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eqHR Business Tips: 228 million dollar Settlement – Misclassified Employees – Are Yours?

Posted on November 30, 2015

Recently a $228 million settlement in a class action lawsuit filed against FedEx alleging that drivers were misclassified as independent contractors was preliminarily approved by the courts.

This is yet another example from the headlines of the importance of classifying your employees correctly.

You may feel that your company is too small to worry about huge class action lawsuits, but there are still very real risks and financial penalties for employers who misclassify their employees. According to the IRS, misclassifying employees as independent contractors and failing to pay Social Security and Medicare Tax as well as withhold and pay federal income tax can subject an employer to back taxes of as much as 41.5% of the contractors’ wages. These penalties can go back for three years. IRS will add fines on top of that ranging from $50-25% of the total tax liability depending on the situation.

Compounding the problem is if the misclassified worker should have also been eligible for overtime during the time they were misclassified. The employer could then be subject to further fines and paying back overtime wages.

What is an independent contractor?

In general, an independent contractor controls what will be done and how it will be done, while the employer can only control the result of the work. For more information, see the EDD worksheet for determining if a worker is an employee or an independent contractor: http://www.edd.ca.gov/pdf_pub_ctr/de38.pdfThings to consider:

  • What is the degree of control over work and who exercises that control?
  • What type of skill is required for work?
  • Is the worker an integral part of the business?
  • Does the worker provide their own equipment, supplies and tools?
  • Can the worker be discharged at any time?
  • Does the worker set their own schedule for work?
  • Is the work temporary or permanent?

As the saying goes: “if it looks like a duck, quacks like a duck, then it’s a duck.” In other words if the worker looks like an employee, has a desk, an office extension, business cards, etc., then chances are they’re an employee.

Call us today if you need to assitance or require guidance for employee classifiation.

This article was written by Lauren Sims, an eqHR Solutions Principal Consultant and may be contacted by calling eqHR Solutions.