Employers are often faced with the question of whether to classify their workers as “employees” (with an IRS Form W2) or “independent contractors” (with an IRS Form 1099). For employers and workers alike, this is an important question for a multitude of reasons including eligibility for overtime, worker’s compensation, benefits and taxes. Misclassifying employees can subject employers to serious legal punishment, regardless of whether the misclassification was intentional or merely accidental. To alleviate confusion regarding worker classifications, the Department of Labor (DOL) recently finalized its new rule that focuses the analysis for these classifications to assist employers in ensuring the proper designation is made.

The final DOL rule adopts a multifactor assessment known as an “economic reality” test. The test relies on six separate factors which are largely focused on the nature of the worker’s relationship with the employer:

• the worker’s opportunity for profit or loss;
• the worker’s financial stake and/or investment (of any resources) in the job;
• the degree of permanence of the work relationship;
• the degree of employer’s control over the worker’s performance or work;
• whether the worker’s work is integral to the employer’s business; and
• the worker’s skill and initiative required for the job.

For the DOL, the purpose behind this rule is to provide an easier framework for employers to follow and to ensure that workers are classified properly so they may receive wages actually earned in the course of their work. If an employer does not properly designate existing workers, they may find themselves on the wrong end of a misclassification lawsuit from the worker, their worker’s compensation carrier, the DOL or even, the IRS. Potentially steep financial penalties include unpaid wages, taxes, increased premiums as well as liquidated damages and/or attorney’s fees.

The final rule will officially take effect on March 11^th of this year, which should provide employers with just enough time to assess existing classifications of workers and to make changes where necessary. While it may be wise to err on the side of caution to avoid penalties, not all cases and jobs are alike. Consult our RKW employment attorneys as soon as possible if there is any question concerning your workforce’s designation.

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