Over the past 18 months, employers have endured rough waters in the wake of the U.S. Department of Labor’s (DOL) attack on how businesses engage 1099 contract workers and, on almost a parallel track, to what extent employees can be paid on an overtime exempt basis.
Studies estimate that more than 40 percent of the U.S. workforce will be made up of independent contractors by 2020. Yet, standing in the way of this rapidly emerging economic shift, and poised to seize upon the slightest 1099 misclassification issue, are the Internal Revenue Service and DOL, together with state regulators, activists, unions and of course, the plaintiff’s employment bar. In 2015, the DOL doubled down on its “Misclassification Initiative” by collaborating with several states through work-sharing agreements. This initiative is designed to promote information sharing and coordinated enforcement efforts against independent contractor misclassification.
According to the DOL, misclassified workers are often denied access to critical benefits and protections. The other driver of these combined federal and state initiatives is simple: money. By leveraging an independent or contingent workforce, employers avoid paying state and federal unemployment taxes and workers compensation premiums, as well as Social Security and Medicare taxes.
The problem? Revenue-starved federal and state governments believe the proliferation of misclassified workers is a primary reason for their financial situation. Moreover, the penalties and fines for misclassification are significant and include unpaid federal and state taxes, unemployment insurance and workers compensation premiums, to name a few.
The DOL is especially skeptical of the restaurant industry as a whole and considers restaurants responsible for “significant compliance problems.” The DOL’s new overtime rules, paired with its recent guidance on independent contractor classification, spell interesting and perhaps perilous times for franchisor relationships in particular.
Just in this past month, the Subway restaurant chain entered into one of the most significant compliance “partnerships” with the DOL ever seen in the industry. See Keeping it Fresh: New Agreement with Subway Will Protect Workers.
In short, Subway agreed to take an active role in its franchisees’ Fair Labor Standards Act compliance efforts including providing compliance materials and ongoing communications with franchisees regarding their compliance responsibilities. Further complicating this from the restaurant franchisor perspective is the NLRB’s expanded scope of joint employer liability under last year’s Browning-Ferris Industries of California decision, which found businesses could be held liable as joint employers if they shared in “...matters governing the essential terms and conditions of employment” or had the potential to do so. Now, while the agreement between the Subway franchisor and DOL is notably silent as to whether Subway in effect agreed to obligations indicative of joint employer status, there is little question of how it will be viewed and ultimately, used, by employee advocates, unions and others.
Interestingly, Subway and DOL agreed to explore ways to use technology to support franchisee compliance.
Specifically, as it relates to the use of independent contractors, we highly recommend restaurants enter into a “diagnostic” phase to assess the degree of defensibility of I.C. classifications. This will likely lead to one of the following compliance strategies:
1. Restructure, clarify and document your defensible model
Even with the regulatory climate as it is, a company that has yet to examine its workforce may not want to simply “cut and run” from its contingent model. Rather, adjustments to the relationship – possibly through an individualized written agreement — could enable the arrangement to withstand scrutiny.
2. Reclassify to a W-2 payroll structure
Of course, certain companies, as a result of agency action or self-audit, may decide in favor of eliminating risk of misclassification as much as possible and shift their independent contractors to employee status. This strategy is not without risk, however, and should be handled in a way that minimizes any presumption that prior classifications were improper.
3. Utilize compliant staffing vendors
The economic shift toward independent contractors or contingent workers has over the years given rise to many companies that assume the risk of independent contractor compliance and manage the relationship with the independent worker. Depending on the arrangement, some even treat the worker as an employee and handle all required payroll deductions on a federal and state level. While these entities can certainly help ease the headache of classification, companies should remain mindful they may still be liable for using the servicesof a misclassified worker.
As federal and state regulators together with unions and plaintiff’s lawyers sharpen their focus on the independent contracting model and the new overtime rules, these are the most costly compliance risks facing restaurants today. Accordingly, there’s no better time than now to construct a compliance plan designed to protect your company and limit your vulnerabilities.
Lori Brown is president and chief operating officer of ComplianceHR, a web-based platform that helps companies make critical employment decisions.