Worker misclassification: An expensive mistake

Some leaders make running a business look easy. They’ve got great behavioral skills and subsequently are trusted by clients and staff. They seem to know the ins and outs of what’s happening in every department. But it’s not always this easy.

Taking time to know the details and follow the rules set forth by government entities is critical to success. Recently, our staffing team has seen instances where a business misclassified temporary workers. Hiring contractors carries an inherent risk of misclassification. In the United States alone, some estimates say nearly 10% of workers are misclassified and that 10-20% of businesses have misclassified an employee.

In March 2024, the Department of Labor released a new rule that essentially reinstates a decades-old system for analyzing whether a worker should be classified as a W-2 employee or an IC based on the economic reality of the relationship between the worker and the employer. This analysis is based on the following six factors:

(1) opportunity for profit or loss depending on managerial skill;

(2) investments by the worker and the potential employer;

(3) degree of permanence of the work relationship;

(4) nature and degree of control;

(5) extent to which the work performed is an integral part of the potential employer’s business; and

(6) skill and initiative.

What Are the Risks?

The risks associated with violating labor laws can be substantial. A restaurant and supermarket chain in South Carolina had to pay nearly $400,000 in back wages, overtime and damages for failing to pay 31 workers minimum wage. A restaurant in Dallas was required to pay over $68,000 (half for back wages, half for damages) to four cooks who were denied overtime. Not only are employers liable for back wages in cases of misclassification, they can face penalties of up to $1,000 per misclassified employee and potential jail time. In addition, some states have their own rules for worker classification and assess separate penalties for intentional or inadvertent misclassification.

PREMIUM CONTENT: Protections for Gig and Platform Workers

How to Avoid Misclassifying Workers

To help business owners and hiring managers get a better understanding of the rules associated with worker classification, the Department of Labor has created a Handy Reference Guide to the Fair Labor Standards Act. This tool is a good resource for understanding employers’ obligations and limitations in hiring.

One area of hiring where misclassification frequently happens is in the use of temporary labor. Many app-based temporary hiring platforms categorize their workers as ICs, leaving the employer on the hook for potential fines, back wages, unpaid payroll taxes and overtime.

Traditional staffing firms, on the other hand, usually classify their workers as W-2 employees. They cover payroll taxes, worker’s compensation and appropriate wages. With a reputable staffing agency, an employer can enjoy many benefits from hiring temporary workers, but even among traditional firms, not all are alike. Employers must perform due diligence on their potential staffing partner.

According to Angelo Spinola of Polsinelli PC, writing in the National Law Review, “An employer should carefully vet any staffing agency providing supplemental workers to determine how the staffing agency classifies the workers and confirm the business is legally compliant.”

Hiring Temporary Workers the Right Way

Temporary staff can be a great way for employers to meet transient hiring needs without the expense and long-term obligations of permanent employees. Temporary hiring is a good way to try out potential workers before offering permanent employment. Hiring temporary staff incorrectly, however, can bring the potential for Department of Labor charges of violations of the Fair Labor Standards Act.

Employers can reap the benefits of using temporary workers while avoiding classification pitfalls by working with a trusted staffing partner who can guide them through the process. With the right partner, employers can meet their hiring needs with a slam dunk and avoid showing up on a highlight reel of expensive hiring blunders.

George Lessmeister

George Lessmeister
George Lessmeister is CEO and founder of LGC Hospitality.

George Lessmeister

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