Avoiding legal risks in DOL’s new classification rule

Think the higher labor costs from the Department of Labor’s new worker classification rule is going to put a dent in your company’s pocketbook? Imagine the pricey penalties for failing to comply.

DOL officials last month announced the new rule that created a stricter formula for determining whether a worker should be considered an employee or a contractor. The department’s goal is to put more contractors on company payrolls, according to experts like Patrick Dalin, a partner at the labor and employment law firm Fisher Phillips.

CFO Brew spoke with Dalin about the possible legal costs associated with the new rule, which he said potentially impacts any company that uses contractors in some form.

This interview has been lightly edited for length and clarity.

What heightened legal risks do companies face with the new worker classification rule?

Directly under [the federal overtime and minimum wage] statute, employers can face investigations by the US Department of Labor, which they often do for large groups of employees rather than, say, a single plaintiff type of situation. If they find or claim that workers are employees rather than independent contractors, the government will make a demand for unpaid wages, which could be minimum wage or overtime, [with] overtime being the much bigger number. They could go back a period of either two or three years, depending on the facts. They could do it for a large group of employees potentially. Under the statute, there’s what they call liquidated damages, which could double the back pay. The government can issue civil money penalties.

In addition to government investigations, the workers can bring lawsuits…They can bring a collective action lawsuit under the statute. So one disgruntled worker can bring a claim and try to bring it on behalf of a whole host of employees…seeking the same thing: back pay for two to three years. Liquidated damages could potentially double that. And in a private lawsuit, they would also seek attorneys fees and costs, which can oftentimes, for a collective action, be quite hefty.

What are the potential costs associated with these risks?

It all depends on the number of workers we’re talking about, how many hours they work, and what their pay rate is. Those are your main variables. Whether it’s a private lawsuit or government investigation under the statute, there is this multiplier effect where judgment can be pursued on behalf of the collective. If you have five workers at issue, you can think, “What may they have earned over the past two to three years in overtime if they were an employee?” You can start from there and do the liquidated damages. [For] some companies, the issue might be 1,000 workers who are in question, and you can have a lawsuit seeking back pay for 1,000 workers. Obviously, the dollar amount there is going to be very different from that company that’s dealing with five or 10 workers.

What advice would you give to businesses navigating the new classification rule?

It’s a best practice to identify any contractors you have. Where you think this new rule might possibly affect the analysis, err on the side of being over inclusive. Do a review under attorney client privilege. In some instances, if it’s a close call, sometimes you can change the relationship and make a couple of these factors point in your direction. Maybe they weren’t pointing your direction before, and you make them point your direction, or maybe they kind of were before, and you make them more strongly point your direction. You want to get as many of the factors in this test pointing in your favor.

There are going to be cases where you have to start treating contractors as employees. It’s kind of, an ounce of prevention is worth a pound of cure sometimes with these things. It all depends on what your business model is. That’s a big factor as well, but in some cases, it’s going to make sense to convert people to employees. Sometimes that’s the solution.