Classify Right. A ‘Nonemployer’ of Choice

177445279In today’s labor market, close to 30 percent of your total workforce is made up on nonemployees. Even otherwise good employers are failing both types of workers by inadvertently or knowingly incorrectly classifying your job positions. Don’t fool yourselves.  Wilful or not, improper classification of the workforces you utilize every day is illegal.

The further we probe, the deeper the impact becomes. The root of the issue is the way you pay the workers, not merely the financial implications of tax penalties that plague you stemming from increased governmental scrutiny.

And sometimes the classification errors come at the behest of the workers themselves. Consider these scenarios:

  • A worker whose functions are similar to those of an employee insists on being classified as an independent contractor
  • An administrative assistant and his or her hiring manager push back at the classification of the position as nonexempt (and per company policy should be paid on an hourly basis) or vice versa

Still, employers (and their suppliers of contingent workers) are responsible for properly classification, regardless of how the workers’ wishes.

Who’s afraid of the Big, Bad DOL?

Given the Obama administration’s focus on wage and hour violations, you should realize that the U.S. Department of Labor (DOL) has been known to audit a company’s files even without the presence of a worker complaint.

According to the most recent government data, the DOL received 23,845 official complaints of wage and hour abuse in 2008 and collected more than $185 million in back wages.

PREMIUM CONTENT: U.S. Staffing Industry Forecast: September 2014 Update

Most frequently occurring violations include, but are not limited to:

  • Improperly classifying nonexempt employees as exempt and failing to pay misclassified employees overtime pay
  • Poor record keeping: e.g.:
    • Hours worked for salaried employees (when reclassifying occurs into nonexempt, these are needed)
    • Improper tracking and therefore payment of total hours worked (including travel, time spent meeting employer-mandated work attire requirements, time spent preparing or clearing the work station at the day’s start and end, and time spent in mandatory trainings or other company-sponsored events)

It’s an all-or-nothing proposition. When the DOL receives a complaint, it will audit, and that audit will include whatever files the DOL needs to conduct a proper investigation, not merely the file associated with the complaint.

It’s time to get your house in order. Audit yourself, or ask your third-party provider to conduct an internal audit as a service.

And what about your independent contractors (ICs)? Come on now, are they really employees? Here’s what counts:


  • ICs are fastest-growing segment of the contingent workforce
  • IC advantage for companies:
    • flexibility, short-term cost, savings in benefits and taxes, long term cost savings in compensation costs
  • Hidden Risk:
    • self-employed sector underreports income more than, and to a larger degree than any other sector of the workforce

What does an IC look like?

  • Receives a “1099” form for tax purposes vs. a W-2
  • Typically works as an individual
  • Often referred to as “consultants, freelancers…”
  • Paid through purchase orders or accounts payable processes
  • Any non-employee that does not have taxes withheld per pay period
  • The name given to the worker; contingent worker, freelancer etc. is just that – a name
  • Issuing a 1099 to a worker, does not make them independent
  • Independent contractor agreement – a piece of paper
  • What determines IC or employee is an overall picture of behavioral, financial and relationship factors.

The Issue:

  • $345 billion deficit in unpaid taxes — $68 Billion of which is attributed specifically to independent contractors
  • One in four companies fail compliance in an audit
  • Almost half (46 percent) of all contractors are misclassified
  • Misclassification costs can be more than 70 percent of payment
  • Government audits have “look back” period of 3 years

Determining proper IC classification must include:

  • Behavior Control
    • Training and instructions
    • Reports
    • Hours of work
    • Location of work
    • Assistants
  • Financial Control
    • Significant investment
    • Paid by the job
    • Own tools and equipment
    • Services are made available to the general public
    • Business expenses
    • Profit OR loss on a job
  • Relationship of the Parties
    • Intent of the parties
    • Termination
    • Firm’s core business
    • Benefits provided
    • Liable for breach

Let’s sum it up. Properly classifying your workforce is no longer a choice.  The majority of Fortune 2000 employers are either ignoring or seriously underestimating the reach of the government mandates and therefore the financial risk to which they are exposing themselves.  And a number of states are teaming with the feds to reach wider and deeper into your workforce practices, both with and without official worker complaints. Your CNN moment awaits you…will it be for developing the newest chip or folding your hand?

MORE: Are ICs in or out?


Dana Look-Arimoto

Dana Look-Arimoto
Dana Look-Arimoto, founder and CEO of Phoenix5 LLC, is an executive and leadership team coach, Talent Eco advisor, speaker and author of Stop Settling, Settle Smart: Rethinking Work-life Balance, Redesign Your Busy Life. She can be reached at dana (at) phoenix5th (dot) com.

Dana Look-Arimoto

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