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On December 1, 2016, Parker Hannifin Corporation and CLARCOR Inc. announced that the companies have entered into a definitive agreement under which Parker will acquire CLARCOR for approximately $4.3 billion in cash, including the assumption of net debt. The transaction has been unanimously approved by the board of directors of each company. Upon closing of the transaction, expected to be completed by or during the first quarter of Parker’s fiscal year 2018, CLARCOR will be combined with Parker’s Filtration Group to form a leading and diverse global filtration business. Bass, Berry & Sims has served CLARCOR as primary corporate and securities counsel for 10 years and served as lead counsel on this transaction. Read more here.

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Labor Talk Blog: DOL Steps Up Enforcement Efforts on Employers Who Misclassify Workers as Independent Contractors


September 4, 2013

In 2011, the Department of Labor (DOL) initiated a crackdown on employers who misclassify employees as independent contractors. Employers are not required to withhold income taxes from an independent contractor’s pay, and they do not have to pay FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes for the contractor. Employers also do not contribute to state programs such as unemployment insurance and workers’ compensation funds for independent contractors. Misclassification denies workers access to benefits and protections, such as Family and Medical Leave, overtime, minimum wage, unemployment insurance, and certain employer-provided benefits like health insurance and retirement plans that are available only to qualifying employees.

Since the Misclassification Initiative’s introduction in 2011, the DOL has hired more than 350 new investigators in the Wage and Hour Division alone. As these investigators have completed training and integrated into the Department, we have seen an uptick in investigations. The DOL’s Misclassification Initiative includes a Memorandum of Understanding (MOU) with the IRS that states the agencies will share information regarding misclassified employees. The DOL has MOU’s with several state agencies, as well. At this time, Tennessee has not entered into such an agreement with the DOL.

What Does This Mean?

  • Misclassification of employees creates significant risk for employers. An audit by the IRS or a wage claim brought by an individual employee can quickly morph into a larger, unwieldy investigation as agencies share information and move beyond an initial concern to pursue broader issues of classification throughout an organization’s workforce. Remedies for misclassification include backpay, back taxes, interest, and civil penalties – often calculated on a per employee basis.
  • Correctly classifying workers from the outset is critical. Be aware there are slight variances between the requirements of the IRS and the requirements of the Fair Labor Standards Act (FLSA) to qualify as an independent contractor, though both tests focus on the employer’s right to control or direct the worker.
  • Immigration issues also must be considered. Failure to maintain complete and accurate I-9 Forms for all employees can result in civil – and in some instance, criminal – penalties.
  • Employers seeking to correct misclassification of workers should create a comprehensive strategy for addressing all possible sources of liability. Some agencies currently offer settlement programs that allow employers to avoid interest and penalties and to settle accounts for a small percentage of what is owed. Some errors, such as unpaid overtime wages, are relatively straightforward to correct. Other "fixes" are more complex or cannot fully relieve employers of potential liability if audited. Misclassification issues are like a hydra: because agencies share information, cutting the head off one problem (by resolving a claim) could result in several more heads sprouting up (as other agencies investigate).

What to Look For?

Red flags that signal you might need to look deeper into whether an independent contractor is actually an employee include:

  • Compensated on anything other than a project-by-project basis (especially if paid hourly)
  • Eligible for employee-type benefits (retirement plan, insurance, vacation)
  • Employer reimburses for expenses
  • Perform same work as current or former employees (watch for a former employee brought back as an independent contractor)
  • Hours determined by employer (watch for regularly-kept hours that mirror those of employees and use of employer time-keeping system)
  • Length of business relationship not tied to a defined project or goal
  • Employer provides materials and equipment
  • Employer instructs worker on how to accomplish assigned work (true independent contractor typically has some autonomy as to how to accomplish a project)
  • Existence of a non-compete agreement or an exclusivity provision in a work agreement (worker is not to work for others while in the employ of the employer)
  • Existence of an employment agreement (and review provisions of independent contractor agreement to ensure it doesn’t read more like an employment agreement)

What Are the Risks?

Independent contractor misclassification implicates a broad range of laws and agencies. Included below is a quick summary of the major risks and potential liability an employer faces when confronted with a misclassification determination. Some states may have additional legal considerations.

  • Failure to meet minimum wage and overtime requirements of the FLSA
    • Unpaid wages and overtime wages, with an equal amount as liquidated damages
    • Collective action under the FLSA (a representative action that can incorporate large numbers of employees in a single action)
    • Attorneys’ fees
    • Costs
  • Failure to withhold federal employment taxes (federal income tax, FICA, and FUTA
    • All back taxes
    • Failure-to-pay penalties (0.5% accruing monthly up to 25% of net amount due)
    • Late-filing penalties (5% accruing monthly up to 25%)
    • Interest (3% annually)
    • *Note: the IRS currently offers a reclassification program to qualified employers that significantly reduces liability and removes all penalties – but an employer cannot be under audit by either the IRS or the DOL to participate. Participation in the IRS program may alert other agencies to a classification problem; therefore, a coordinated approach to reclassification is a must.
  • Failure to complete I-9 Forms
    • Civil penalties ranging from $110 to $1100 per violation (I-9 form) for a first offense (regardless of whether a worker is authorized to work in the United States)
    • Criminal penalties if employer is found to have engaged in a pattern or practice of hiring, recruiting, or referring for a fee unauthorized workers
  • Failure to pay employment insurance premiums
    • Unpaid employment insurance premiums
    • Interest (1.5%/month in Tennessee)
  • Failure to pay Workers’ Compensation premiums
    • Varies by state

If you see any red flags or have any other reason to question whether a worker truly is an independent contractor, contact your relationship attorney or one of our Labor Attorneys.

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