Having a clear strategy for worker classification is critical in 2023. The gig economy has changed the way work is done, and it’s impacting businesses in many ways. One of these impacts is how you classify your workforce. In this article, we talk about the different kinds of worker classifications, what they mean, and strategies for avoiding misclassification problems.
Understand the Definitions of Worker Classifications
In order to determine how to classify a worker, you must understand the legal definitions of worker classifications as they are in 2023. We saw a slew of litigations last year around independent contractor misclassification, and there is not a single company that should risk misclassification in 2023 and beyond.
What are worker classifications?
Worker classification is a legal determination. In essence, worker classification is determining what category a worker is in. Workers can be classified in different categories, depending on the type of work they do and how they do it.
A worker classification is a tax-related designation that describes an individual’s involvement in a company, such as sole proprietor, partner, or employee. Worker classification regulations dictate the way in which workers are classified, for intents and purposes of wage, benefits, overtime exemptions, and more.
There are seven common worker classification types: full-time, part-time, contract, independent contractor, temporary, on-call, and volunteer. In order to understand the implications of each type of worker classification, one must understand the FLSA.
Fair Labor Standards Act
The FLSA, or Fair Labor Standards Act, is the Federal law, and it is used for classifying employees. There are two ways employees are classified under the FLSA: exempt or non-exempt.
- Exempt employees are primarily performing work that is not subject to overtime provisions of the Fair Labor Standards Act. Exempt employees hold jobs that meet the standards and criteria established under the FLSA by the U.S. Department of Labor.
- Nonexempt employees are employees primarily performing work that is subject to the overtime provisions of the Fair Labor Standards Act. Most employees covered by the FLSA are nonexempt but not all.
Of the seven common worker classification types, all but independent contractors and volunteers qualify as employees who are eligible for FLSA benefits. Knowing the difference between an employee and independent contractor is vital. The IRS states, “It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.”
Independent Contractor Classification
Worker classifications can most simply be distilled down to employees (who are classified as exempt or nonexempt under FLSA) and independent contractors. Independent contractors are neither exempt nor nonexempt. Since classifying a worker as an independent contractor means not having to guarantee FLSA benefits, some companies are actually misclassifying their employees as independent contractors.
In October 2022, the DOL proposed a new rule for classifying workers, which would reclassify certain independent contractors who are “economically dependent” on a company as employees. While there is no new rule officially in place, the ABC test is supported by President Joe Biden as the best way to determine if a worker can legally be classified as an independent contractor.
Avoid Misclassification Problems With Proper Worker Classification Strategies
There are many potential problems that can arise when a company misclassifies its workers. Not only can this lead to legal trouble, it can also cause confusion and resentment among employees. In order to avoid any potential issues, it is important to develop proper worker classification strategies. By taking the time to properly categorize your employees, you can help ensure that everyone understands their role in the company and minimize the chances of any misunderstandings.
Worker Classification Strategy #1: Get Legal Help
Due to the confusing nature of classification, it’s recommended that employers consult with an attorney or accountant who specializes in employment law to determine which category best fits their needs before proceeding with worker classification.
This is especially important in cases where there is a lot of ambiguity surrounding the position, such as with independent contractors or gig economy workers. A legal professional can help you determine the best category for your needs, which will help avoid any potential misclassification issues.
Worker Classification Strategy #2: Get All the Right Documents in Place
Having all the right documents in place helps establish your worker as an independent contractor. Make sure to have documents such as an Independent Contractor Agreement, documentation of payment information, and W9.
Make sure that you do not use any employment applications that you use for hiring employees. All documents should clearly state that you are hiring an independent contractor. It is also helpful to have any other sort of documentation from your independent contractor that will establish them as a separate business entity and not an employee.
Worker Classification Strategy #3: Utilize HR Tech
Utilizing HR technology is the best strategy to avoid worker classification problems in 2023. This strategy incorporates all the other strategies into it because some of the latest HR technology has legal and document help included.
Take GreenLight, for example. We’re the world’s first AI-driven classification engine that tests worker classifications based on the U.S. DOL and Internal Revenue Service definitions. We examine multiple variables, including the role of the worker, whether the individual can demonstrate that he or she operates independently and free from the company’s control, and how the individual receives payment from the company.
We’re classification experts who rigorously update and maintain our systems in compliance with the most recent laws, mandates, and court rulings. Our AI determines the correct worker classification and your workers either become employees of GreenLight or we hire them as an approved contractor. Either way, you get any worker you want from almost anywhere in the world without having to worry about government agencies.
The last thing you want is to misclassify your workers and end up paying huge fines for it. Worker classification can be complicated so make sure you get the help of GreenLight, the world’s first AI-driven worker classification engine. Schedule a demo today.