“Historically, misclassification mistakes have
been a very big issue in the trucking industry, or
especially if you are dealing with contractors,” said
Eric Silverstein, senior vice president and leader of
Lockton’s risk management team.
“As a result, the trucking industry has put together
the blueprint for how to deal with this. If you’re
providing insurance for an owner/operator fleet, or
you’re dealing especially with subcontractors, then
there needs to be a clear contract and an arms-length
agreement. From a risk management perspective this
can be a lot of work — it must be very clear who’s
working under contract.”
According to Friedman, misclassification of
employees has serious implications for companies, as
they are at risk for investigations and lawsuits from
both federal and state governments, as well as private
lawsuits from individuals or classes of individuals.
In addition to taxes and benefits (including the
value of lost benefits), a company may be liable for
penalties (such as fines, liquidated damages and/
or punitive damages), costs, interest, and attorneys’
fees, she said.
Companies also may be required to post notices
about their wrongdoing in their workplaces, and, in
California — even on their company websites.
“Importantly, federal and state governments
have been losing billions of dollars each year due to
misclassifications and therefore have been putting
more resources into identifying and prosecuting
misclassifications,” said Friedman.
“In 2011, the U.S. Department of Labor and the
IRS entered in a Memorandum of Understanding
[MOU] to share information for the purpose of
identifying and reducing misclassifications of
workers. Since that time, at least 14 states also
have entered into MOUs with the U.S. Department
of Labor to share information and reduce the
incidence of worker misclassifications.”
The IRS also has an employment tax initiative
in place to audit more than 6,000 employers,
selected at random, with the objective of finding and
correcting worker misclassifications.
Friedman pointed out that this increased
government focus is resulting in millions of dollars
in back wages and penalties.
In May 2013, for example, the DOL obtained a
consent judgment against Bowlin Group LLC and
Bowlin Services LLC, providers of infrastructure
solutions, for more than $1 million in back wages
and damages covering 196 employees. Seventy-seven of the workers had been misclassified as
“On the state level, New York should serve as a
cautionary tale,” Friedman added. “In 2013 alone, New
York identified almost 24,000 instances of employee
misclassification, uncovered more than $300 million in
unreported wages and assessed nearly $12.2 million in
unemployment insurance contributions.”
Other states also are getting increasingly tough
on misclassification. Massachusetts announced
that in 2013, it collected more than $15 million
in back taxes, unpaid wages, unemployment
insurance contributions, fines and penalties
related to employer fraud and misclassification.
Earlier this year, a California state labor board
ordered a logistics company to pay more than $2.2
Misclassification mistakes — two words that
sound almost innocuous, but which could result in
substantial fines and legal headaches for a company
if they get things wrong.
Put simply, misclassification mistakes arise most
often when a company misclassifies an employee as
an independent contractor.
Such a misclassification can have a serious
impact if that person is, for example, supposed to be
covered by insurance. Moreover, it happens more
often than many people think.
“Misclassification of employees as independent
contractors continues to be rampant, especially
in traditionally low-wage industries such as home
health care and janitorial services, but also remains
prevalent in higher-paying industries such as
construction and trucking,” Debra Friedman, a
member of the labor and employment practice
Group at law firm Cozen O’Connor, told Risk &
A 2000 study by the U.S. Department of Labor
(DOL) found that approximately 30 percent of
companies misclassify workers. Some of them may
simply be ignorant of the law (although ignorance
offers no legal defense).
More often, though, companies deliberately
misclassify workers to save money. This is
because companies do not pay Social Security and
Medicare taxes, unemployment insurance tax, or
workers’ compensation insurance for independent
contractors, nor do they provide independent
contractors with employee benefits such as health
insurance, pensions or 401(k) matches, and paid
Significantly, these costs can represent 20
percent to 40 percent of an employee’s total
Also, said Friedman, “independent contractors,
unlike employees, are not protected under federal
or state minimum wage or overtime laws or anti-discrimination statutes, and do not have the right to
bargain collectively and join unions or obtain job-protected leave.”
STAKES ARE HIGH
Some recent cases have shown a wide variety of
companies and plaintiffs.
In July of this year, FedEx Ground drivers won
summary judgment in their misclassification lawsuit
brought against FedEx under the Massachusetts
Independent Contractor Act, with the judge ruling the
workers were, in fact, employees.
And in October 2013, the Penthouse Executive
Club in New York reached an $8 million settlement
with a group of adult dancers who had complained
that they had been misclassified as independent
contractors and had not been properly compensated
as a result.
An increasing number of employers deliberately misclassify workers
as independent contractors. State and federal agencies are cracking
down, and going after unpaid wages, benefits and tax contributions.
BY MARC JONES
RISK & INSURANCE®
• The worst misclassification offenders are low-wage
industries, but also construction and trucking.
• Local and state governments are devoting more
resources to identifying and prosecuting offenders.
• Employers voluntarily correcting mistakes should
consider working with the IRS to ensure compliance.
EMPLOYERS THAT misclassify workers to save a few bucks may later find themselves on the hook for millions.
OCTOBER 15, 2014