Avoiding Misclassification: The Importance of Clear Job Descriptions

Misclassification of employees can result in legal battles, back-wage claims, and financial penalties for employers.

Proper classification of workers clarifies the employer’s legal rights and responsibilities. Clear job descriptions and staying within defined roles can help employers avoid costly legal issues. For legal help crafting accurate job descriptions to define the worker’s role and classification, contact an employment law attorney.

Understanding Employee Misclassification

There are a couple of ways employee misclassification can impact employers. The most common types of worker misclassification include:

Exempt vs. Non-Exempt Employee

Exempt full-time employees generally get a salary and are not subject to minimum wage and overtime pay laws. These tend to be for white-collar type jobs in executive, administrative, and professional work.

Misclassifying a worker as exempt could expose the employer to back wage claims and financial penalties.

Employee vs. Independent Contractors

Employee versus independent contractor classifications are also important for employers. Classifications define the rights and responsibilities of employer and worker.

Misclassification exposes employers to additional labor laws, legal liability, and workers’ comp claims.

Employee and Contractor Classification Tests

Identifying a worker as a contractor or employee depends on several factors. States generally follow either a multi-factor common law test or the ABC test developed by California. The IRS uses a 20-factor checklist for employers to determine job classification.

These tests generally determine the level of independence and control workers have over their job and relationship with the employer.

Common Law Factors for Job Classification

Many federal agencies, including the U.S. Department of Labor, still use the common law test. The key factors for determining employment status include the following:

• Behavioral control: How much control does the employer have over the work done?
• Financial control: Does the employer have financial control over the worker’s job and compensation?
• Working relationship: Does the relationship follow a typical independent contractor job or are there terms and benefits like a regular employee?

Job Classification Under the ABC Test

The ABC test starts with a presumption the individual is an employee. Then, the following factors determine job classification:

• Absence of control: Does the worker have control over their work free from the employer’s direct direction?
• Business of worker: Is the worker’s service part of the employer’s usual course and place of business?
• Customarily engaged: Is the worker normally engaged in the independent occupation or business they provide to the employer?

Legal Consequences of Misclassification

There are several legal consequences of misclassifying a worker. Many of the Fair Labor Standards Act (FLSA) regulations do not apply to exempt workers. Tax laws, labor laws, and tort laws can all depend on whether someone is an employee or independent contractor.

Types of legal consequences for worker misclassification could include:

• Payroll taxes and employment tax withholding
• Tax audits
• Overtime and minimum wage back pay claims
• Health insurance coverage
• Retirement plan benefits
• Unemployment insurance
• Workers’ compensation claims
• Vicarious liability for accidents caused by employees
• Legal fees defending misclassification lawsuits

Employers could also face reputational damage for misclassifying employees. It harms the company’s reputation if they are avoiding labor law protections or denying employee benefits. Misclassifying workers can also trigger a regular audit by government agencies.

Crafting Accurate Job Descriptions and Employment Agreements

Job descriptions alone do not prevent misclassification, but they can reduce the risk of misclassification. Employers should start by considering whether a job is best suited for a contractor or employee relationship. Job descriptions should clearly identify the worker’s role, responsibilities, expectations, and job duties.

For independent contractor jobs, the work description should indicate:

• The worker’s independence in doing the job
• The worker’s own financial risks and investments
• Non-exclusivity (can work for other members of the public at the same time)
• Limited terms of the job (a limited time or based on completing the job)

For exempt and non-exempt workers, job descriptions should clarify the type of work, salary, and job duties. Exempt workers usually have a guaranteed salary, not based on the number of hours worked. Job descriptions can show an employee falls into the exempt category based on the following:

• Job function
• How the role fits within the organization
• Qualifications, skills, training, and experience required
• Job duties and responsibilities
• Compensation and benefits

Employers can use regular audits to ensure work stays within the defined job description and classification. If the employer wants to reclassify a worker, they should craft a new job description and agreement.

Employers still concerned about misclassification can get a determination by the Internal Revenue Service (IRS).

Staying Within Defined Roles and Responsibilities

Some employers start off with the understanding they hired an independent contractor. If they are satisfied with the work, they may ask the worker to do other jobs or take on more responsibilities. An independent contractor can transition to an employee as the role and responsibilities change over time.

A regular audit can help employers understand how any job roles may have changed over time. Some changes require reclassifying the worker. The employer can take action to clarify the worker’s job role and responsibilities.

Using Employer of Record Services

Employers exploring global hiring options must be aware of different labor law requirements. Some employers can benefit from using Employer of Record (EOR) services.

An EOR acts as a local employer, handling many of the administrative tasks associated with hiring workers. EORs takes care of onboarding, worker payment, benefits, and tax withholdings. However, there are risks of using an outside company in global employment opportunities. Contact an employer law attorney to understand the benefits and risks of using an EOR.

Best Practices for Job Descriptions

For any improper classification law claims, contact legal experts who understand the legal challenges and liability associated with worker misclassification. Find a local employment law attorney who can help craft clear job descriptions to avoid misclassification issues.