The classification of workers as employees or independent contractors is an ongoing headache for employers.  Different government agencies use different tests to determine a worker’s status.  The one thing the tests have in common is that they are subjective: two people applying the same test to the same worker will often reach different conclusions about the worker’s status.  Employers face substantial liabilities under tax provisions, employee benefit plans, workplace rules, overtime requirements, and other laws if they misclassify an employee as an independent contractor.

The Department of Labor recently issued guidance on the misclassification of workers under the Fair Labor Standards Act.  Covington’s employment practice group has analyzed the guidance in an alert, available here.  Our government contracts blog explains the special issues the new guidance raises for government contractors.

Reduced to its essence, the Labor Department’s new guidance suggests that most workers should be classified as employees for purposes of the FLSA.  The guidance does not affect employee benefit plans directly; but since many employers use payroll feeds to administer their benefit plans, the guidance might inflict collateral damage.  If an employer reclassifies an independent contractor as an employee for purposes of the FLSA’s overtime requirements, it is likely that the classification will affect payroll systems, tax withholding, employment tax, employee benefit plan coverage, nondiscrimination testing, Affordable Care Act reporting, and a host of other compensation and benefit systems.

Employers considering how to react to the new worker classification guidance should be sure to consider the collateral effects of changing a worker’s classification.  This would also be a good opportunity to review the eligibility provisions of benefit plans, to make sure they do not inadvertently include workers whom the employer does not intend to cover.

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Photo of Amy N. Moore Amy N. Moore

Amy Moore advises public and private companies and tax exempt organizations on a wide range of tax, ERISA, and employment law issues concerning all types of benefit programs.  Ms. Moore counsels some of the world’s largest multinational companies on the design and implementation…

Amy Moore advises public and private companies and tax exempt organizations on a wide range of tax, ERISA, and employment law issues concerning all types of benefit programs.  Ms. Moore counsels some of the world’s largest multinational companies on the design and implementation of innovative benefit strategies, including the restructuring of retirement programs to meet the needs of the modern work force; the use of surplus pension and insurance assets to provide non-traditional benefits; and the establishment of funding and security arrangements for welfare plans and executive compensation.  She represents clients in connection with pension fund investments in private equity funds, hedge funds, group trusts, and derivatives.  She also advises on benefits and compensation issues in acquisitions and divestitures, debt finance, joint ventures, and other corporate transactions.  Ms. Moore represents companies in audits and contested agency proceedings involving benefit plans and advises clients on employee benefits issues that arise in connection with ERISA litigation and settlements.  She also counsels employers on issues of plan administration and the correction of operational problems under government-sponsored remedial programs.