Misclassification Question and Answer

Logos from WHD, Department of Labor and Industry, IRS, DLUSA and Employee rights form

By David

Published January 2021

Back in September 2018, Allana and I wrote an article about worker classification. It discussed some of the factors used to consider whether a worker is properly classified as an employee or an independent contractor (IC). It also referenced the idea that a worker has the right to ask the government for a review of the situation if they think they’ve been misclassified.

One reader had several excellent follow-up questions. (Thanks, reader!) Others probably are also wondering the same things, so I’m publishing those questions and my additional research here.

To best appreciate these questions and answers, it may be useful to review this brief summary of what benefits employees get that ICs don’t, and what the basic factors are that the government might weigh to determine a worker’s status.

Note: This article is super long! It’s like reading four average Technicians for Change (TFC) articles! Plus, it gets kind of technical! Don’t worry, no need to read the whole thing. Just look at the questions and see which sections you find interesting. 

As always, we at TFC 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. 


Question: 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 [employee vs. independent contractor] chart. 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 matter more than others? Does this vary state to state?

Answer: 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. I 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, “[t]hree 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). (Minnesota OLA, Misclassification of Employees as Independent Contractors Evaluation Report; Nov 2007) “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.” (Ibid)

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).” (US DOL, Misclassification Facts PDF)

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

I 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 our costume designers were ICs. She 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. 

Q: If the same working situation might be interpreted differently by a different agency, then which agency should I report to if I think I’m being misclassified?

A: The bottom line is: Don’t worry, if you contact an agency and they’re not the best match for your concern, there’s every chance they’ll refer you to the correct agency. Federal and state agencies sometimes work together. Depending on your state, your local DOL may have a good working relationship with the federal DOL.

Different government agencies may care about worker classification for different reasons, which may or may not match your own reasons. For example, DEED might care whether unemployment taxes have been paid. The IRS and your state Department of Revenue might care whether you’ve paid the right amount in taxes. Probably none of those is your primary personal concern! (No offense to those agencies.) You’re probably best off going to either the Federal or State Department of Labor (contact info listed at the end of this article).

Federal and State government agencies may have different definitions about who is covered. For example, as regards overtime, in Minnesota, nearly all employees are covered by the state overtime law (with some exceptions like babysitters, seafarers, and carnies). However, the federal overtime law only covers employees at businesses with gross annual sales of more than $500,000. So if you’re a worker at a small organization, and your issue is that you haven’t gotten overtime, you’re not covered by the federal government and should go to the state.

(Again, don’t worry: The government spokespeople I talked to said that individual workers aren’t expected to know all the intricacies of who is covered by which agencies, and the agencies would help a worker understand.)

Let’s say you’re indeed covered by both federal and state; both sets of law may apply to you, but one may be more advantageous to you. Consider minimum wage. If you work in a state like Minnesota where the state minimum wage is higher than the federal minimum wage, then it’s to your advantage to report to the state. You are entitled to whichever rate is higher, but the question is which government agency has the power to compel the employer to pay that rate. The federal government can enforce the federal minimum wage, and the state government can enforce the state minimum wage. (But the federal government would tell you, “hey, your state minimum wage is higher, it’s to your advantage to talk to them!”)

Conversely, if you work in a state like Minnesota where overtime applies only to hours worked over 48, then it’s to your advantage to report to the federal government, where overtime applies to hours worked over 40. Interestingly, that means there’s a chance of a worker needing to report to both federal and state: the former to make sure you get the best overtime pay, and the latter to make sure you get the best hourly rate.

Q: What happens if you file a complaint or a request for clarification –does the hiring company know that a form has been filed? Do they know by whom? 

A: For a complaint that affects only one worker, the government agency will get permission from you before they share your name. If your employer is a jerk and tries to connect the dots about who complained, they won’t get any help from the government agency. It’s technically possible that someone could file a Freedom of Information Act (FOIA) request that might reveal your information, but that would be an extreme case.

Regarding confidentiality, the US DOL website emphasizes: “All services are free and confidential, whether you are documented or not.” (US DOL, How to File a Complaint PDF; Jan 2017)

Q: What happens after I file a complaint? 

A: If the agency decides to explore your complaint, you’ll have an investigator. That investigator will stay in regular contact with you during the process. They’ll tell you things that are relevant to your case. They will ultimately tell you whether or not the complaint was substantiated, and if it is, they’ll tell you what you can expect next, if anything.

These agencies deal with this stuff all the time and see some problems over and over – it’s possible that the investigator could talk with you by phone and make a determination right then. It’s also possible that an investigation would be more complicated. Instead of an individual case, an agency might expand to an in-depth investigation that covers more or all workers at a company.

If your complaint led them to discover other workers who were misclassified, you would not be informed of that. Unfortunately, you probably won’t get the satisfaction of having the government tell you, “Good job, because you contacted us, we’ve uncovered corruption at the highest levels!” Talking with your coworkers is the best way to know whether conditions have improved for more people than you.

If the agency determines they can’t take your complaint, they will tell you that, and they’ll tell you why. For example, if you aren’t covered under their particular jurisdiction, or if the statute of limitations has expired (see below).

Q: 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?

A: Yes, if your job has ended and you file within the statute of limitations, you’d be covered.

For the US DOL, “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.” (US DOL, Backpay) Other agencies may have different statutes of limitations.

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

A: If you’re not being directly affected (because you haven’t accepted the job) it would probably be like if you were reporting on behalf of someone else. Government agencies MAY take on such third party complaints, but there’s no guarantee. It may depend on available resources at the agency. They’re more likely to take on cases that have already affected the complainant. 

If you do file a third party complaint, you wouldn’t have an investigator assigned the way you would if you were the person affected, and you likely wouldn’t find out the results of the investigation.

Q: What happens if they hired you as the wrong classification? 

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

For what benefits may accrue to the worker, the government may order the company to give you your back wages (relating to minimum wage and/or overtime), if applicable: “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.” (Ibid)

I 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.

Note that there may be cases where an audit does reveal a misclassification, but no actual issue. Or at least, no actual issue from the perspective of that agency – they could refer the case to a different agency if they knew that new agency would find an issue.

Q: 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? 

A: 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.” (IRS, Employer’s Supplemental Tax Guide for 2020 15-A

There can also be a civil monetary penalty for a company that repeatedly or willfully violates minimum wage and overtime rules. (US DOL, Backpay)

Below is what Minnesota DEED, DLI, and DOR do when an employer has misclassified a worker. (This information is taken from the Minnesota OLA, Misclassification of Employees as Independent Contractors Evaluation Report; Nov 2007.)

“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 switch 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. It didn’t amount to that much. They did not assess us any penalty.

Q: 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?

A: No. 

Q: What protection does the worker have, should the company be angered by the investigation? 

A: Requesting a clarification or raising a complaint about worker classification would be protected under both state and federal Whistleblower law. 

Federal: “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.” 

Minnesota: “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 whistleblower 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 whistleblower complaint.

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

A: Allana and I have personal experience with this as workers. We were offered a Spot Operator 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 we had, which was, “Do we get workers’ compensation 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’ compensation 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 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. The PM agreed with our position, but didn’t have the power to change the contract; however, 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.” We knew management might 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. However, we knew that simply not taking the job and not saying anything meant that definitely nothing would change.

Workers refusing the job, followed by the PM going to management, didn’t work. Therefore 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.

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, I’d encourage dialogue.

First, talk 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. 

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. 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, talk 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 someone has said, “You know, I think that job should be an employee job” to their friendly neighborhood Production Manager, and the PM has 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 made an honest mistake. 

I believe in giving conversation/education a chance, because it can work. Change that comes from mutual understanding can be more lasting and powerful than change that comes because of getting caught and punished once.

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. 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.

Q: 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”?

A: Before I address how to protect yourself as an IC, let’s address a potential assumption hidden within the question. It doesn’t matter if you “want” to be an independent contractor, if the characteristics of the job mean that you should properly be classified as an employee.

The US DOL notes, “Employers may not misclassify an employee for any reason, even if the employee agrees.” (US DOL, Misclassification Facts PDF)

In Minnesota, “the mere existence of a contract does not make a worker an employee or an independent contractor. The actual relationship between the parties must be examined.” (Minnesota Revenue, Independent Contractor or Employee Fact Sheet PDF; Mar, 2010)

If you want to be an independent contractor, then the only legitimate way of doing it is to take the right jobs.

Now, as to protecting yourself: Remember, if you’re actually an IC, you are an independent contractor – meaning you get to negotiate the terms of the job before you take the job, or choose not to take that job. Make sure you actually negotiate! You can protect yourself by, for example, fairly valuing your work and signing a contract that provides you with a decent income. To protect yourself in case of injury, if you’re an IC, you should have your own liability insurance.

How to File an Inquiry or Complaint:

Minnesota Department of Labor
dli.laborstandards@state.mn.us
651-284-5070 or 800-342-5354
US Department of Labor
PDF instruction sheet; www.dol.gov/whd
1-866-487-9243

A Final Note

In September 2020, the US Department of Labor announced a proposed rule addressing how to determine whether a worker is an employee or an independent contractor. If adopted, this new rule would adjust how different factors are considered, potentially making it easier for employers to classify someone as an IC (leaving that worker with fewer protections). Here is a useful overview of that proposed rule and its implications. Especially important: the new rule would “not apply to states, which are still free to use their own worker classification test.”

2 Comments

  1. Excellent article, and thank you!

    I think we can simplify the first part by saying that there are three main entities that have classifications about worker status, and each dictates different benefits/responsibilities (these are largely off the top of my head, so please correct me if I’m mistaken about something or left off something major):

    1) US Department of Labor (federal): Due to the FLSA, this dictates applicability of federal minimum wage and overtime protections.

    2) State labor laws (state): These might be affected by different state branches (as in Minnesota), but in short, these dictate liability coverage/requirement, worker’s comp coverage/requirement, state minimum wage applicability, and who pays state taxes.

    3) IRS (tax): As per the IRS webpage, this would dictate who pays income tax, SS and Medicare tax, unemployment tax, and self employed taxes. (Note: Employers put some of your wage toward SS and Medicare, but they also directly contribute to those; Independent Contractors are responsible for paying BOTH portions, which is what the self employment tax is.)

    That’s a very dumbed down analysis, but it is meant to illustrate that the three main entities will change different aspects of what you are entitled to, depending on which ones classify you as an employee. You’d be wise to familiarize yourself with what the full benefits or responsibilities are of each definition with each entity–even if you are NOT an independent contractor!

    As for the last, Independent Contractors (who are correctly classified as such) should consider the following things to protect themselves (at least):
    1) Liability Insurance — check state laws to see what is required at the bare minimum, but it’s probably safest to assume that you will be liable for any damages unless you get your own insurance
    2) Workers’ Compensation Insurance — again, check state laws to see what is required, but assume that you will be responsible for your own injuries and time off while you recover unless you get your own insurance
    3) Legal Advice — You will be negotiating contracts, and contracts will be written to favor the person who wrote them. Learn what to argue against and how to protect yourself in the language of the contracts, and how to keep from being bullied into a contract that is unfair to you. Also, consult with a lawyer to make sure you have a solid understanding of what you need as an IC in your state(s), in case you missed something.
    4) Taxes — You will need to pay taxes, and they will be more than what you’d see from working on a W2 (because your employer won’t be withholding or contributing to them). The forms will be a little more convoluted than just the standard ones employees fill out; specifically, look into self employment taxes.
    5) LLC — Do yourself a favor and look into the benefits vs cost of incorporating yourself into an LLC. It may or may not be what’s right for you, but read up on it to decide for certain. Here’s a handy breakdown: https://www.nolo.com/legal-encyclopedia/should-an-independent-contractor-form-an-llc.html
    6) Pay — Ultimately, make sure that you factor in the cost of all of the above when it comes to negotiating your pay. And if you only occasionally accept work as an IC, make sure that that work is worth your while.

    (Note: I am not typically an independent contractor, but have worked as such on occasion without really understanding what it meant. Ever since being misclassified and realizing what that meant for Workers’ Comp, I’ve taken an interest in how professional ICs in our industry protect themselves. This list of considerations for ICs is an amalgamation of the things that I have taken away from conversations with multiple ICs, a wonderful lawyer who is part of an organization in this industry, a business owner in the industry, and my own research into the difference between ICs and Employees. This is only intended to be a suggestion.)

    Like

    1. @John Doe, your reply here is a great addition! Your specific suggestions about things to do to protect yourself as an IC are excellent!

      Like

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