Classify workers accurately

An employee by any other name....is still an employee

By Ed Zalewski

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State and federal laws define an employee simply as someone who works for an employer. They do not, however, define classifications such as full-time, part-time, seasonal, or temporary. Employers often use these classifications, but employers can define them however they choose.

All employees, regardless of classification, can be protected by minimum wage and overtime laws, can file discrimination claims, and can obtain non-discretionary entitlements such as leave under the Family and Medical Leave Act. So why use classifications? Often, the employee’s classification determines eligibility for company benefits such as vacation, holiday pay, and participation in health plans.

Differences in Benefits
Most benefits are offered at the employer’s discretion, and they need not be provided to all employees, as long as they are not denied based on membership in a protected class. Plans and policies should clearly describe the eligibility criteria to avoid confusion over who can obtain the benefits.

Many states will accept claims for failure to provide vacation and holiday pay based on the eligibility criteria in a policy. A long-standing legal doctrine says that when a dispute arises over ambiguous contract terms, the contract will be interpreted in a manner most favorable to the signatories (the employees). Employers should review their policies and plan documents to ensure that employees cannot claim benefits that the organization did not intend to provide.

For example, an employer might not provide vacation to part-time employees. If the policy states that employees who work more than 35 hours per week are eligible for paid vacation, a part-time employee might attempt to obtain vacation pay after working long hours for several weeks. Instead, the policy should simply exclude part-time employees. Employees can still be classified as part-time even if they work 40-hour weeks for several months, especially if the annual average hours supports the part-time designation.

Temporary Employees
Employers often hire temporary employees to meet short-term business needs, usually through a staffing agency. Despite the name, an employer might retain a “temp” for several years. Employers are not legally obligated to hire a temp after a certain amount of time. Alternatively, individuals hired for special projects or seasonal work might be designated as temporary or contract employees. They are not normally eligible for discretionary benefits, but may become eligible to participate in retirement plans depending on the criteria in the plan documents. In many states, employees hired for a known duration cannot collect unemployment benefits when the relationship ends. Employers should avoid abusing this provision, however. For example, a practice of hiring all sales staff as “contract employees” for three months in case they do not meet expectations would likely be challenged by a state unemployment agency, because the individual works in a position that would normally be held for an indefinite duration.

Note that establishing an employment contract does not make the worker an independent contractor. Lawsuits for benefits and wages from misclassified independent contractors are becoming more common. These cases can also involve liability for unpaid employment taxes.

Independent Contractors
To help employers properly classify independent contractors, the Internal Revenue Service (IRS) describes three broad areas to consider: behavioral control, financial control, and type of relationship. Each area involves several factors to consider, but the following offers a brief summary.

• Behavioral control primarily evaluates whether the company controls (or has the right to control) how the worker performs the job. A contractor is normally given an expected outcome, then determines the means and methods needed to accomplish that outcome.


• Financial control typically means the person has an individual opportunity for profit or loss, often through multiple contracts, whereas employees depend primarily on one employer for income.


• The type of relationship considers whether the relationship may continue indefinitely, or only for a defined term such as completion of a project. This factor also considers whether the work is integral to the business, or if the contractor will perform work of an entirely different nature.

Note that incorporation of the contractor’s business is not a factor. An independent contractor does not need to establish a business enterprise. Conversely, the owner of a private business could be deemed an “employee” of the host organization if the degree of control and type of relationship support that determination.

Some employers allow employees to undertake short-term projects as independent contractors. However, an Opinion Letter dated July 5, 2000, from the federal Wage and Hour Division says, “it is unrealistic to assume that an employment and ‘independent contractor relationship’ may exist concurrently between the same parties in the same workweek.”

Properly classifying independent contractors is critical to avoid wage and benefit lawsuits. In cases of wrongful classification, an individual can claim back overtime pay and benefits that were available to employees.

Liability Concerns
The best defense against these lawsuits is to classify employees according to established definitions, or in the case of independent contractors, according to IRS guidelines. Determining eligibility for discretionary benefits is a primary reason for using different classifications, but employers must clearly define and consistently apply those classifications.

As economic or working conditions change, employers might reclassify some employees. However, the organization should have a legitimate business justification for doing so. Changing an employee’s classification for the express purpose of denying benefits, especially if the job duties and work hours stay the same, might result in lawsuits for benefits. If benefit costs are a concern, employers can change the eligibility criteria, or simply eliminate certain benefits.

WP

Edwin Zalewski has been an editor at J. J. Keller & Associates Inc. since 1999. As a member of the Human Resources Publishing team, he researches and creates content on topics such as discrimination, harassment, FLSA compliance, workplace violence, and I-9 compliance. Zalewski has fielded thousands of employment-related questions in an effort to assist HR professionals in addressing the various nuances and challenges facing them today.