Millions of dollars in worker misclassification settlements are in the news almost every other day! The cost of doing nothing to ensure your independent contractors are properly classified is too high. The world of worker misclassification is often very confusing with a maze of guidelines varying by agency and locations. You should always consult with an attorney familiar with worker misclassification for any and all clarification on what you need to know about worker misclassification in your state.
This article will cover worker misclassification at a high level and begin to help you understand the challenges and risks associated with misclassifying independent contractors.
Stats on Misclassification
- 30% of employers misclassify their workers
- 4 Million employees are misclassified as independent contractors annually
- Thousands of actions/suits are filed each year
- The average cost per IC to settle a misclassification lawsuit is $3,315 and that doesn’t include your legal fees
One of the tests, but not the only one, that an agency may use to audit your workforce is the “ABC Test”. If you are interested in knowing exactly what test your local jurisdiction uses please contact your legal counsel or your local labor agency. The ABC Test has become more widespread in recent years and it’s also one of the most rigorous tests agencies use to determine worker classification. The test is a 3-part standard for identifying independent contractors (ICs):
A: Does the person do the work independently of your control and direction? (Your local jurisdiction may use this A prong of the test to frame a broader 7 or 8 question test.)
B: Does the work they perform fall “Outside the usual course” of your company’s business? (Or simply, does the IC do the same job that your employees do?)
C: Do they have their own independent business or trade beyond the job for which they were hired? (Or simply, are they licensed and/or maintain their own business tools?)
The key to this ABC Test is that if you answer “No” to either A, B, or C , then you may be at a greater risk of worker misclassification.
Between state agencies, federal agencies, and class action suits there are many ways that you should be prepared. So how do you prepare against an agency claim or audit? Here are some tips:
- First thing to do is to identify which workers are at risk by using one of the standard tests such as the ABC test above.
- Train your staff on proper terminology when interacting and talking with ICs. One of the easiest examples is to avoid using “our ICs” or “our drivers”; this can be taken to mean they are not allowed to work for other businesses. It’s too similar to the relationship of an employee. The better way to refer to them would be to say, “our contracted drivers” or “our contracted ICs.” Other terms to avoid are “hiring” or “employee.”
- When you are onboarding an IC, it is best to make sure they are signing an Independent Contractor Agreement with all the proper verbiage and arbitration clauses. Make sure a worker misclassification lawyer has reviewed your agreement.
- Using tech is key. Doing manual processes on paper and storing those docs will not be your friend during a misclassification claim or audit. There are document management solutions that can help with being able to search documents easily. A full IC lifecycle platform does this and other things such as onboarding, compliance, settlements, and retention.
The cost of worker misclassification can be hard to estimate, but the stats show that a civil class action lawsuit can cost a business thousands of dollars per IC. A claim or audit of a business with 40-50 ICs could end up costing hundreds of thousands of dollars.
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