In recent years, the United States has witnessed a troubling rise in the misclassification of employees, which has significant implications for workers’ rights and corporate compliance. Employee misclassification occurs when employers incorrectly label employees as exempt from overtime or as independent contractors, thereby circumventing various labor laws, including the Fair Labor Standards Act (FLSA). Understanding the nuances of these misclassifications and their repercussions is crucial for both employees and employers.
The Problem of FLSA Non-Compliance
The Fair Labor Standards Act establishes crucial protections for workers, including minimum wage, overtime pay, recordkeeping, and youth employment standards. Non-compliance with FLSA often stems from misclassifying non-exempt employees—who are entitled to overtime pay—as exempt, or labeling standard employees as independent contractors. This categorization denies workers their rightful benefits and protections, such as overtime pay, health insurance, and unemployment benefits.
Misclassifying Non-Exempt Employees as Exempt
Non-exempt employees are entitled to overtime pay at one and a half times their regular rate for any hours worked beyond 40 in a weekly period. Unfortunately, many companies misclassify these employees as exempt, a category generally reserved for executive, administrative, and professional roles under FLSA guidelines. The improper classification results from either a lack of understanding or a deliberate attempt to reduce labor costs.
Misclassification as Independent Contractors
The misclassification of workers as independent contractors rather than employees is another prevalent issue. Unlike employees, independent contractors are not entitled to the same labor protections, such as minimum wage and overtime, thereby saving companies substantial sums in labor costs and taxes.
The ABC Test and Common Law Test
To determine whether a worker is an independent contractor or an employee, various tests are deployed, the most notable being the ABC test, used by 33 states, or the Common Law test.
The ABC Test
Under the ABC test, a worker is presumed to be an employee unless the employer can demonstrate:
– The worker is free from the company’s control in performing the work.
– The work performed is outside the usual course of the company’s business.
– The worker is engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The Common Law Test
The Common Law test assesses the degree of control and independence in the worker-employer relationship, focusing on factors such as:
– Instructions and training provided by the company.
– Financial aspects of the worker’s job.
– The permanency of the relationship.
Implications and the Way Forward
The rampant rise in employee misclassification reflects underlying issues in corporate practices and regulatory enforcement. For employees, misclassification translates to lost wages, benefits, and job security. For employers, it opens the door to hefty fines, litigation costs, and reputational harm.
Companies must invest in better training and compliance programs to ensure proper classification. Tackling employee misclassification is not only about enforcing labor laws but also about ensuring justice and equity in the workplace.
Marzano Human Resources Consulting has worked with companies on ensuring they don’t misclassify employees. This means checking compliance with the ABC and Common Law tests for independent contractors, along with FLSA exemption testing to ensure employees are properly classified as exempt or non-exempt (overtime eligible).
Please consider reaching out for a no-cost initial consultation.