At a recent meeting of the CEO peer group I lead I asked one of my trusted advisors to make a presentation. Audrey Gee is a partner in the law firm, Brown Church & Gee, and one of her specialties is employment law. In my mind there is a lot of confusion in the minds of employers around how to classify some of their employees, my CEO members included.
First, Why Do We Care?
Audrey’s first point was that there is currently heightened scrutiny at the federal and state level in the misclassification of independent contractors. And the two are sharing information. The intent is to make sure they are collecting the tax revenue they deserve and companies are complying with federal labor laws.
A May 2013 report stated that California Labor Commissioner, Julie Su, had found more wages owing to workers and monetary penalties assessed than in any year previous! Look at this list for the year 2012:
- Over $3 million in unpaid minimum wages assessed.
- Over $13 million in unpaid overtime wages assessed.
- Over $51 million in civil penalties assessed.
- Over $25 million in wages assessed and civil penalties on public works projects.
- The highest rate of civil penalty citations in the past decade.
Audrey was making sure all my CEOs understood the State of California and the Federal government are being very aggressive in these areas and my members had better be aware and assess their own company’s policies.
The risk = “Employees can now recover unpaid wages PLUS LIQUIDATED DAMAGES…”. It can get VERY expensive for you.
Common Myths Around Exempt versus Non-Exempt
Audrey also spent time blowing holes in common myths around what constitutes an exempt employee. The following are not necessarily true:
- That being a salaried employee makes you exempt.
- That being in a white-collar job makes you exempt.
- That being a supervisor makes you exempt.
- That computer people are always exempt.
- That all commissioned salespeople are always exempt.
- That all college degreed employees are always exempt.
The second area Audrey covered and which is being scrutinized carefully by both the Federal and State governments is the area of independent contractor versus employee status.
Common Misconceptions Around Employee versus Independent Contractor
Here are some common misconceptions where you might assume you are employing an independent contractor:
- You have a written agreement where the worker agrees that he/she is an independent contractor.
- You issue a 1099-Misc for their work.
- The worker is part-time, temporary, probationary or casual labor.
- Your industry treats this position as an independent contractor.
- The worker performs similar work for another business as well as yours.
- The worker has a city business license.
- You pay this position only by commission
What makes it difficult for you, the employer, is that courts and different agencies apply different tests in determining whether a worker is an employee or an independent contractor. The three tests are:
- Common law/Right-to-control test
- Economic realities test
- IRS factors
There is not enough time to go into the differences of these tests. I recommend that if you have a concern on any of the above that you seek counsel from a good employment attorney. If you do not have one then call Audrey.
Consider Reading This
Flash Boys: A Wall Street Revolt by Michael Lewis. Following his #1 bestseller The Big Short, Lewis shares with us in this book about a small group of Wall Street guys who discover how the U.S. stock market has been rigged for the benefit of insiders and is more controlled by the big Wall Street banks.