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Misclassifying Workers as Independent Contractors is Not Worth the Risk

Posted by Charlotte Morello on Sep 20, 2017 7:23:00 AM
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There has been a historical trend in the med-tech industry for organizations to explore avenues to hire temporary staff (specifically their clinical teams) under the 1099 model, leading to misclassification of employees as independent contractors.

Despite this serving as a potential entry-point into the established medical device or diagnostic markets, it is evident that misclassifying workers as independent contractors is a bad idea for business. This problem is often motivated by organizations attempting to keep costs down while unknowingly adopting an unnecessary amount of risk and liability.

This risk and liability extends beyond the walls of their organization to their partner organizations. It's important to have visibility into and assess the potential risk and liability when hiring 1099 clinical teams or when initiating a new partnership with one of these employers. With the U.S. Department of Labor more strictly enforcing the classification of employees, med-tech companies must critically evaluate the risks they are exposed to should charges be filed, an accident happen on-site, or if there's a violation of overtime laws, among other independent contractor risks.

For the misclassified employee, this intentional or unintentional decision could lead to a loss in workplace protections and critical benefits they are entitled to by law. This includes minimum wage, overtime pay, workers' compensation, and family and medical leave. 

Annually, the U.S. Department of Labor is winning millions of dollars in settlements due to misclassification across every industry. Below are several companies who have suffered severe consequences for breaking the law and getting caught. 

Legal Victories for Misclassification:

  • In April 2016, Uber decided to settle two class-action lawsuits in California and Massachusetts initiated by its drivers for misclassifying them as independent contractors instead of employees. The $100 million settlement prevented the lawsuit from going to trial.1 
  • In 2015, Homejoy, a home-cleaning services company closed their doors due to four pending employee misclassification lawsuits.2
  • In 2012 and 2013, the U.S. Department of Labor collected more than $18.2 million in back wages on behalf of 19,000 employees who had been misclassified.3

The potential risks to both the employing and partner companies comes down to professional liability. It could include millions of dollars in fines, a potential class-action lawsuit, and brand degradation. Most often, the largest company involved holds the "deep pockets" responsibility.

The risks include, but are not limited to:

  • Drug & Background Screening - The vast majority do not complete drug and background screenings. This increases risk and liability as well as quality concerns as it relates to customer-facing challenges.
  • Tax Deduction (IRS/Tax Law) - They do not withhold taxes from their employees. Based on the guidelines put forth by the U.S. Department of Labor (DOL), 1099 employee are responsible for
    owing income, self- employment, Social Security, and Medicare taxes, which typically results in higher overall taxes. Both the 1099 and partner companies could face severe financial
    penalties for not withholding the state and federal tax of those misclassified. Further, the IRS can impose additional fines if they deem necessary, including:
    • 20% of all wages paid as a fine
    • Criminal penalties of up to $1,000 per misclassified worker
    • 1 year in prison
  • FLSA Compliance - Under the Fair Labor Standard Act (FLSA), both companies could be held liable for overtime back pay when any misclassified individual worked more than 40 hours in a week. In addition, either or both companies could be prosecuted and charged for liquidated damages equal to the back pay due.
  • Worker's Compensation & General Liability - 1099 workers are not covered by the hiring company’s worker’s compensation or general liability insurance. In the event an individual of this team was
    injured, caused an injury, or damaged property while working, the first question one must ask is, "whose insurance is covering this?" With limited or no insurance coverage, substantial liability would be imminent.
  • Training - 1099 employees cannot be trained and are not required to follow policies and procedures provided by the employer. By not being required to follow product training, you increase the risk of
    misguided messaging and associated liability.
  • Family & Medical Leave Coverage - Employees are not provided sick time, disability and family leave as a 1099 employee. This negatively impacts employee retention and as a result, quality.
  • Unemployment Benefits - Employees are not provided unemployment benefits as an independent, 1099 employee.
  • Credentialing Requirement - Often times, these organizations only require certain documentation for certain credentialing platforms, as opposed to comprehensive documentation required for all four platforms. This can lead to employees turning up to a facility and not being allowed to enter.
  • Sensitive Brand Exposure - It is not uncommon with some of these organizations for sensitive customer information to be exposed on social media during recruitment efforts (Twitter, Instagram, etc.).

Considering these risks, we must acknowledge that there are appropriate times to employ 1099 employees. For companies unsure how to properly classify their workers, you can contact labor attorneys, the IRS and/or government labor regulators. Prior to selecting a classification, it is critical that businesses evaluate whether the individuals providing services are in fact employees or independent contractors. Resources are also available on the Department of Labor and IRS websites.

For med-tech companies concerned about the risks associated with an existing 1099 program or a partner operating under the 1099 model, rest assured Novasyte has developed processes and procedures to mitigate the legal, HR and compliance risks associated with your 1099 program. With all of our Novasyte clinical team members classified as W2 employees, we have taken important steps to verify accurate and low-risk classification (for both us and our client partners), as defined by the U.S. Department of Labor

The small cost savings gained (for the employer or their partners) from misclassifying 1099 workers who are performing W2 classified work, does not outweigh the associated penalties of not following the law.

To learn more about Novasyte, visit us here.

Sources:

1. Levintova, Hanna “Uber Agrees to Pay $100 Million to Drivers in Historic Class Action Settlement” Mother Jones. April 22, 2016. Retrieved from: http://www.motherjones.com/mojo/2016/04/uber-announces-it-will-pay-100-million-drivers-historic-class-action-settlement

2. Huet, Ellen. "Homejoy Shuts Down, Citing Worker Misclassification Lawsuits" Forbes, July 17, 2015. Retrieved from: https://www.forbes.com/sites/ellenhuet/2015/07/17/cleaning-startup-homejoy-shuts-down-citing-worker-misclassification-lawsuits/#1238206078be

3. “US Labor Department signs agreements with NY Labor Department and NY Attorney General’s Office to reduce misclassification of employees.” United States Department of Labor, November 18, 2013. Retrieved from http://www.dol.gov/opa/media/press/whd/WHD20132180.htm

Topics: Novasyte News, Med-Tech Industry Update, Employee Classification

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