The US Department of Labor made an example out of yet another company – National Consolidated Couriers Inc. this time. According to San Jose Mercury News, the $5 million judgment against the California-based company for misclassifying 600 drivers as independent contractors serves as a warning shot for others.
Misclassify your employees, and this could happen to you, too.
The Judgment Heard Round the World
First, let's be clear that National Consolidated Couriers seems to have made many, many mistakes. The Mercury News report states the company…
- Didn't give its 1099 contractors minimum wage or overtime pay.
- Avoided the Department of Labor's investigation and deposition from the outset.
- Required an employee to destroy all emails related to the DOL case.
- Exercised managerial control over its drivers.
You don't have to make the major missteps National Consolidated Couriers made to be hit with misclassification lawsuits and fines. You simply have to accidentally treat your independent contractors like employees without offering them the benefits that comes with W-2 employment.
Why Is the DOL So Invested in Employee Classification?
Worker classification is one of the many areas of employment the Department of Labor oversees. According to information on the DOL's site, it's responsible for:
- Improving work conditions.
- Advancing opportunities for profitable employment.
- Administering federal labor laws.
The issue of worker classification ties into all these objectives. For example, when a company misclassifies an employee as an independent contractor, that company isn't paying the worker's overtime wages, part of their employment tax, or their Workers' Compensation Insurance coverage, which most states require employers to carry for each employee.
The laws are designed to protect workers from being exploited for the employer's gain. So businesses that sidestep labor laws have an unfair advantage over companies that do comply with those regulations. They fatten their bottom line at the expense of the workforce.
In a nutshell, that is why the Department of Labor is investing its energy into classification issues. It's trying to protect workers and level the playing field. You can read more about how it's accomplishing this goal in "Labor Department Helping States Crack Down on Worker Misclassification."
Now Is the Time to Accurately Classify Your Workers
A couple weeks ago, we discussed how 10 to 20 percent of businesses misclassify employees as 1099 contractors (catch up here: "10 - 20% of Businesses Make this Expensive Mistake. Do You?"). Unfortunately, ignorance of the laws isn't a defense for offending businesses. They can be sued and fined over misclassification all the same.
To make sure you stay on the right side of the law, get familiar with the difference between a contractor and an employee. Recently, the Department of Labor clarified that a worker must be in business for themselves to be a contractor, which narrows the scope considerably.
In other words, if the worker is economically dependent on you, they are probably not a contractor. Learn more about 1099 vs. W-2 classification in "Workers' Comp Insurance: When Is Someone a Contractor?"
If you find that your contractors are technically employees, amend the situation right away. That may mean…
- Updating the way you pay them. Put them on the payroll instead of having them submit invoices.
- Offering benefits. This may include paying for overtime wages and offering health insurance if you have 50 or more fulltime employees. Read more about that on the Health Law Guide for Business website.
- Insuring them. Most states require employers to carry Workers' Comp Insurance for their employees. This policy can help pay for their occupational injuries. You can learn about your state's insurance requirements in our guide Workers' Compensation Laws by State.
Yes, employees are an investment. However, it's better to correct course now than face all these expenses and regulatory fines later if you don't comply. If you need more inspiration to evaluate your employment practices, read "Another Day, Another Worker Classification Lawsuit."