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How Employee Misclassification Could Cost Your Millions

by Charlotte Freed | Nov 16, 2018

Warehouse worker pulls box Government figures approximate that 25 to 30 percent of all employees are misclassified as independent contractors. While hiring a worker as an employee can cost 25 to 30 percent more than hiring an independent contractor, misclassification can be a steep legal battle when acted on. Taking the time to properly classify your employees may not seem like a high priority item on your list, but doing so can help you avoid frustrating, expensive lawsuits.

Since employees under different classification require various pay structures, ensuring you know the difference between hourly (non-exempt), salaried (exempt), and independent contractors is important. Just as key is properly classifying each of your employees.

Here are some main items to note when classifying:

  • Non-exempt employees are required to be paid at least minimum wage and time-and-a-half of their regular pay for all overtime hours, all hours worked over 40 hours in a workweek.
  • Non-exempt employees must be paid for all hours worked. It’s important to be cognizant of employees working off the clock and of technology that allows them to work off the clock, such as a laptop or mobile phone.
  • Exempt employees must qualify for identifiable exemption such as white-collar exemptions, professional, executive, and outside sales positions. These exemptions can be measured by taking the salary basis test, salary level test, and duties test.
  • When assessing whether someone is an independent contractor, ask these questions:
    • Is this person paid hourly or per job?
    • Do you have an independent contractor agreement?
    • Who controls how the work is performed?
    • Who sets the work schedule?
    • Does the person work for multiple companies or solely your company?
    • Who provides the tools to work?

To ease the process of classification for everyone involved, organize your practices internally. Audit job positions to ensure each are classified properly, determine how starting pay, current pay, and merit increases are fulfilled and assess any pay disparities. Charles Krugel, an attorney in Chicago, told SHRM, “If an employer doesn’t engage in good record-keeping, class-action wage and hour lawsuits become easy money for plaintiffs’ side attorneys.” All could be avoided with organized, clear records and proper employee communication. 

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