Understanding Employee Misclassification

There is a unique set of challenges and risks for all organizations

The advent of new employment protection laws and the rise of the freelance economy/”gig” worker has given rise to a significant number of penalties being levied against employers who misclassify their employees.

Determining whether a worker is an employee or an independent contractor is a necessary part of the hiring process, but if done improperly it can lead to a lot of potentially expensive problems. Here’s what you need to know about employee misclassification and what steps you can take to avoid it.

The “gig” worker is projected to increase to 43% by 2020

What is Worker Misclassification?

Worker misclassification is simply incorrectly identifying individual members of your workforce as either employees or independent contractors. While this can happen as a result of a mistake, the consequences can be real and very expensive, even if the action was not intentional. The first step to avoiding this mistake is to understand just exactly what makes each role unique, so this is what classifies a worker as an employee versus a contractor.

What is an Employee?

An employee-employer relationship is much more defined in the boundaries of the role. Traditionally, this is how most people have been employed. This means that the employer dictates:

  • The hourly or salaried rate of pay
  • How and when work is performed
  • Key performance indicators and quality standards

What is a Contractor?

The rise of the digital and distributed economy has given a noticeable rise to the number of contracts in the job market. A contractor has more flexibility in how they choose to carry out their role to achieve a stated goal. They should control:

  • Their rates of pay
  • Where and how the job is done
  • Increasing or decreasing the scope of work based on skill and ability to have a significant impact on the bottom line

Employer misclassification of employees as independent contractors is a widespread phenomenon in the United States. The Internal Revenue Service (IRS) estimates that employers have misclassified millions of workers nationally as independent contractors

Misclassification in the FedEx Business Model—a Case Study:

It is estimated that FedEx reduced their labor expense by as much as 40 percent by misclassifying drivers as independent contractors. For quite some time, FedEx has denied that their Ground and Home drivers are employees entitled to benefits and the right to unionize. By classifying drivers as independent contractors, FedEx was able to transfer operation costs onto its drivers, avoided paying Unemployment Insurance and Social Security taxes for the workers, and excluded drivers from FedEx’s health and pension plans.

The Federal Ninth Circuit Court of Appeals ruled that FedEx misclassified 2,300 workers in California and Oregon as independent contractors. The Kansas Supreme Court ruled that FedEx drivers are company employees, not independent contractors.

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