Last summer, the Department of Labor found several hotels liable for the misclassification of workers by the staffing agency with which they contracted. This could be a good time to review proper worker classification and consider how to avoid replicating this cautionary tale in temporary staffing practices.
Worker misclassification—improperly labeling workers as independent contractors, rather than employees—continues to be source of liability for businesses, including those in the hospitality sector.
This past June, the U.S. Department of Labor reported that several hotels in Arizona were fined because they contracted with a staffing agency that had misclassified hundreds of servers, bussers, cooks, dishwashers and banquet staff.
Using staffing agencies as a source of short-term workers would seem to help hospitality enterprises dodge the responsibility of ensuring that the workers are properly classified. Ideally, the agency bears that responsibility.
In this case, however, the Phoenix-area hotels were held to be jointly liable with the staffing agency. According to a news release issued by the Department of Labor’s Wage and Hour Division, the agency “paid overtime only when an employee worked at the same hotel for the entire workweek and the hotel client agreed to pay the required time and a half.”
The Department of Labor determined that the workers were intentionally misclassified as independent contractors, and were entitled to overtime back pay in the amount of $75,683. The hotels were required to pay more than $22,000 in civil penalty “because of the willful nature of the violations found.”
“Staffing agencies and their employer clients share responsibility to ensure that all employees working on their behalf are paid the wages they are entitled to by law,” Eric Murray, director of the Department of Labor’s Wage and Hour Division in Phoenix, said.
With the Department of Labor imposing joint liability for misclassification violations, it might be a good time to revisit these legal landmines with your attorney. “These violations are all too common in the hotel industry,” said Murray, perhaps signaling that the Department of Labor is going to keep an eye out for similar violations going forward.
The six-factor economic reality test
Even managers with the most basic understanding of the distinction between an independent contractor and an employee know that simply issuing an IRS 1099 form is not sufficient to meet the definition of independent contract under federal and state laws.
Beyond that, this area of the law can become increasingly complex, particularly since there is no single set of criteria that define what an employee is. The standard applied can depend on the area of the law, and whether the matter falls under federal or state jurisdiction.
Perhaps the most well-known federal criteria are promulgated by the Internal Revenue Service, which published a “20 Factor Test on Employment Status.” This criteria is specific to the employer’s and employee’s responsibility for payroll and self-employment tax.
The Department of Labor follows what is called the “economic realities” test.
The six factors considered as part of the “economic realities” test are:
- Is the work an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
The impetus to hire independent contractors
To avoid liability, employers might be expected to hire workers as bona fide employees rather than independent contractors in any case in which the distinction is unclear. However, hiring employees can be expensive—particularly as a way to solve temporary worker shortages. If you own or manage a business, you understand this.
Employers have been known to misclassify workers to avoid paying unemployment and other taxes, as well as covering them on workers’ compensation and unemployment insurance. In the hospitality industry, the impetus to hire independent contractors rather than employees is more likely driven by the challenges of seasonal fluctuation in labor demand and high turnover.
Nevertheless, worker status determinations are a big deal. They determine eligibility for federal unemployment, state workers’ compensation, and some pension and fringe benefit plans. A worker must be classified as an employee to be eligible to sue under the Fair Labor Standards Act, Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, the National Labor Relations Act, and others. No surprise that the penalties for willful misclassification can be steep.
Employers that contract with staffing agencies for temporary workers are advised to periodically audit the agencies’ worker classification practices. While it will not shield them from being found liable for agency employment law violations in cases such as the one in Arizona, employers are also advised to require indemnification provisions to shift financial responsibility for any fines to the agency.
Barry Shuster JD, MBA, MS, CHE, CHIA is an attorney and interim chair and visiting associate professor of hospitality law & ethics and hospitality finance in the Department of Hospitality & Tourism Administration at North Carolina Central University School of Business.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.