Employee Misclassification: How it May Affect How Your Company Does Business

audit-checklist Hiring team members as 1099 independent contractors is a common practice across several industries, and, for many companies, has become one of the cornerstones of their business model. In the world of event staffing, for example, hiring staff as independent contractors has been the industry standard for decades. A recent government crackdown on the misclassification of employees, however, is now forcing many companies into a paradigm shift regarding how they onboard and classify their experiential marketing field teams.  Those that do not make the shift to W2 variable hour employees will be faced with intense scrutiny regarding non-compliance.

California Governor Jerry Brown recently signed an important law that went into effect on January 1st of this year, increasing penalties for willful employee misclassification. A little over two months later, the California Secretary of Labor entered into a ‘memorandum of understanding’ with the US Labor Department regarding the improper classification of employees as independent contractors (1099 workers), joining 11 other states who signed a similar pledge. These 11 states are Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington. Since California reports to 28 other states, many others are expected to join in preventing employee misclassification. The use of 1099 contractors by any company or agency carries with it an increased risk of worker misclassification liability. Misclassification of independent contractors, who the government views as employees, can result in substantial liability and penalties including back taxes, overtime pay, workers compensation, employee health benefits and more. It is also important to be judicious when hiring an agency that brings field employees on as independent contractors, as there have been many cases of agencies and brands being named as “co-employers” in audits, resulting in the agency or brand being held liable for payments of any corresponding fees and fines, on behalf of the staffing agencies they subcontracted.

As a result of the crackdown on employee misclassification, there are several things every company should consider:

  • What are the determining factors that the labor department uses to ascertain if a person should be hired as an independent contractor or an employee?
    • There are several determining factors that the IRS utilizes, however the most basic are behavioral control, financial control and the type of relationship between the parties. If an employee is given training regarding how to perform the job and is paid hourly, they are most likely an employee, NOT a contractor.  
  • Is our organization exposed to any risk or liability in regards to employee misclassification, either internally or with one of our vendors?
    • If your organization hires anyone as an independent contractor, the above litmus test must be applied to determine exposure to risk. Any vendor that hires people to represent the company should also be considered, as the hiring company can be named as a “co-employer” in audits.
  • What steps need to be taken in order to prevent liability?
    • To prevent liability, it is important that everyone from the executive team to the HR team understands the importance of proper classification. Ensure that all vendors who are responsible for hiring staff are compliant as well. 

EventPro Strategies has been hiring 100% of our experiential marketing field talent as W-2 employees for the past 5 years. In January 2008 EPS saw this paradigm shift coming, and in response, overhauled the way we hire staff by adopting the W-2 model. EPS was the first and is one of the only event staffing agencies to hire our field team members in this fashion, and we are proud to have been the first to make this important and legally necessary change. Since then we have provided our clients with peace of mind, in that they know they are working with a compliant event staffing agency, whose field talent are a true extension of our team.

Our experience in making this switch gives us a valuable insight into the challenges, and benefits, of the W-2 model; insight which we are more than happy to share with any of our clients and partners. If your company hires field staff directly, and upon analysis does not pass the above litmus test, consider asking our event staffing agency to perform a cost to benefit analysis to determine your best course of action. Depending upon your organization’s specific needs, we can establish whether it is most cost effective and risk adverse to reclassify your employees internally or subcontract your staffing needs to a compliant event staffing partner such as EPS, who hires staff using a W-2 model.

To contact an EPS representative to further discuss this topic or any other, please click here!

About JESSICA STACKPOOLE

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