Worker Classification Defined

by David and Allana

There has been a continuing conversation in the Minnesota theater community about workers, sustainability, value, and compensation.

Download this PDF for a 2-page summary of how the government classifies (all) workers, and what that means for the worker and the employer. It is something that we tried to distribute to all of the Mill City Summer Opera technicians in 2016.  The Technicians for Change don’t believe everyone should be classified as an employee but we do hold strongly that everyone deserves the rights appropriate to their situation. We hope that this raises awareness, and encourages dialogue and positive change.

6 Comments

  1. It would be helpful to know how to tell what your classification is when different aspects of your work fall on different sides of the chart. For example, if the worker is allowed to do the work whenever they wish (within the hiring company’s business hours), but the company provides all the materials and the premises, which factor is more important? Or if there is a set schedule, but your pay is not associated with how much work you’ve done for each payment? Do you simply tally how many factors apply to each side, and then assume the one that has more applicable points? Or do certain ones trump others? Does this vary state to state?
    And what if the company you work for used a second company to hire you and pay you, even though you’ve never met this other company or signed anything with them, and your contract is with the company you’re providing the work for? This seems impossible to fill out the form, given that there’s a third party that you don’t have the details for.

    It would also be helpful to know what happens if you file that form to the IRS–does the hiring company know that a form has been filed? Do they know by whom? What happens if they hired you as the wrong classification? What protection does the worker have, should the company be angered by the investigation? If a company is investigated and it’s discovered that they’ve been misclassifying employees as independent contractors for years, what penalties do they owe and to whom? Does finding out that you’ve been misclassified nullify the hiring, meaning that you may not be paid for work that you’ve done so far, or need to return any money you’ve already received? How long do you have to ask for a determination of your classification after a job has ended? If the job already ended before you ask for the investigation, will you be affected by the findings?

    What questions do you recommend a worker ask when faced with a contract/offer in order to verify that you are not being misclassified? What are you allowed to ask about the contract/offer, and what does the company have a right to not inform you about? How do you recommend handling a situation in which you can tell that the company is attempting to misclassify you, whether knowingly or not? If you determine that the company is intentionally trying to misclassify you, is there a way to report this without accepting the job?

    If you want to be an independent contractor, what do you recommend doing to protect yourself, since you won’t have the protections of an “employee”?

    Liked by 1 person

    1. Thanks for your great questions. We don’t immediately have all the answers, and getting ahold of people in the state and federal government for clarification has been difficult. (The general IRS phone message actually says, essentially, “call volume is so high right now that we aren’t even trying to answer.”) While we continue to reach out for further information, here are the answers we have right now.

      As always, we are activists, not legal experts. The information provided does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only. Information may not constitute the most up-to-date legal or other information.

      >>You said:
      >>”It would be helpful to know how to tell what your classification is when different aspects of your work fall on different sides of the chart. For example, if the worker is allowed to do the work whenever they wish (within the hiring company’s business hours), but the company provides all the materials and the premises, which factor is more important? Or if there is a set schedule, but your pay is not associated with how much work you’ve done for each payment? Do you simply tally how many factors apply to each side, and then assume the one that has more applicable points? Or do certain ones trump others? Does this vary state to state?”

      The answer will vary according to the particular situation. There is no formula about exactly how to weigh factors. Unfortunately, this means that in a situation where some factors indicate employee status while other factors indicate IC status, it requires actually filing a request for clarification to know what the true legal answer is. We recognize this is frustrating!

      It’s also worth noting that the same working situation might be interpreted differently by a different agency. In addition to any determination made by the IRS, “Three state agencies in Minnesota administer and enforce state laws that require them to determine whether workers are properly classified”: the Department of Employment and Economic Development (DEED), the Department of Labor and Industry (DLI) , and the Department of Revenue (DOR). “Different state laws and rules, along with related judicial case law, establish DEED, DLI, and DOR’s obligations regarding worker classification and the factors that each should consider when determining a worker’s status… [Thus] agencies’ worker classification determinations can differ.” (https://www.auditor.leg.state.mn.us/ped/pedrep/missclass.pdf)

      The federal government emphasizes this as well: “Even if you are an independent contractor under another law (for example, tax law or state law), you may still be an employee under the FLSA [Fair Labor Standard Act].” (https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/misclassification-facts.pdf)

      It’s worth noting that all the government literature talks about workers being misclassified as ICs when they should be employees – we haven’t seen anyone talking about the government looking at a worker and saying they should have been an IC, not an employee.

      The authors do not have any experience with classification in other states besides Minnesota.

      A personal experience: when I was working as management for a small local theater company, we were randomly selected for an audit by DEED. The auditor interviewed me extensively to learn about the particular conditions for different workers, and reached a determination about classification for each. She shared much of her reasoning with us: for example, she talked about how, for us, a costume designer does some work independently on their own schedule in their own location, and some work at times and places set by the company (production meetings, tech). The auditor said that the business of theater simply requires a certain number of instances where everyone is together in one room at one time, but this requirement doesn’t automatically mean that theater workers are employees.

      >>You said:
      >>”What happens if they hired you as the wrong classification?”

      What may happen to the company is indicated in the next section.

      For what benefits may accrue to the worker, the federal government may order the company to get you your back wages, if applicable. If you were misclassified as an IC, then you may have been paid less than minimum wage, or you may not have received the proper pay for any overtime. “A common remedy for wage violations is an order that the employer make up the difference between what the employee was paid and the amount he or she should have been paid… Generally, a two-year statute of limitations applies to the recovery of back pay. In the case of willful violations, a three-year statute of limitations applies.” (https://www.dol.gov/general/topic/wages/backpay)

      We also know of cases where a determination was made that the worker was indeed an employee and that the worker must therefore have their workers comp claim covered by the company’s policy.

      >>You said:
      >>If a company is investigated and it’s discovered that they’ve been misclassifying employees as independent contractors for years, what penalties do they owe and to whom?

      The IRS says “If you [employer] classify an employee as an independent contractor and you have no reasonable basis for doing so, you’re liable for employment taxes for that worker.” https://www.irs.gov/pub/irs-pdf/p15a.pdf

      There can also be a civil monetary penalty for a company that repeatedly or willfully violates minimum wage and overtime rules: https://www.dol.gov/general/topic/wages/backpay

      Below is what Minnesota DEED, DLI and DOR do when an employer has misclassified a worker. This information is taken from https://www.auditor.leg.state.mn.us/ped/pedrep/missclass.pdf:

      “When, through an investigation or audit, DEED identifies an employee who was erroneously classified as an independent contractor, DEED notifies the employer of the determination and directs the employer to correctly classify similarly employed workers. Also, if the reclassified worker is eligible for unemployment benefits, those benefits are paid. Employers that have misclassified workers are assessed unpaid unemployment insurance taxes, penalties, and interest. DEED may assess back taxes for up to four prior years.

      “Like DEED, DLI does not directly penalize employers for misclassification. If an employer incorrectly classified all of its workers as independent contractors and did not carry workers’ compensation insurance, then the employer can be penalized for failing to have mandatory coverage. If an employer has a workers’ compensation policy, misclassified employees are covered by it. In these cases, the issue that the employer may not be paying a sufficient premium to cover all actual employees is between the insurer and the employer. Finally, if the Labor Standards division finds that a worker was misclassified as an independent contractor and the payment to the worker did not meet minimum wage standards, the division may assess penalties for labor standards violations.

      “According to DOR officials, Withholding Division audits focus on bringing employers into compliance going forward so that, in the future, the employers properly classify workers who are employees and withhold income taxes from their wages. If an audit finds misclassification, the department sends an assessment to the employer for the amount of income tax that should have been withheld (minus the amount of income tax that the misclassified employees actually paid), penalties, and interest. According to DOR officials, the most applicable penalty is for late reporting of withholding obligations. The department may also assess a negligence penalty if the employer did not exercise ‘due diligence’ in properly classifying its workers.”

      Again from personal experience: when my company was audited by DEED, we had actually just that year switched some workers from being ICs to being employees. In our case that was because of a fundamental change in job description, and we recognized that this change in the nature of the job meant that their worker status had changed. Because we made the change halfway through a year, this created an irregularity in reporting – our auditor said that for the purposes of DEED, we needed to have made that change at the beginning of the year. So we were found to have technically misclassified workers for 6 months. DEED wasn’t angry with us, and understood the situation, but still had us pay the back unemployment taxes plus interest for that portion of the year. They did not assess us any penalty.

      >>You said:
      >>Does finding out that you’ve been misclassified nullify the hiring, meaning that you may not be paid for work that you’ve done so far, or need to return any money you’ve already received?

      No.

      >>You said:
      >>What protection does the worker have, should the company be angered by the investigation?

      Requesting a clarification or raising a complaint about worker classification would be protected under both state and federal Whistle-blower law.
      Federal: https://www.whistleblowers.gov/ “An employer cannot take an adverse action against employees, such as: firing or laying off, demoting, denying overtime or promotion, or reducing pay or hours, for engaging in activities protected by OSHA’s whistleblower laws.”
      State: https://www.revisor.mn.gov/statutes/cite/181.932 “An employer shall not discharge, discipline, threaten, otherwise discriminate against, or penalize an employee regarding the employee’s compensation, terms, conditions, location, or privileges of employment because: (1) the employee, or a person acting on behalf of an employee, in good faith, reports a violation, suspected violation, or planned violation of any federal or state law or common law or rule adopted pursuant to law to an employer or to any governmental body or law enforcement official.”

      Of course, the employer COULD illegally retaliate against you. In addition to the adverse action the employer took against you, you’d then have to go through the process of filing a whistle-blower complaint. Probably some employers do rely on workers not being able to endure the prospect of potential retaliation even if it would be illegal, and on the assumption that a worker won’t have the wherewithal to file a whistle-blower complaint.

      >>You said:
      >>How do you recommend handling a situation in which you can tell that the company is attempting to misclassify you, whether knowingly or not?

      We have personal experience with this as workers. We were offered a tech job for a production and it all sounded fine, right up until we got a contract to sign. Although all the key factors implied that the job should be employee status (employer provides all equipment, work is done on employer’s job site, employer provides artistic control of all work while worker has no personal creative input, and the payment was not negotiated but set by the employer) the contract went out of its way to say “Whether you are an independent contractor or an employee shall be governed by applicable law.” This didn’t answer one very important question, which was “Do we get workers comp coverage?” Always important as a consideration, but especially important here given the working conditions of this particular production. If we were employees, the employer would be required to provide workers comp coverage.

      Back then, we didn’t know about the option to file a request for clarification with the government. Even if we had, we still might have followed the path we took, which started with communication with each other and with the employer. We strongly suspected the misclassification was intentional, but thought it was our responsibility to make sure, and see if education could fix things.

      First, we declined to sign the contract as written, and told the Production Manager why we were refusing the job. We believe the PM agreed with our position, but didn’t have the power to change the contract; but having enough people (more than just us) complain about the contract and turn down work, gave the PM ammunition to go to upper management and say “you need to fix this.” The risk was present that management would just ignore the complaints, and that there would be enough workers who didn’t know their rights, needed work, and wanted an In, who would still take the job. But we knew that simply not taking the job and not saying anything meant that definitely nothing would change.

      Workers refusing the job, and the PM going to management, didn’t work, so we contacted management directly. (We understood that the PM was concerned about their own job and only had so much power to advocate.) We had a couple meetings with management where we thought we were making progress – for example when they expressed fear that the logistics of getting a payroll processor, and the costs of payroll taxes, would be prohibitive, we pointed out that other companies, with budgets much smaller than theirs, that we worked with had done it just fine. It truly seemed like they didn’t know it wasn’t that hard, and that we had made a breakthrough by telling them something new.

      As it turned out, though, for some reason, they were philosophically opposed to having anyone with employee status. They played nice, but never intended to change anything for us.

      That’s a pretty extreme case, and that’s part of what led to the creation of Technicians for Change. We knew we needed a critical mass of workers who understood their rights, so that management would have a harder time bullshitting people.
      So for your question of how to handle a situation involving misclassification, from the perspective of increasing justice for all, we’d encourage dialogue.

      First, dialogue with your fellow workers. When it feels like it’s just you, it can be overwhelming, and you feel like it’s on you to do everything. Maybe there are coworkers who are experiencing the same thing you are, and you can band together, or at least commiserate.

      Although we note that sometimes it can be yet more work and stress if you encounter coworkers who are indeed experiencing the same thing, but don’t understand why it’s a problem, or don’t care. That sucks. But at least planting that seed now could have results later with coworkers who might be new to some of these ideas, and need time to come around.

      Second, dialogue with the employer if you are in a position to do that (and certainly not everybody is). While change didn’t happen in our story above, it has happened in other cases. There have been times when we’ve said “You know, I think that job should be an employee job” to the friendly neighborhood Production Manager, and they’ve said “Oh! You’re right!” There are times when the employer doesn’t know the rules, and times when they do know the rules but unintentionally haven’t followed them.
      We believe in giving conversation/education a chance, because it can work. And change that comes from mutual understanding can be more lasting and powerful than change that comes because of getting caught and punished once.

      But if you aren’t in a position where you have the power, or the safety, or the time, or the energy to have a conversation with your employer, that’s understandable too. It’s fine to go straight to a government request for clarification (acknowledging that we haven’t answered all your questions about what happens when you do). You’re not a jerk if you go right to invoking a higher authority – you’re standing up for your rights and saving yourself a lot of difficult emotional work by skipping the “being nice” step.

      ***
      Here are the questions we haven’t answered yet:

      It would also be helpful to know what happens if you file that form to the IRS–does the hiring company know that a form has been filed? Do they know by whom?

      And what if the company you work for used a second company to hire you and pay you, even though you’ve never met this other company or signed anything with them, and your contract is with the company you’re providing the work for? This seems impossible to fill out the form, given that there’s a third party that you don’t have the details for.

      How long do you have to ask for a determination of your classification after a job has ended? If the job already ended before you ask for the investigation, will you be affected by the findings?

      What questions do you recommend a worker ask when faced with a contract/offer in order to verify that you are not being misclassified? What are you allowed to ask about the contract/offer, and what does the company have a right to not inform you about?

      If you determine that the company is intentionally trying to misclassify you, is there a way to report this without accepting the job?

      If you want to be an independent contractor, what do you recommend doing to protect yourself, since you won’t have the protections of an “employee”?

      David

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    2. One more thing I’d like to add related to this question:

      >>And what if the company you work for used a second company to hire you and pay you, even though you’ve never met this other company or signed anything with them, and your contract is with the company you’re providing the work for? This seems impossible to fill out the form, given that there’s a third party that you don’t have the details for.

      I think there is some confusion (which means *my* confusion, at the very least) about the second company “hiring” you. If your contract is with (signed by) the first employer only, then you could be a subcontractor of that employer but they usually pay you directly. Alternately, that first employer could have hired a payroll company to manage their billing, in which case you’d definitely be the employee of the first company. If you work for a temp agency or the venue is managed by an out-of-state event management company like VenuWorks (venuworks.com), you could have on your hands whats called Joint Employment. Here is a link to start to explain this idea:
      https://www.nelp.org/publication/joint-employment-explained-how-hr-3441-legalizes-corporate-rip-off-workers/

      There is also something called a Shared Employee, which I do not think is the case here.
      I’m also confused about Outsourced HR services and how that relates to Joint Employers …
      (From the looks of this article, it sounds like it depends on *which type* of Outsourced HR you use.
      https://syndeohro.com/hr-outsourcing-peo-vs-aso/)

      I’ve been meaning to write an article on Joint Employers in the Events Industry for almost 2 years now. It became a hot topic (in the non-entertainment world) in the winter of 2019-2020 and I thought that was my chance but I’ve been too busy and done little more than collect a couple dozen resources to read. If you’d be willing to work with me to wrap our brains around this topic, PLEASE send an email to TechnicianRights@gmail.com or fill out the Connect form. I would love that!!

      Thanks for your awesome questions. We’ll keep digging for more answers and maybe make them into a full article so everyone can benefit from them!

      Allana

      Like

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