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Risk in Context

Independent Contractor or Employee? The Wrong Answer Could Cost You Millions

Posted by Diane Kooken September 27, 2016

How you classify — or misclassify — your workers can create significant employment-related wage and hour (W&H) liability risks. Under several recent court decisions and federal agency guidelines, many types of workers are now considered employees rather than independent contractors, a shift that is expected to increase employment-related claims, specifically W&H claims.

At issue is how federal regulators define “employ.” The Wage and Hour Division of the US Department of Labor (DOL) in 2015 concluded that under the Fair Labor Standards Act (FLSA) definition of “employ,” most workers are employees rather than independent contractors.

The Risks

Worker misclassification can lead to several issues for employers, including unpaid income tax withholdings, work-related expenses, and sick and overtime pay. It’s not uncommon for W&H litigation — particularly for “sharing economy” businesses such as ride-hailing services and other app-based companies — to center around independent contractor relationships.

Such misclassifications have led to:

  • Increased class-action litigation, including some settlements in excess of $100 million.
  • Difficulty in obtaining summary judgment.
  • More states passing laws that place the burden on employers to overcome the presumption that workers are employees.

Managing the Risks

Companies operating in the “sharing economy” and those unclear on the current distinction between employees and contractors should consider the following steps:

  • Err on the side of caution. If the employer is making decisions about the hours, location, schedule, and performance of a project, the worker is likely not an independent contractor.
  • Establish a centralized decision-making system to determine who will be allowed to work as an independent contractor.
  • Use independent contractor agreements.
  • Ask independent contractors to carry insurance, including disability and workers’ compensation.

Insurance Solutions

W&H liability insurance can help transfer employee classification risks. Typically, W&H claims are excluded under employment practices liability (EPL) insurance. W&H liability insurance — available in a blended EPL program or on a standalone basis — provides coverage for defense costs, settlements, and judgments. This includes wages and liquidated damages, plaintiffs’ attorneys’ fees, and often civil monetary penalties or statutory penalties.

W&H liability insurance also covers claims for actual or alleged violations of the FLSA or similar state laws, including:

  • Claims brought by the DOL, employees, and independent contractors.
  • Claims for failure to pay overtime and provide meal and rest breaks.
  • Collective and class-action wage and hour claims.

W&H insurance pricing is steadily decreasing as the market continues to grow and more companies purchase the coverage, a trend likely to continue, barring unforeseen changes. Work with your insurance and risk management advisors to address wage and hour risks and potential insurance solutions.

For more on employment practices liability and employee classification risks, listen to Marsh’s recent New Reality of Risk webcast.

Diane Kooken

Managing Director, FINPRO