Personnel e.bulletin – September 2015, Part 1

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Who’s What? — Part 1

 Prepared for the PHCC Educational Foundation by TPO, Inc.

Many business leaders and owners face frustrations in attempting to comply with the classification requirements of the Fair Labor Standards Act (FLSA).  The FLSA is a federal regulation that establishes the federal minimum wage (currently $7.25/hour), overtime pay eligibility and rates, recordkeeping requirements, and youth employment standards, as well as a definition of what constitutes actual work.

Also, states and cities can establish their own regulations that may include more stringent requirements or higher minimum wage rates. It’s important for companies to be aware of both federal and applicable state and municipal regulations, since they must adhere to the higher or more generous rate. The following link shows mandated minimum wage rates by state: http://www.dol.gov/whd/minwage/america.htm.

This article focuses on sets of classifications to help you determine your employees’ treatment under the FLSA: employee versus independent contractor.  Clarification of these classifications can give you some tools to review and classify each position in your company and to be in compliance with the FLSA.

Employees vs. Independent Contractors

Your company may hire independent contractors to save money – since you don’t have to pay employer taxes or provide benefits to independent contractors – and simplify administration, since independent contractors are responsible for their own taxes and withholding.

The Department of Labor (DOL) has increased focus on this classification, and if your business is out of compliance, you can face stiff penalties. You can be held liable for all employment taxes and withholdings, the employer’s portion of FICA taxes, and interest and other fines. It’s therefore important for you to be aware of factors that enter into these classifications. 

Criteria for Employees vs. Independent Contractors

An agreement stating that a worker is an independent contractor is insufficient to establish that status.  An evaluation of the reality of the working relationship between the employer and worker – a much more complex proposition – helps determines the worker’s status.

The DOL recently released guidance for classifying workers as employees or contractors, and it looks at a number of factors. It’s not enough that workers simply perform work offsite or have specialized skills to classify them as independent contractors; a number of factors should enter into that classification.  This article details five areas, all of which should be taken into account and weighted equally when making that evaluation.

1.      Wages and Benefits

Employees are characterized by the following:

  • they are guaranteed a regular wage;
  • they are paid that regular wage based on a schedule or established work period;
  • they receive employee benefits;
  • taxes are withheld from their paychecks;
  • they receive workers’ compensation; and
  • your company pays unemployment on their behalf.

Independent contractors, however:

  • earn either a profit or loss from their work for you;
  • are paid by the job;
  • provide their own benefits;
  • estimate their own quarterly tax benefits;
  • have no protection from work-related injuries; and
  • do not receive unemployment.

2.      Management 

If your company pays, hires, and supervises additional staff to assist the workers, they are employees. Your company also trains and instructs employees as necessary.

Independent contractors pay, hire, and supervise their own staff. They determine how to get the work done.

3.      Equipment and Investment

Employees receive any necessary tools and materials from your company. Your company also pays for any business and travel expenses. Finally, employees have an at-will relationship with your company, so they may quit whenever they choose.

Independent contractors provide their own tools and materials to get their work done. They also pay their own business and travel expenses.  They have a contract with your company, so quitting may result in breach of contract.

4.      Type of Work 

Employees provide services that are integral to your business. Independent contractors provide expert or specialty service. For example, a software developer who designs a program to manage work schedules wouldn’t provide an integral service to a business that specializes in heating and cooling repair. A repairman is more likely to be an employee in that example. (Of course, the rest of the factors would need to be taken into account to definitively classify the repairman).

5.      Control Over Work

Employees work only for your company.  They adhere to established company working hours. Your company decides where work will be done.

Independent contractors can work for more than one firm at a time. They set their own working hours and work location.

When you’re doing the classification…

Keep in mind that a worker may exhibit qualities of both an employee and an independent contractor.  Since that’s the case, along with the fact that the DOL looks at all these factors, it’s important to weigh them all when evaluating your workers.

The following chart provides a quick reference guide to the factors discussed above.

Employees

Independent Contractors

Are guaranteed a regular wage

Can earn a profit or suffer a loss from the activity

Company furnishes tools and materials to do the work

Furnishes the tools and materials needed to do the work

Are paid a regular salary based on a work schedule or established period of time

Are paid by the job

Work only for the company

Work for more than one firm at a time

Company pays for business and travel expenses

Pays his/her own business and travel expenses

Company pays, hires, and supervises additional staff to assist with work

Pays, hires, and supervises own staff to assist with work

Adhere to established company working hours

Sets his/her own working hours

Has an at-will relationship with the company. May quit without incurring liability.

Has a contractual relationship with the company. Quitting may result in breach of contract.

Receives instruction and training from the company as to how to do the work

Determine their own methods for getting the work done

Receives employee benefits

Provides own benefits

Taxes are withheld from paycheck

Must estimate quarterly tax payments

Company decides where work will be done – typically at the company site

Decides most appropriate place for work to get done – typically off-site

Provides services that are an integral part of the company’s day-to-day operations.

Typically provides expert or specialty services.

Receive workers’ compensation

No protection for work-related injuries

Company pays unemployment on behalf of employee

Do not get unemployment

The DOL takes seriously the classification of workers as employees or independent contractors. You can look at each worker, review their responsibilities, and reclassify them if necessary based on those factors. The DOL website (http://www.wagehour.dol.gov) provides even more information.

Since this issue is thorny and noncompliance can carry significant consequences, it may be necessary to engage other resources as well.  In the end, it’s always a good idea to consult with a human resources professional or employment lawyer.

This article is intended to give you guidance in classifying your company positions and the employees in those positions as either independent contractors or employees and as either exempt or non-exempt. You should also see the DOL Reference Guide http://www.dol.gov/whd/regs/compliance/hrg.htm for information on FLSA requirements not covered in this article.

That being said, no article can cover the particulars of every employment situation, and the ramifications of misclassifying a worker can be significant, if not overwhelming, to a business. Consequently, it is best to check with your employment attorney or human resources professional when making classification determinations, or better yet, proactively conduct a company-wide audit of employment classifications before the DOL comes knocking at your door.


This content was developed for the PHCC  Educational Foundation by TPO, Inc. (www.tpo-inc.com). Please consult your HR professional or attorney for further advice, as laws may differ in each state. Laws continue to evolve; the information presented is as of August 2015. Any omission or inclusion of incorrect data is unintentional. Please note this article is not intended to provide legal advice or to substitute for supervisor employment law training.

The PHCC Educational Foundation, a partnership of contractors, manufacturers and wholesalers was founded in 1987 to serve the plumbing-heating-cooling industry by preparing contractors and their employees to meet the challenges of a constantly changing marketplace. If you found this article helpful, please consider supporting the Foundation by making a contribution at http://www.phccfoundation.org.

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