Recently, a direct mail company in Virginia paid $743,443 in back wages and liquidated damages to 73 employees to resolve violations of overtime and recordkeeping provisions of the Fair Labor Standards Act, the US Department of Labor announced.
An investigation by the US Department of Labor’s Wage and Hour Division found RPG Enterprise LLC, doing business as Planet Direct Mail, misclassified production employees as independent contractors, and failed to pay them overtime when employees worked more than 40 hours in a workweek. The Manassas, Virginia company also failed to maintain records required by law.
The company paid an additional $32,099 in penalties.
The growing trend of worker misclassification has been one of the biggest storylines within the rise of the freelance economy. Since 2013 more than one-third of mid-size U.S. businesses have been fined or penalized for non-compliance, according to ADP.
Within the last two years, a number of leading businesses have experienced a surge of lawsuits alleging worker misclassification, including:
- Amazon’s drivers in 2016 filed a class-action lawsuit in Seattle claiming the company violated federal labor laws by classifying them as independent contractors rather than employees.
- Uber was slammed with a $100 million settlement for a similar misclassification claim with their drivers.
- FedEx agreed to pay $240 million to settle a lawsuit filed by delivery drivers in 20 states, who were also claiming they had been misclassified as independent contractors.
What is worker misclassification and why is it so important?
Worker misclassification involves classifying workers as 1099 independent contractors when they should be classified as W-2 employees. Businesses are required by law to ensure their workers- both W-2 employees and 1099 independent contractors- are properly classified.
When workers are improperly classified, they are deprived of various rights and protections including the minimum wage, overtime compensation, unemployment insurance, healthcare, pension, and workers’ compensation insurance.
Misclassification also undermines federal and state revenue collections and creates an unfair playing field for employers who properly classify their workers.
As the use of freelance and contract labor continues to grow, businesses will need to invest in tools and technology that allow them to properly manage and engage freelancers in accordance with their corporate protocols, as well as regulatory guidelines. While there are incredible benefits to strategically deploying a freelance workforce, the cost of worker misclassification and non-compliance can be costly.
Depending on the severity of infractions, fines for worker misclassification levied by the IRS, DOL and state agencies can total millions. IRS penalties for misclassifying workers as 1099 contractors can range from 22%-43% of all contractors’ earnings retroactive to the initial engagement.
To learn more about best practices for properly managing your freelance workforce, and request a copy of our "Classification Golden Rules," email [email protected] To request our "Classification 101" whitepaper, click here.
