The classification of workers as employees or independent contractors is an ongoing headache for employers.  Different government agencies use different tests to determine a worker’s status.  The one thing the tests have in common is that they are subjective: two people applying the same test to the same worker will often reach different conclusions about the worker’s status.  Employers face substantial liabilities under tax provisions, employee benefit plans, workplace rules, overtime requirements, and other laws if they misclassify an employee as an independent contractor.

The Department of Labor recently issued guidance on the misclassification of workers under the Fair Labor Standards Act.  

Reduced to its essence, the Labor Department’s new guidance suggests that most workers should be classified as employees for purposes of the FLSA.  The guidance does not affect employee benefit plans directly; but since many employers use payroll feeds to administer their benefit plans, the guidance might inflict collateral damage.  If an employer reclassifies an independent contractor as an employee for purposes of the FLSA’s overtime requirements, it is likely that the classification will affect payroll systems, tax withholding, employment tax, employee benefit plan coverage, nondiscrimination testing, Affordable Care Act reporting, and a host of other compensation and benefit systems.

Employers considering how to react to the new worker classification guidance should be sure to consider the collateral effects of changing a worker’s classification.  This would also be a good opportunity to review the eligibility provisions of benefit plans, to make sure they do not inadvertently include workers whom the employer does not intend to cover.