Exclusive Interview with John Rabil, Founder, Launch and Co-Founder, Workspin

What Happens If An Audit Determines You’ve Misclassified Your Workers?

 

"If an audit determines you’ve misclassified your workers you are liable to pay penalties, fines, back pay, back benefits pay, and lawsuits. This can add up to a lot of money quickly. Not to mention that some states (Virginia, for example) allow the workers an independent private right of action against employers who have misclassified them,"says John Rabil, Founder, Launch and Co-Founder, Workspin. In an exclusive interview with HR.com, John talks about how gig economy in the post-pandemic era, key factors on worker classification and risks associated with misclassification, and more.

Experts from the interview:

Q: How has Covid-19 impacted the gig economy? What is going to be the implication of this economy on the future of work and businesses?

John: I think Covid-19 expanded on what was already a growing gig economy for a couple of reasons. One, many people, unfortunately, found themselves out of work, even if temporarily, and the gig economy offered people jobs that are often quick and easy to get into and that they could do from wherever they live without relocation. Secondly, many companies that were already in the gig economy saw an increase in demand leading to more opportunities for people looking to get into the gig economy. 

I think companies who are just starting out and entrepreneurs who are launching new ventures will see the gig economy, in some form or fashion, as here to stay and look for a way to use that to their benefit, only increasing an exponentially expanding gig market. Overall, it will give workers more opportunities and control over when and how they work and businesses some more flexibility over how they operate. 

Q: What sort of new challenges will this work culture bring to the worker classification space?  

John: Significant ones. There’s no single “test” on how to classify a worker. You’re dealing with multiple things on the federal level and likely some on the state level. Many businesses will consider misclassification worth the risk, especially if they aren’t drawing attention on a national stage for operations using independent contractors, and therefore, unlikely to come under the enforcement spotlight. Continued regulations on the state level and changes to how the federal government tests worker classification will lead to additional confusion. I think companies will have to carefully consider the employee vs. contractor option, but that’s easier said than done, and it can be time-consuming (so expensive) to try and properly get someone to fit into the contractor classification. 

Q: What are there risks and responsibilities associated with hiring independent contractors? 

John: The risks are penalties, fines, back pay, back benefits pay, and lawsuits. This can add up to a lot of money quickly, even if you’re running a moderately sized small business, you could be looking at a lot of money if an audit determines you’ve misclassified your workers. Not to mention that some states (Virginia, for example) allow the workers an independent private right of action against employers who have misclassified them. So, on top of federal and state-mandated fines, penalties, etc. you’re potentially looking at the worker filing a suit as well. The responsibilities are mostly making sure you don’t breach the contract you’ve entered into with them, and somehow, inadvertently create an employee/employer relationship where one didn’t exist (paying benefits, providing all tools/equipment, directing how work is done are ways this happens). 

Q: DOL (for the purpose of wage) and IRS's (for the purpose of payroll tax) definition of an employee, the ABC Test and individual state legislations, etc., today there are several policies that govern classifications. What are the key factors that employers be mindful of while classifying employees and independent contractors so that they do not misclassify?

John: Hard to imagine how anyone could meet all the “tests” out there. Control is always a big factor, if you are directing when, where, and how work is done, that person is almost certainly an employee. 

Think about how that person was “hired”, ideally an independent contractor will provide you with an agreement to sign, invoice for work done and control their own time. You give an employee all the paperwork, tax info, and additional information they need. What type of work are workers doing for your company? Is it an integral part of the core service/product your company offers? If you’re an accounting firm and you hire someone to do accounting for clients, that looks like an employee; but if you hire them to manage your IT systems that looks more like someone who could be classified as a contractor. 

Economic independence of the worker – do they only work for you, or are they working for numerous businesses doing the same thing and actively seeking new opportunities. 

In a perfect world, a contractor will have set up a business, have an EIN, have insurance and be actively marketing services to the general public – and can provide you with a copy or examples of all that information for you to keep on file should you request it. 

Q: What is the status of the Trump Administration's Independent Contractor Rule, since the Biden Administration had announced plans to rescind the rule? What should be employers be mindful of when classifying workers?

John: It’s officially been rescinded at this point. On the federal level be mindful that the DOL is using the economic realities test, which is what it’s been doing so no real change ever happened there, and the IRS is using their 20-factor test. 

In the short term, I would probably be more concerned about what the individual state where your business is located is doing while the federal government figures it out. Several of them have made this a priority with increased enforcement and deploying resources to back this up.  Pay attention to how an investigation or audit would take place and think about that when classifying your workers; for example in states where the default position is that any person who does work for a business is an employee and the business has the burden to convince the state otherwise, if you’re hiring contractors you might want to take all the steps you reasonably can to tilt the scales towards classification as a contractor since you’re fighting an uphill battle from the start.  

Q: What sort of changes do you expect from the Biden Administration on this front in the future?

John: I’m sure plenty of people will disagree with this, but major ones. They’ve already made it clear that this is an area they’re going to give a lot of attention. I expect some change in the test used to classify workers towards making it more difficult to classify someone as a contractor. Even if that doesn’t happen and all they do is significantly increase enforcement of the current standard that would be a major shift from the previous administration. That’s the part I’d be concerned about, if all they do is switch the test and continue with lax enforcement, who cares, but increased enforcement will be a different story. 

Q: What are the common mistakes that companies do when it comes to classifying workers?

John:

• Believing that just because the business and the worker both agreed the classification was an independent contractor that makes it so
• Giving contractors benefits
• Maybe somewhat outside the scope of this, but even when business properly classify workers as employees, they mess up the exempt vs. non-exempt status 
• Thinking that because there is a signed Independent Contractor Agreement that automatically makes someone an independent contractor 
• Controlling all the aspects of the work 
• Not taking whatever reasonable steps they can, beforehand, to justify a worker is a contractor, not an employee
• Thinking that a contractor can just be “fired” whenever the business wants; they’re working under a contract, not as an at-will employee, and the contract dictates how businesses can end the relationship 
• In terms of classifying, you basically can’t make a mistake if you classify them as an employee - there are plenty you can make after that, but that’s about as full proof a way I can think of to make sure you don’t have a contractor/employee classification issue, but that’s easier said that’s done based on the realities of many businesses 

 

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