine whether there are disparities in the termination decisions based on a protected status, e.g., age, race, or gender? Has the employee engaged in protected activity that may lead to a claim of unlawful retaliation, e.g., filed a harassment complaint or workers' compensation claim?

Managers may show resistance to explaining, and documenting, why a person was selected for termination. However, it is imperative that the reasons for the selection decisions be well documented. The reasons for the decisions should also be specific and not vague generalizations. For example, a statement that an employee was not a team player, or failed to complete assignments on time, is too vague. What specifically did the employee do, or not do (and when), that leads to the conclusion he is not a team player? What specific assignments were not completed on time and when?

If the reasons for the termination decisions cannot be articulated at the time they are made, it will certainly be very difficult, if not impossible, to do so months or years later if an employee asserts a claim of discrimination. Also, contemporaneous documentation is always better, and more credible, than documentation created after the fact when memories have faded, or the decision-makers are no longer with the company. Human resources professionals must insist on well-supported and documented personnel decisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.