7 things that should never go in a handbook

November 11, 2008 by Sam Narisi HR Legal News
With some commentary by Randall Barker SPHR CELS (in italics)

Mostly, it comes down to the choice of wording. Phrasing policies the wrong way often causes big legal trouble when managers discipline or fire employees.

Here are seven big problems all companies need to watch out for, according to HR consultant Hunter Lott:

1. Illegal overtime policies — A statement that shouldn’t appear in any handbook: “Authorized overtime will be paid at 1.5 times the regular hourly rate.” That policy is illegal under the FLSA — all OT, whether its authorized or not, must be paid. You can have a rule against working OT without permission and discipline or even fire someone for it, but you still need to pay them.

The Department of Labor (the government entity that investigates overtime violations) believes a business knows everything that is going on at the work place. If managers and supervisors don’t know what is happening as far as hours being worked they need to find out, ignorance is not an excuse. A business cannot refuse to pay an overtime premium because the extra hours were worked but not authorized.

It is also wise to have strict rules concerning when an employee can punch in for the day and punch out at the end of the day. Make sure employees understand that they can’t punch in early and out late so they end up in an overtime situation at the end of the week.

2. Vague FMLA language — Policies on FMLA should lay out all of the law’s eligibility rules. Otherwise, employees who wouldn’t have qualified for leave may still be able to sue the company. Also, make sure you’re specific about how FMLA and paid time off intertwine. If employees are required to use FMLA and PTO concurrently, that needs to be in the handbook. If it isn’t, employees may argue in court that their 12 weeks of medical leave didn’t start until after their sick and vacation time was used up.

We strive to make sure that every one of your new employees receives a basic policy guide that explains FMLA leave and an employee’s rights in a clear and concise manner. We encourage clients to adopt the same language in their own policy guides.

3. Bans on salary discussions — The only logical reason for a company to ban talk about salary, Lott says, is that its pay structure is unfair and unlawful — which is a possibility employers certainly don’t want to raise. Also, such policies may run afoul of the National Labor Relations Act, which gives employees the right to talk freely about working conditions.

Often a business owner or manager feels that there is a compelling reason to pay “Bob” just a bit more than the rest of his co-workers who are doing the same job. There are “superstars” who might deserve a higher wage. If you decide to pay Bob a higher wage about all you can do is ask “Bob” not to brag about it, but you can’t discipline him if he reveals what he is making.

However, you can discipline someone who is charged with keeping payroll records secure if that person decides to make everyone’s pay scale public knowledge. A business would also have a reason to discipline a person who rifled a co-workers desk or work space to discover a pay stub and then made the co-workers wage public knowledge.

4. Unnecessary probationary periods — Specifying that new hires are on a 90-day probation is appropriate for union or government employees, who are protected from termination in some cases. But for any other company, it doesn’t make much sense. Most employees are at-will — which means they can be fired at any time for any legal reason. Giving everyone a probationary period might negate an employee’s at-will status once the 90 days are over.

We (A Plus Benefits) support telling a new employee that he/she is subject to a 90 day probationary period. However, if you are going to make this part of your policy guide make sure to clarify that a successful completion of the probationary period does not change the at-will basis of employment and does not create a contract for continued employment.

Don’t forget why we use probationary periods for new employees…to see if we want to keep them long term. Be brave enough to acknowledge that if there are issues at day 89, those issues will not go away at day 90 or 91. Don’t turn a probationary employee with issues into a regular employee with issues.

5. Rules that are too personal — Lott warns against handbook statements like, “Employees are prohibited from dating co-workers.” It makes the company sound like a babysitter and creates a serious enforcement headache. Employers will get a lot more protection from a job-related policy such as: “Any relationship that affects your ability to do your job may be a valid reason for firing.”

We suggest that you do have a statement in your policy guide that requires supervisors and managers who enter into a relationship with a subordinate to report the relationship to upper management.
The revelation of this relationship is not a reason to terminate either employee, it is however a good reason to seek additional help from an experienced HR professional or legal advisor.

Don’t ignore these types of relationships and walk blindly into a sexual harassment complaint. Consensual relationships can turn ugly for the employer when one of the two parties decides to end the relationship.

6. Salary offers that offer too much — Employees and their attorneys will try to interpret everything the company says literally — especially when it comes to money. For example, telling employees what their “annual salary” is when they’re hired could imply that you intend to pay them for an entire year, no matter what. Instead, the statement should read something like, “an annual salary of (blank), earned and paid biweekly, monthly, etc.”

We suggest that businesses should be in the habit of using a carefully crafted offer letter when new employment is offered to an applicant. A carefully crafted offer letter is a perfect opportunity to notify the new employee that employment is on an at-will basis and that there is no basis for employment other than at-will.

An offer letter should cover how an employee earns paid time off, what the maximum level of accrued time off is and how accrued time off is handled at the end of the employment relationship.
Please ask your assigned HR Advisor with some assistance in this area if you aren’t using offer letters at the beginning of new employment relationships.

7. Too many details — Sometimes, listing too many specific behaviors that warrant discipline can make it difficult to discipline for other issues. For example, if a dress code includes 35 things employees aren’t allowed to wear, there’s likely to be some resistance when a manager tries to punish someone for inappropriate dress that hasn’t been explicitly spelled out.

A policy guide – and by the way, don’t call your company document a handbook, in the past courts have ruled that calling your document a handbook creates a situation where the business loses flexibility. A handbook is viewed by the courts as more stringent than a policy guide.

It is our hope that when you have a properly crafted policy guide that you can spend less time worrying about this subject and then you can get back to business.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.

Does FMLA Protect Grandfather Caring for His Grandchild?

“I needed time off to take care of my grandchild,” insisted payroll supervisor William Hamm. “I’m entitled to that leave under the FMLA.”

“As a grandfather, you don’t qualify for leave to take care of your daughter’s kid,” said Human Resources Director Jennifer Lyons. “Besides, you were fired for performance issues, not for taking leave.”

Was worker protected by FMLA?

Facts: The employer hired a payroll supervisor on a contractual basis subject to annual renewal. Initially, the worker’s performance was highly rated by the employer.
The employee’s daughter, a student and Army Reserve member, gave birth. The employee financially supported his daughter, a single parent, and the grandchild, and also cared for the grandchild while his daughter was away at school or Army Reserve obligations.

Concerned with his declining work performance, the employer gave the employee a performance improvement plan requiring him to “demonstrate significant progress” through a one-month period.

Meanwhile, the employee’s daughter was informed that her unit would be deployed overseas. The employee submitted a request for 12 weeks of FMLA leave to care for his grandchild, beginning on May 7. The request was approved through June 30, but not beyond the June 30 scheduled expiration of the employee’s annual contract.

The employee began leave, but his daughter was never deployed. The employee continued to care for his grandchild when his daughter was at school or away for Reserve weekend drills. On June 21, the employee received a letter from his supervisor stating that the employer decided not to renew his contract because he failed to complete his performance improvement plan.

The employee sued under the FMLA, alleging unlawful interference and retaliation for exercising his statutory right to leave. The U.S. District Court for the Middle District of Florida ruled for the employer, finding that the employee’s leave was not FMLA-protected. The employee appealed.

Award: The employee may pursue his FMLA interference and retaliation claims, the U.S. Court of Appeals for the Eleventh Circuit ruled Sept. 30 (Martin v. Brevard County Pub. Schs., 11th Cir., No. 07-11196, 9/30/08).

Discussion: The FMLA provides otherwise eligible employees with up to 12 weeks’ unpaid leave for the birth or adoption of a child or for situations in which an employee acts in loco parentis, the appeals court observed.

“We cannot agree with the district court that no reasonable jury could find that [the employee] stood in loco parentis (Latin: in the place of a parent, either parent of a minor, a guardian, or a person standing in loco parentis in order for a person to be considered in loco parentis, he or she must have intentionally assumed the rights and duties of a parent) to [the grandchild] while he was on FMLA leave,” the court said. “During that period, [the employee] provided [his grandchild and daughter] substantial financial support, including a home, food, and health insurance,” the court said. The worker “also played a significant role in caring for [the grandchild] even though [his daughter] was never deployed overseas,” it said. “We cannot say as a matter of law that [the employee] stood in loco parentis to [his grandchild]; nor can we say that he did not. [The employee] has presented sufficient evidence to create a genuine issue of material fact, and the district court erred in concluding otherwise.”

Assuming the employee’s leave was FMLA-covered, the appeals court said the employee raised a triable issue of unlawful interference with his statutory right to reinstatement. A jury could find either that the employer terminated the employee for performance issues unrelated to his leave or that the employee effectively was fired for taking leave that coincided with his probationary period, the court said. If the jury finds the latter, then the employee has shown unlawful interference, the appeals court said.

Pointers: Under the FMLA, family members are an employee’s:

• spouse, as defined under state law where the employee resides;

• children, including biological, adopted, foster, and stepchildren, legal wards, and children for whom the employee has day-to-day and financial responsibility (children must be under age 18 or over 18 and incapable of self-care because of a physical or mental disability); and

• parents, including biological mother and father and persons who had day-to-day and financial responsibility to care for the employee as a child.

Some states have family and medical leave laws that include other family members in addition to spouse, child, and parent. Employers should review their state laws for more information.

(This article was originally published in the November 4, 2008 issue of BNA, Inc. Bulletin to Management)

Final thoughts – when dealing with FMLA issues it is a good idea to ask lots of questions before telling an employee that leave under FMLA will not be allowed. Even though FMLA has been law for over 15 years it seems that new wrinkles develop out of court cases each and every year.

Generally, a grandparent would not qualify for leave under FMLA to care for a grandchild. In this case, the grandfather had assumed the duties of a parent by offering and taking responsibility for day to day financial (and other) responsibilities.

This is not a settled case. The case has been allowed to proceed to determine if the employer is guilty of interfering with the employees rights under FMLA.

We suggest that when these kinds of issues come up you should call your assigned HR Advisor. We may not have an immediate answer to every question, however, the HR Department at A Plus Benefits has the tools to find the right answer to seemingly obscure questions or situations.

Pass the task of answering these difficult questions to us so you can get back to business.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.

The following is a very thought provoking story and then a follow up to the original story. While this HR Update is longer than usual I believe it’s worth the time it will take to read the article.

After reading the article I believe a business owner or manager needs to ask several questions about the reader’s organization, do employees understand their role in the organization, does management know what is going on in “the trenches,” when an employee “colors outside of the lines” what effect does it have on other employees, is just okay good enough – have we accepted mediocrity.

What questions does this article spark in your mind about your organization?

We appreciate your business! We hope what we do for you allows you to get back to business.

Randall Barker SPHR CELS – VP Human Resources – A Plus Benefits, Inc.

Goodbye, Mr. Foster–A True Story About an Employee Who Was Too Good
Friday, September 26, 2008 7:00 AM HR Daily Advisor by BLR
by Steve Bruce – Andy Andrews also contributed to the story.

Can an employee do his or her job too well? If so, what do you do? Praise? Raise? Discipline? Terminate? Today’s guest columnist tells the true story of Foster, who did his job too well.

I met him at least 8 years ago at the Atlanta Hartsfield International Airport. He wore black pants and a white shirt with a black tie and bib apron. “Let me carry that for you, young man,” he said, noticing the balancing act I was performing with my luggage and the tray of food from Paschal’s Restaurant.

The old fellow grabbed my tray with a smile and was off, limping heavily on one leg that was obviously shorter than the other. I followed him around the escalator to an empty table I would never have found, and it was only then when I realized that he had also brought napkins, a straw, and packages of salt and pepper … items I usually forget.

With a flourish, he wiped the table, removed my plate from the tray and arranged it carefully with the napkins and the iced tea. Pulling back my chair as I hurriedly retrieved three, one-dollar bills from my pocket, he smiled and said, “God bless you.” His nametag read: FOSTER.

I was curious to see if this was a new service the airport had put in place. Certainly, I had never been “helped” before. I saw several other men and women dressed like my new friend, loosely assembled, and talking with each other, waiting without enthusiasm for tables to come empty. At that point, one of them would disengage from the group, clear any trash left on the table wipe it down, and return to their co-workers.

Glancing around the huge area, I quickly spotted Foster. Smiling, laughing, and moving fast, he helped one person after another. He never waited to be summoned. He went where he was needed.

I was back through the airport the next day and couldn’t wait to visit the food court again. Sure enough, there he was, the old man with the big smile. He helped me to a table as he had the day before (with napkins, salt and pepper, and a straw) and said, “God bless you, young man,” as he held out my chair.

I had a twenty folded and ready to place in his hand that day. I was impressed and inspired by this old man who struggled to walk, yet moved like a dervish as he cleaned empty tables and looked for people to serve. From that day forward, he was Mr. Foster to me.

As the years rolled by, I developed a great admiration for Mr. Foster. I saw him several times each month and introduced him to anyone with whom I was traveling. “Watch this guy,” I would always instruct as he left our table. “And watch that bunch of other people over there dressed just like him.” The contrast was clear.

I never once suspected Mr. Foster was making a play for tips. In fact, though I rarely slipped him less than twenty dollars, he often made me wait while he helped someone in obvious need of assistance. And whether they offered money or not, he always smiled, held their chairs and said, “God bless you.”

And then he was gone. Unable to find my friend, I asked the ladies at Paschal’s, “Where is Mr. Foster today?”

“Fired,” they told me. “They fired him. Humiliated him. Sent the man home!”

The Atlanta Airport Authority, I was told, had determined that Mr. Foster had become “a distraction.” They ordered him to stop helping people. “Stand with everyone else,” he was told, “and wait for the tables to empty. You are a busboy; act like one.”

A few months later, he was back (happy as ever) on a trial basis. But I never again let him carry my tray. I did, however, continue with the tips. He took the money because I made him take it. I was mad for him and he knew it. His “God bless you’s” often came to me with a tear. His spirit was gone.

Today, I went by Paschal’s. Before I could even ask, one of the ladies on the serving line spotted me. “I been expecting you,” she said. “Mr. Foster’s gone. He quit. Told ‘em he was old and sick and couldn’t do the work no more.” Then she cocked her head and added with a whisper, “He ain’t sick. There ain’t nothing broken about that old man.”

Nope, I thought as I turned away, there ain’t nothing broken about that old man. Nothing but his heart.

What happens to the Mr. Fosters in your organization? What can you do to encourage employees to go above and beyond for customers? Or should you? What do you think?

Readers See ‘Mr. Foster’ Column as Inspiring, Troublesome, Symptomatic
What a response to our recent story about “the employee who was too good”! Some readers called for a boycott, some lashed out at management, and one lashed out at HR.
Although most readers heaped lavish praise on Mr. Foster, one reader wasn’t convinced that he was such a good employee after all.

‘Mr. Foster personifies the ultimate customer service!’
One group of readers focused on what a good employee Mr. Foster was:

“Mr. Foster should be director of training. Where is this man now? Maybe I can hire him as a consultant!”

“Mr. Foster sounds like an exceptional employee. He should have been rewarded and given a pay raise.”

“Shame on that company. This is a person who should be rewarded and held up as an example to his co-workers.”

“Exceptional customer service … is becoming so rare that when some one does encounter it they write a book or a story about it.”

Boycott Foster’s Employer
Two readers called for a boycott of the restaurant where Foster worked:

“We should vow that when we go to Atlanta we will not use the services of Paschal’s. But we should stop and tell the manager what we think! I know I will take the extra step to do so.”

“Stories like this one make me angry and I retaliate by refusing to spend further money in their establishments.”

‘Going the Extra Mile Doesn’t Put You Ahead Any More’
Three readers felt the tale was symptomatic of what is wrong with America:

“From our school systems to our social systems to our work places, going the extra mile doesn’t put you ahead any more, but it alienates you from the group. Those who excel are punished while those who only put forth minimal are rewarded.”

“It was easier to ask people to be ’status quo’ so the managers did not have to encourage other employees to meet a higher standard.”

“I suspect poor Foster was the victim of a metrics push, and since the core function of the job was to clean tables, perhaps Mr. Foster didn’t react as quickly or clean as many tables as his do-nothing counterparts. In today’s workplace, it’s not about how well you do your job or please your clients, it’s about the number on the metrics chart.”

‘From top to bottom this story is about a management issue’
A number of readers blamed management for failing to appreciate Mr. Foster:

“Good waiters, busboys, etc. are trained, not born. If the ownership trained laziness, they got laziness … do-nothing employees are created by slacker ownership, management, and trainers.”

“This seems to have happened because of a lazy or unaware manager. It was easier to tell Mr. Foster to work less hard than to get the other workers to perform to his level.”

“I think we have all seen this attitude, ’slow down, you’re making the rest of us look bad.’ The question is, do you care about your customers enough to care about your employees?”

“If employees have no way to differentiate themselves from the herd of mediocre workers, everything and everybody achieves a lower, flatter, blander mediocrity because the real stars move to a better universe.”

“This is a situation where HR could and should have stepped in … or maybe HR is the problem.”

Maybe Mr. Foster Wasn’t that Great
One reader saw another angle:

“On the face it appears that the employer is the bad guy, but what do you do when an employee expands his job description under the guise of enhanced customer service at the expense of other job functions? What if customers were uncomfortable with his attentiveness and the undercurrent that perhaps a tip (How much is enough? You tipped $20) was required?

“Perhaps the employee was not being effectively recognized for doing the expected job functions. But you come along and tipped him $20. What behavior will he continue to exhibit?”

Finally, one reader added, “This was an excellent, thought-provoking story that I will use to underscore the need for timely, reasonable and relevant reprimands and rewards.”

Randal Barker is the VP of Human Resources for A Plus Benefits, Inc.

Are They Really Independent Contractors?

(The following information was derived from BLR HR Updates May 21 and 22, 2008)

These days, organizations frequently try to increase their workforce flexibility and decrease their benefit costs by hiring independent contractors to do required work.

All well and good … unless a court later determines that while you’re calling such workers independent, you’re really treating them as employees. In that case, and as names as famous as Microsoft have learned the hard way, penalties can be severe.

Often the issue revolves around how much control employers exercise over these workers’ job activities. The more control, the more likely the worker is actually an employee.

This point was highlighted recently in a case described by attorney Michael Curtis on the website, Mondaq.com. The case helps in understanding the reasoning that must be used in determining how “independent” workers are. (Curtis is with the California law firm of Thelen Reid Brown Raysman and Steiner LLP).

The facts were these:
Threatened with unionization of his drivers, a cab company owner contended that they were independent contractors and, thus, not a collective bargaining entity, because:
–They paid a fixed rental fee for the cabs.
–They didn’t have to account for fees or tips.
–They had no set work hours or minimum work requirements.
–They received no benefits and no tax or social security was withheld from pay.
–Lease agreements openly stated that the drivers were independent contractors.

Independent contractors, right? Not so fast. The court held that while all the above was true, the drivers also suffered a “lack of entrepreneurial freedom” (i.e. the chance to make money on their own).

The evidence:
–Drivers could only use cabs to respond to the cab company’s dispatches.
–They were prohibited from distributing private business cards and could not accept calls for service on their cell phones.
–They had to comply with company policy on how they drove and dressed, and they were subject to company discipline.
–They had to carry ads in their cabs that generated revenue for the company, but not for the drivers.
–Drivers were required to take more training than was legally mandated.

Taken together, those facts indicated that the company had a significant amount of control. This led the court to conclude that the cabbies did not have entrepreneurial freedom. And that, said the court, meant they were employees.

What the DOL Says
The U.S. Department of Labor (DOL) states that, under the Fair Labor Standards Act (FLSA), the employer-employee relationship is tested by “economic reality” rather than “technical concepts.” So just words in a leasing agreement, or a “little bit of independence” isn’t enough to classify someone as an independent contractor.

Furthermore, the U.S. Supreme Court has, on a number of occasions, indicated that there is no single test for determining whether an individual is an independent contractor under the FLSA. It’s instead the total activity or situation that defines. Besides the control and entrepreneurial freedom issues mentioned above, courts consider:

– The extent to which the services rendered are part of the principal’s business
– The permanency of the relationship
– The amount of the alleged contractor’s investment in facilities and equipment
– The amount of initiative, judgment, or foresight required
– The degree of independent business organization and operation

Bottom line on all of this: Before you seek the advantages of calling your workers independent contractors, consider their total situation carefully. And remember, it’s not what you call them that may count in the end.

The U.S. Department of Labor (DOL) points out the following particular problem areas for employers when it comes to determining whether a worker is an employee and, thus, is eligible for protections under the Fair Labor Standards Act (FLSA), or is an independent contractor, and therefore not covered under the FLSA. (And note that when DOL identifies problem areas, that usually means they’re keeping a keen eye on anyone in these situations.)

1. Construction. DOL notes that in the construction industry, many builders hire “so-called independent contractors,” who in reality should be considered employees because they do not meet the government’s tests for independence.

2. Franchises. Franchise arrangements can pose problems in the independent contractor arena as well. Depending on the level of control the franchisor has over the franchisee, workers may be considered to be employed.

3. Volunteers. A person employed by a for-profit organization cannot “volunteer” to perform the same services he or she performs as an employee. (Of course, DOL says, individuals may volunteer their services to religious, public service, and nonprofit organizations without contemplation of pay, and not be considered employees of such organizations.)

4. Trainees. Trainees, interns, or students may also be employees, depending on the circumstances of their activities for the employer. Are they doing the same work that regular employees do, as opposed to tasks that help them learn? They might then be considered employees.

5. Homeworkers. People who perform work in their own homes are often improperly considered to be independent contractors. FLSA covers such home workers as employees, and they are entitled to all benefits of the law.

HR Discussion:
One category not listed above that should be considered is sales. Many employers errantly believe that sales people can be classified as independent contractors. In most cases it comes down to an issue of control. If an employer demands total loyalty, and by that we mean prohibiting the sales person from selling other products it’s a good bet that sales person isn’t a qualified independent contractor.

Please contact the A Plus Benefits Human Resource Department if you have any concerns that you might have employees that are misclassified. A Department of Labor audit that occurs because of misclassification is time consuming and potentially very expensive.

It is our desire to assist our clients with being in full compliance with Department of Labor regulations. It is our goal to help you get back to business.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.

From time to the Human Resources Department here at A Plus Benefits receives an inquiry concerning how a client might classify one of their employees as an independent contractor in order to avoid paying overtime wages. Generally this happens when the client wants to have the employee perform some kind of work that is different from the employees regular job on an after hours basis.

The short answer is….it is all but impossible to accomplish. A more “smart alec” answer is - you can indeed call a duck a horse – but the duck is still a duck no matter what you do. So, you can call an employee an independent contractor but the employee is in fact just an employee and would have to jump through a lot of hoops in order to qualify as an independent contractor. It is all but impossible to accomplish.

Below are some important factors to know about Independent Contractors.

Legal Exemptions
Independent contractors relieve employers of a variety of legal compliance issues, as the following examples illustrate:

• Independent contractors do not count toward the employee thresholds used for determining employer coverage under most federal employment statutes.

• Employers have no obligation to pay federal and state unemployment insurance, Social Security, and Medicare taxes on behalf of independent contractors.

• Employee protections under the Fair Labor Standards Act, ERISA, the Family and Medical Leave Act, the National Labor Relations Act, and federal nondiscrimination statutes do not apply to independent contractors.

• Employers often do not have to pay state workers’ compensation premiums on behalf of independent contractors.

As a result, using independent contractors can save employers substantial money. However, improperly classifying employees as independent contractors carries substantial penalties. As a result, employers need to make sure that a worker meets the requisite tests for independent contractor status. These tests and exceptions to the tests are discussed below.

Common-Law Test
IRS examines 20 factors—derived from court rulings or common law—to determine whether someone qualifies as an independent contractor or an employee for purposes of federal income, Social Security, Medicare, and unemployment taxes.

Similar factors for determining employee or independent contractor status apply under:

• the National Labor Relations Act, which specifically exempts independent contractors from its employee protections (29 U.S.C. § 152(3));

• the Occupational Safety and Health Act (OSHA Standard Interpretation Letter “Information on Temporary Workers, Particularly Those in the Electronic Assembly Industry,” 4/30/96); and

• most federal discrimination laws, including Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, and the Age Discrimination in Employment Act.

The IRS test often is termed the “right-to-control test” because each factor is designed to evaluate who controls how work is performed. Under IRS rules and common-law doctrine, independent contractors control the manner and means by which contracted services, products, or results are achieved. The more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors.

A worker does not have to meet all 20 criteria to qualify as an employee or independent contractor, and no single factor is decisive in determining a worker’s status. The individual circumstances of each case determine the weight IRS assigns different factors.

NOTE: Employers uncertain about how to classify a worker can request an IRS determination by filing Form SS-8, “Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, some tax specialists caution that IRS usually classifies workers as employees whenever their status is not clear-cut. In addition, employers that request an IRS determination lose certain protections against liability for misclassification.

20 Factors
The 20 factors used to evaluate right to control and the validity of independent contractor classifications include:

• Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.

• Amount of training. Requesting workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.

• Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.

• Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.

• Control of assistants. If a company hires, supervises, and pays a worker’s assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.

• Continuity of relationship. A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.

• Flexibility of schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees.

• Demands for full-time work. Full-time work gives a company control over most of a person’s time, which supports a finding of an employment relationship.

• Need for on-site services. Requiring someone to work on company premises—particularly if the work can be performed elsewhere—indicates a possible employment relationship.

• Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.

• Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.

• Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.

• Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.

• Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.

• Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.

• Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.

• Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.

• Availability to public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.

• Control over discharge. A company’s unilateral right to discharge a worker suggests an employment relationship. In contrast, a company’s ability to terminate independent contractor relationships generally depends on contract terms.

• Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.

Economic Reality Test
Independent contractors are not covered by FLSA’s minimum wage and overtime protections for employees. Court interpretations have established an “economic reality test” for determining whether someone is an employee or independent contractor under FLSA.

Rather than examine who controls how work is performed, the economic reality test evaluates whether a worker is economically dependent on a company’s business. The greater the economic dependence, the more likely the worker qualifies as an employee protected by FLSA.

Similar to the common law test, the economic reality test focuses on the degree of control exercised by the employer as an essential factor in determining whether an employer-employee relationship exists. While no single factor is controlling or decisive in determining whether an employment relationship exists, the facts and circumstances that courts and federal enforcement officials examine in deciding whether an individual is an employee or an independent contractor are:

• the degree to which the employer controls or directs the manner in which work is performed,

• whether the worker’s opportunity for profit or loss depends on his or her managerial skills,

• whether the worker’s duties are performed for the employer on an ongoing or permanent basis,

• whether the service performed by the worker is an integral part of the employer’s business,

• the extent of the worker’s investment in equipment or materials needed to perform the job, and

• the degree to which the worker is engaged primarily for the benefit of the employer.

Worker’s Compensation
In many states the Worker’s Compensation Insurance Laws have been written to make a business that has hired an independent contractor responsible for work place injuries if the business has not verified that the independent contractor has his own worker’s compensation policy.

This is another was to ascertain if a person is in fact an independent contractor. If upon being quizzed about worker’s compensation, the employee who is acting like an independent contractor seems to know nothing about worker’s compensation insurance and his need to have a policy as an independent contractor – any government investigator or auditor is going to see through the smoke and mirrors that the business has attempted to use to qualify someone who is in fact not an independent contractor as an independent contractor.

Are there penalties for misclassifying employees as independent contractors?
There are penalties for misclassifying employees. If the IRS finds your independent contractor was really an employee, it may assess you:

An amount equal to 1.5% of wages (3% if no information return was filed) if you erroneously treated a worker as an independent for income tax withholding purposes. (The worker is still liable for 100% of his/her income tax bill) [IRC Sec. 3509 (a)(1), (b)].

20% of the worker’s share of Federal Insurance Contribution Act (FICA) tax that you should have withheld (40% if you failed to file an information return) if you erroneously treated a worker as an independent for FICA tax purposes [IRC Sec. 3509(a)(2), (b)].

A civil penalty equal to 100% of the total amount of tax evaded or not collected, if the IRS finds your misclassification was an attempt to evade or defeat employment taxes. The responsible person must receive written notice by mail or in person [IRC Sec. 6672]. There may also be a criminal penalty of a $100,000 fine ($500,000 in the case of a corporation) and/or five years in prison [IRC Sec. 7201].

Up to $50 per Form W-2 you should have filed but didn’t (maximum penalty, $250,000 per calendar year) because you treated the worker as independent.

A civil penalty of $50 per W-2, if the IRS finds you willfully failed to furnish correct W-2s to employees [IRC Sec. 6674]; there’s also a criminal penalty consisting of a $1,000 fine and/or one year in prison for willful failure to furnish W-2s as required [IRC Sec. 7204].

Interest on past-due tax payments (although IRS’s Proposed Regulations would allow an interest-free adjustment if you failed to file Form 941 for a given quarter solely because you improperly failed to treat any individuals as employees for that quarter (and therefore failed to pay over any withheld income tax or employer-employee FICA tax) [26 CFR 31.6205-1].

When in doubt
We encourage any client of A Plus Benefits who has a question about independent contractors and employees to call us for direction. We are committed to keeping you far from the danger line that can be crossed when an employee is improperly allowed to work as an independent contractor.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.Read Randall’s previous HR Update.

Read Randall’s previous .