Compliance: Worker Classification and Overtime


Compliance is a loaded term in any industry. In all cases, compliance refers to the adherence to rules, laws and other guidelines, where failure to comply results in negative, often costly consequences. In the context of workforce management, compliance means following employment guidelines set forth by government agencies and policies designed to protect workers and the organizations they serve. How much do you know about workforce compliance? Here are some important definitions to help your organization grow more aware of the rules.

The Department of Labor is the government agency responsible for issuing the guidelines relevant to workforce management. The DOL’s mission is “to foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights.” To that end, the DOL is the main government agency responsible for Worker Classification and Overtime regulations, which all organizations must comply.

What is worker classification? Worker classification is the process employers are required to follow to properly classify each worker in their employ (or under contract). Currently, the DOL maintains two main categories of worker classification: Employees and Independent Contractors. There are different sets of rules for how each classification must be managed from a tax and administrative standpoint. Getting the classification wrong – either intentionally or by mistake – represents a compliance violation of labor laws and can carry stiff fines and penalties. The execution and validation of these two classifications is the responsibility of the employer to ensure compliance with the guidelines set forth by the DOL.

Sounds simple enough, no? But, there are some catches to complicate matters a bit. For example, while the Department of Labor is the main body that governs worker classification, the IRS and State Agencies are also involved in monitoring company’s compliance to the guidelines. If an organization misclassifies workers as Independent Contractors instead of employees, the State and the IRS can levy penalties and compel additional wages due to be paid to the improperly classified worker. These back wages are most often associated with hours worked or overtime.

Overtime has been a topic in the news recently, with newly updated guidelines released in May requiring employers to be compliant by December 1. Overtime is defined by working in excess of 40 hours in a week. (Note, in California overtime is defined as working more than 8 hours in a day.) Compliance with the new overtime rules is two-fold. First, the employer must accurately determine who qualifies to receive overtime pay. Those eligible for overtime are delineated from those not eligible by exemption status: Workers are either exempt or non-exempt.  Exempt workers do not receive overtime pay while non-exempt workers are entitled to earn overtime pay. Exemption is determined by a number of factors including number of hours worked and the nature of the pay structure (salaried vs hourly).

Beyond determining eligibility, employers must determine if their company is properly paying for overtime. If a worker is entitled to overtime pay or is classified as non-exempt, the company should be paying the worker at time and a half, (150% of their wage) for the over limit time. Compliance infractions against the new overtime rules are most typically encountered when worker classification is not first properly executed. Instances of workers being improperly classified as Independent Contractors instead of employees so the hiring company can avoid paying overtime wages are on the rise. We posted a blog about one such case in April wherein a call center company was found in violation of the new overtime rules under the Fair Labor Standards Act. The rights of the call center’s workers were infringed upon because the hiring company improperly engaged them as IC’s. The call center was fined a hefty sum and forced to pay back overtime wages to the affected workers.

The rules change frequently and it is the responsibility of each organization to ensure compliance with respect to their own workforce. Is your workforce in compliance? Ask nextSource to help you assess your risk and levels of compliance before you run into challenges. And costly challenges, at that– right Uber?

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