The Fissured Workplace and Employee Misclassification

In recent times, companies such as Uber and Handy have been faced with lawsuits challenging whether the individuals working for them should truly be considered “contractors.” Are their “staff” in reality employees being denied rights reserved to those in the proper classification? In this issue of Astronology® we explore the fissured workplace and the accompanying issue of employee misclassification. How large of an issue is misclassifying employees? Is this part of larger concerns related to the fissured workplace?

What is the Fissured Workplace?
David Weil, an administrator for the United States Department of Labor’s Wage and Hour Division, popularized the term “fissured workplace” to describe the surge in employers’ use of contracted laborers. In 2014 Weil highlighted on the US Department of Labor’s blog what results from workplace fissuring: “The blurred lines from the fissured workplace make achieving compliance with the wage and hour laws we enforce a difficult task. Intense competition between business models like subcontracting, temporary agencies, labor brokers, franchising, licensing, and third-party management leads to low pay, and noncompliance pulls down standards for all – making it difficult for responsible employers to survive in low margin, fiercely competitive conditions. The costs in this race to be the lowest bidder are borne by workers deprived of their wages and their rights.” There’s a danger involved in a fissuring workplace: the danger of misclassification.

The Growth of Contracted Workers
But how many people actually are working in an independent contractor arrangement? To get a better understanding, economists Larry Katz and Alan Krueger replicated the 2005 Contingent Worker Survey in 2015. The results of the survey provide an estimate of how much labor is being contracted out by employers in the United States. The 2015 survey noted a jump from 10% in 2005 to 16% of workers in 2015 in “alternative arrangements,” working while not directly being an employee of an organization. Why the increase in outsourcing and contracting? In a Wall Street Journal online article, Anna Louie Sussman and Josh Zumbrun point to fissuring.

The Consequences of Misclassifying Workers in a Fissured Workplace
The Wage and Hour Division (WHD) website explains that although the department supports the proper use of independent contractors, there is a difference between legitimate independent contractors and misclassified employees. By classifying a worker as an independent contractor, an employer avoids expenses such as overtime pay, unemployment compensation tax, workers’ compensation insurance, and employee benefits such as sick pay & vacation. Such attempts to cut costs results in losses for everyone, however. Not only are employees cheated, but heavy fines from organizations found guilty of misclassification can add up to 41.5% of the contractor’s pay. Also of note is that these penalties can go as far back as three years. As a result, the WHD has worked with the IRS and many states to combat worker misclassifications. With 32 states cooperating in 2015, the WHD investigations resulted in more than $74 million in back wages for more than 102,000 workers in a variety of industries, including janitorial and hospitality.

“In general, independent contractors should comprise a small minority of most employers’ workforces,” states Jennifer Loftus, National Director for Astron Solutions. “Activities that are non-strategic in nature, and not the primary focus on the organization, are best candidates for outsourcing. When independent contractors or contract labor begin to comprise a noticeable and / or large portion of the workforce, the organization leaves the door open to lawsuits and investigations. When in doubt about workers’ proper classifications, check with outside legal counsel or other outside advisors. Proactive protection to the organization is advisable over negative consequences down the road.” Do you think fissuring workplaces will be curtailed as more misclassified employee cases come to light? Tell us your thoughts! We enjoy hearing from our Astronology® readers!