Insureon Blog

$2 Million Fine for Misclassifying Employees

3. July 2014 08:48

Oil workers with giant machinery in a road

When employers misclassify their employees as independent contractors, it can cost them big bucks. Just ask J&A Services, a Colorado-based oil / gas monitoring and maintenance company that allegedly misclassified several current and former employees. According to HR.BLR.com, a resource for business compliance issues, J&A recently settled the collective-action lawsuit for $2 million.

J&A still denies that they misclassified the employees, but decided to settle out of court anyway. You can be sure that if this complicated case went to trial, it would have taken a lot more time and a lot more money.

How Do the Courts Decide That an Employee Is Misclassified?

Generally speaking, there are two ways someone can work for your business: as an employee or as an independent contractor. Businesses hire employees when they want a long-term commitment to a job. Employees must follow a business’s protocol. In exchange, employers must follow certain employment laws. For example, businesses pay half of their employees’ Social Security and Medicare tax obligations. Businesses may also offer employees optional benefits, such as retirement plans and Health Insurance. On the other hand, independent contractors are generally hired for short-term gigs and one-time projects. They don’t receive benefits from their employers.

Now, the distinction between these two types of workers may seem cut and dry, but the IRS doesn’t formally define “independent contractor.” Instead, it uses a series of factors to determine whether someone is a contractor or an employee.

That’s what spurred the J&A lawsuit. Flow testers at the company thought they were being asked to work more like employees – but without the benefits. They were working overtime, but were denied overtime pay due to their independent contractor status.

Here are the three factors that the courts consider when determining if a worker is an employee or independent contractor:

As you can see, there is quite a bit of gray area here – which is why you must be careful when deciding to classify a worker as an independent contractor. For more information, visit the IRS’s guide to employee classification.

What Happens If I Accidentally Misclassify an Employee?

Based on the flow testers’ allegations, it seems pretty clear that they were being treated as employees and should have been receiving their benefits. But based off the IRS’s classification criteria, an employer could feasibly misclassify an employee accidentally. What happens then?

Unfortunately, it doesn’t matter whether you intentionally or unintentionally classify a worker as an independent contractor when they should really be employees. The workers can always file a lawsuit.

The good news is there’s an insurance policy for just that. It’s called Employment Practices Liability Insurance, and it helps pay for your legal defense and damages when your workers sue you over employment issues. It can also help you pay for settlements if your business can reach an agreement out of court, like J&A did with its flow testers.

know your business risks

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Contractors | EPLI | Insurance News

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