• Conducting Internal Audits to Ensure Employees Are Properly Classified
  • June 1, 2010
  • Law Firm: Hunton Williams LLP - Richmond Office
  • The proposed 2011 fiscal year federal budget signifies a renewed commitment to combating employee misclassification, as it contemplates funding an additional 4,700 investigations into worker misclassification issues.  With penalties for worker misclassification being quite steep -- including back taxes, interest, and even punitive fines -- employers should audit their workforce to ensure that their independent contractors are properly classified.

    Unfortunately, there is no bright line test to determine whether a particular worker has been properly classified as an independent contractor.  In fact, the precise definition of an independent contractor not only varies between federal and state law, but can also vary from state to state and even statute to statute. 

    Many employers believe that including language in a contract stating that a worker is an independent contractor will end the classification inquiry.  The inquiry, however, will extend beyond the contract language since determination as to whether a worker is properly classified as an independent contractor is based on multiple factors.  While written contracts and job titles are certainly important factors to consider when assessing whether an independent contractor has been properly classified, a thorough audit should focus on all the facts and circumstances surrounding the worker’s specific job functions and the relationship between the worker and the company.  Examples of questions that should be asked during an audit include:

    • Does the company have the right to control the means and methods of the work or just the work result?
    • How, when and where does the worker perform the work?
    • Who provides the equipment?
    • To whom does the worker report?
    • Does the company have a right to determine which workers can perform the services?
    • How is the worker paid?
    • How does the worker earn vacation and benefits?
    • Are the services performed by the worker traditionally services that are performed by employees?

    While an employer should always review its job classifications at the outset of a new employment relationship or new job classification, employers should also reexamine such classifications periodically to ensure continued compliance with the various applicable laws.