IRS and Department of Labor Announce Crackdown on Misclassifying Employees
The Internal Revenue Service (“IRS”) and the Department of Labor (“DOL”) recently announced a heightened focus on businesses and nonprofits that misclassify employees as independent contractors—calling it a "serious problem."
Why Does Worker Classification Matter?
When a worker is classified as an independent contractor, the Fair Labor Standards Act (“FLSA”) does not apply. This means the worker is not entitled to overtime, and the employer is not required to pay Social Security or Medicare taxes on their behalf. According to the IRS and DOL, some employers may misclassify workers—whether accidentally or intentionally—to avoid these obligations.
How to Determine Worker Classification
For churches, nonprofits, and small businesses, the key factor in determining worker classification is the degree of control the employer has over the worker.
Employee: Works under the employer’s supervision and direction, both in terms of what is done and how it is done.
Independent Contractor: Controls the methods and means used to achieve the final result, with minimal oversight from the employer.
Additional Factors to Consider
Other factors that may influence classification include:
Tools and Materials: Independent contractors often provide their own equipment.
Independent Business: Contractors typically operate as an independent business with multiple clients.
Payment Structure: Employees are often paid hourly, while contractors are typically paid per project.
Economic Dependence: Contractors are generally not economically dependent on the employer.
Example Scenarios
Example 1: Music Instructors at a Church
A church hires instructors to teach vocal, piano, and guitar lessons. These instructors:
Follow the church’s employee manual.
Adhere to the church’s statement of faith and moral guidelines.
Conduct lessons on the church’s designated schedule and location.
Cannot hire additional instructors to fulfill their duties.
Conclusion: These instructors are likely employees.
Example 2: IT Support Specialist
A church hires an individual IT support specialist who:
Provides IT support to multiple churches and nonprofits.
Uses her own equipment.
Sets her own schedule except for emergencies.
Hires additional team members to assist with tasks.
Conclusion: This IT specialist is likely an independent contractor.
Need Help Navigating Worker Classification?
If your church, nonprofit, or small business needs guidance on properly classifying workers, click the button below to schedule an appointment with one of our attorneys.
