The recent news stories about Uber and Grubhub employee classification has once again illustrated the importance of correct worker classification. A Harvard Business Review article describes the phenomenon of contracted employment as a “fissured workforce”.
A changing workforce
As work is increasingly contracted through staffing agencies, the standard concept of an employee is changing, leaving the many workers exposed to unfair wages and unsafe work environments.
As businesses have refocused efforts on core competencies and automated processes to improve financial performance, workers have lost secure footing. In keeping with the trend, many companies have chosen to outsource activities and use independent contractors to perform core business tasks.
Employee misclassification is problematic
Workers classified as contractors lose out on key benefits available to employees. Employees are eligible for raises and promotions and have access to retirement benefits. Contractors also earn less money, even for identical kinds of work. Contracting also comes with other expenses for the worker, such as the need to carry their own health insurance. Unemployment is also a concern since contractors are easy to terminate as business needs change and contractors are often not eligible for unemployment and workers’ compensation benefits.
Determining correct employment classification
The IRS offers the following guidance for determining if a worker is an employee or a contractor, ““The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” However, the U.S. Department of Labor uses the following factors for making a determination:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor's investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
Given the somewhat conflicting determination factors, employers may incorrectly classify workers. But correct worker classification is a must and employers should take care when classifying a worker as an independent contractor. Employee’s misclassified as independent contractors may be eligible for retroactive overtime pay and other benefits.