Investigation: The perils of misclassifying employees as ICs

HomeInside FCNewsInvestigation: The perils of misclassifying employees as ICs

January 2/9, 2017: Volume 31, Number 15
By Ken Ryan

In August 2016, an Overland Park, Kan., flooring retailer was found guilty of misclassifying its installers as independent contractors (ICS) and was forced to pay 22 workers a total of $159,144—$79,572 in back wages plus an equal amount in liquidated damages—following a U.S. Department of Labor (DOL) Wage and Hour Division investigation.

The division ruled Uni Floor violated overtime and recordkeeping requirements of the Fair Labor Standards Act (FLSA) when it failed to pay installers overtime after treating them as ICs instead of employees. The DOL determined the flooring installers met the definition of employees, triggering overtime protections under the FLSA. Uni Floor violated the FLSA’s recordkeeping requirements when it failed to maintain time records for these employees. In this case, Uni Floor provided the equipment used by the workers, controlled their day-to-day schedules and paid them flat salaries. The employer also bid for all work and supervised jobsites daily.

Uni Floor is a recent example of a flooring dealer that ran afoul of the DOL’s crackdown on misclassification of subcontractors. The agency’s directive is not a new law, rather a new interpretation of an existing statute.

The cost of non-compliance can be staggering. Fines levied by the Department of Labor, IRS and state agencies for worker misclassification can exceed millions depending on the severity of the infractions. The threat of class-action lawsuits should also serve as a further deterrent for companies straddling the boundaries of improper classification, experts say.

According to the ADP Research Institute, more than one-third of midsize businesses have been fined or penalized for not complying with laws pertaining to how they manage their workforces.

Jeff King, counsel for the World Floor Covering Association (WFCA) and an expert on this issue, said some flooring dealers will have to make adjustments, either by bringing installers in house as employees or outsourcing its installation services to a third party. “It would be extremely dangerous to have in-house and outside installers under this new interpretation,” King said. “The IC issue can be costly, it is spreading rapidly and it is not going away.”

However, scores of independent flooring dealers routinely use both subs and employee installers. Robert Varden, vice president of the CFI division of the WFCA, noted that if a government agency (DOL, IRS, etc.) showed up at the workplace of a typical flooring dealer, it would likely find some red flags.

In recent years he has started “smelling fear” in independent retailers. “I never fail to run into a dealer who wants to know what it is going to cost. You can just see the fear in their faces. I see it at the [buying group] events. They say, ‘We don’t know what to do.’ A lot of them don’t have the option [to hire installers].”

Dealers prefer to use subs because contractors aren’t eligible for overtime pay, unemployment insurance or workers’ compensation, and they pay all Social Security taxes compared with employees, who split that cost with employers. In addition, many subs want to remain independent and are not interested in becoming a full-time employee for a dealer.

According to King, the DOL suspects there are those businesses in the construction trade—and many other industries—that are cheating the system. “Far too often, employers misclassify workers as independent contractors when the law defines them as employees,” said Brad Bobowski, acting district director for the Wage and Hour Division in Kansas City, who investigated the Uni Floor case. “We are committed to rooting out misclassification and, as this case shows, will take enforcement actions needed to achieve that goal.”

Varden believes over the next 10 years there will be more installation companies emerging to replace “the guy and his brother and a van” that still exists today. Acknowledging that the flooring industry is often slow to change, he noted, “If I was a betting man I see the retail industry not necessarily converting to employees but I do see growth in large subcontractor [businesses].”

In recent years Home Depot has made the switch from employee installers (it has about a dozen left, Varden estimates) to outsourcing most of its installation work to Romanoff Renovations, one of the nation’s highest-volume flooring installation companies, with 48 U.S. locations.

Varden, who believes it would take more Uni Floor type stories to spur dealers to act, said there is plenty of blame to go around. “Very seldom does the retailer truly appreciate his labor force, whether they are subs or not. In many cases the retail owner doesn’t even know their names. We are a prideful bunch.” Varden added that the majority of crews are not happy, either. “They think the retail owners are making money off their backs.”

As for subcontractors, Varden said many of them do not understand business principles. “Most subs don’t truly know how much money they are making. You have to educate them on what they are really taking home—it’s business 101.” Most subs prefer a 1099 but don’t put money aside to pay the taxes.

The misclassification issue does not belong to the constructions/flooring trade. Among the corporations that have settled lawsuits over misclassifying its independent contractors are Lowe’s, Google, FedEx and Uber.

The Lowe’s complaint, originally filed in state court by home improvement contractors, alleged that Lowe’s controlled all aspects of installation jobs by, among other things, requiring that installers: identify themselves as “installers for Lowe’s” or say, “I work for Lowe’s,” or wear Lowe’s hats and shirts at work sites.

One of the more common misconceptions held by today’s businesses is that working with an LLC removes the risk associated with misclassification. In the case of Lowe’s, the original complaint filed did include installation contractors that operated in the form of a business entity.

In view of all that has happened—and more importantly, what could happen—retailers should be concerned. “The desire to reclassify subcontractor installers as employees should be the biggest concern to every flooring retailer,” said Casey Dillabaugh, owner of Dillabaugh’s Flooring America. “Overtime proposals, minimum wage hikes and affordable health care, to name a few, all get compounded if we’re forced to add subcontractors and their helpers as employees. The impact this has on any small or medium-sized business is enough to put even the most astute floor covering retailer out of business entirely.”

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