June 18, 2009

Employee lawsuits against employers have almost doubled in the last six years. According to the Fair Labor Standards Act (FLSA), if an employer is found to be in violation of the Wage and Hour laws, the Secretary of Labor may bring suit for back pay and an equal amount as liquidated damages, plus attorney's fees and court costs. Small businesses are feeling the burden and must be cognizant of complying with all laws.

To understand the Federal Labor Standards Act (FLSA), you have to first learn what jobs are exempt from the requirements and which are not. This is not as easy as you think, and there are numerous penalties that can come out of noncompliance with the law. The federal statute enables an employee or former employee to go back either two or three years to collect for unpaid overtime compensation. In the case of willful violations, a three year statute of limitations applies. Also, criminal penalties may be imposed for repeated violations. In addition to back pay, fines can range from $1,100 per minimum wage or overtime pay violation, or $10,000 for each child worker employed illegally. The Wage and Hour investigations can be very broad in scope and not limited to the circumstances surrounding a single complaint. As a consequence, an employer opens the door to a total review of the company's payroll in these situations.

As an employer, knowledge of the requirements under the Fair Labor Standards Act is critical in order to avoid penalties for noncompliance. For more information, go to the Department of Labor's website, Fair Standards Act Advisor*.

Employers who call their workers independent contractors merely to avoid unemployment, workers compensation insurance, and federal and state tax withholding etc. are headed for serious trouble with the Department of Labor (DOL) and/or the Internal Revenue Service (IRS). The IRS announced in May of 2007 that worker classification cases would be a major area of emphasis in 2008. In March of this year the DOL investigated a Texas water company and found that over 200 employees had been incorrect misclassified as independent contractors. The company ended up owing nearly $600,000 for two years of missed overtime pay.

Is my worker an employee or independent contractor? Ask these questions:

1. Do you tell the employee when and where to report to work? 2. Is the employee given instructions on how the work is to be performed? 3. Is the work supervised by anyone on your staff? 4. Is the employee covered by any of your fringe benefit plans? 5. Have you issued the employee a company ID card? 6. Are you providing business cards, stationery or other company property?

If yes to the above, the worker more than likely is an employee, not an independent contractor.

The IRS recently updated its test for determining whether or not an employee is an independent contractor. The following information was copied from their website:

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? After reviewing the three categories of evidence, if you are still unsure if a worker is an employee or an independent contractor, the business can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker's status. Be aware that it can take up to six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form Form SS-8 (PDF).

*http://www.dol.gov/elaws/flsa.htm

About the Author

Cathy Baniewicz has over 30 years experience in human resources. Her career began at Beatrice Foods Co., where she progressed to Assistant Director of Affirmative Action and Corporate Personnel Manager. Prior to joining EffortlessHR, Cathy was Assistant Director of Human Resources at Golden Eagle Distributors, Inc. (Budweiser). Cathy has her B.A. degree from DePaul University, Chicago, Illinois, and MBA from George Williams College, Aurora, Illinois. Cathy obtained her Professional in Human Resources (PHR) certification in December of 2004.

EffortlessHR is an online Human Resources Program for small businesses. This program will guide you through the maze of human resource laws and issues. You will have access to your employee information anytime, anyplace. Federal and State laws, personnel forms, "How To" guides, posters and reports are at your fingertips.

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