'HR is stuck between a rock and a hard place': Misclassifying employee status

In today's rapidly changing employment landscape, one of the most urgent concerns for businesses is employee classification. HRD spoke to Brent Douglas, partner at Hahn Loeser & Parks LLP and an expert in Labor & Employment Litigation, to shed some light on the contentious issue.

"Nationwide, and especially here in California, the fastest growing area of employment liability is in wage and hour claims," says Douglas. “Both on an individual basis from a disgruntled former employee - and on a class action basis.

“Increasingly, states are passing laws that expand the scope of the definition of who is an employee. As such, companies are finding it increasingly difficult, if not impossible, to hire workers on an independent contractor basis.”

‘Most costly mistake you’ll ever make’

And misclassifying your workers could be the most costly mistake you ever make. Historically, states like California, Massachusetts, New York, and Washington have been at the forefront of these shifts, pushing forth employee-friendly laws. But the tide is changing.

“Unfortunately, it means HR directors – whom I love, they’re my boots on the ground – are in a difficult situation where they're often more abreast of this changing legal landscape than the C-suite they report to. This means they’re getting a directive to onboard a person or even a whole team on an independent contractor basis and it’s simply not possible legally.”

In these cases, Douglas recommends HR leaders reach out for advice from your local council that will provide advice. Importantly, you need to find someone who can answer the question for where that new hire is going to render services and not where the company is located.

And this is something that Douglas is sadly seeing a rise in.

“Similar to the distinction as to whether a worker is an employee or an independent contractor, my clients are being sued for misclassifying non-exempt employees as exempt. Perhaps the most common misconception is that by simply paying an employee on a salary basis, you have magically made them exempt from overtime requirements. Here in California, it’s the job duties that make someone qualify for the exemption.

“And again, I think a lot of HR personnel are stuck between a rock and a hard place. The CEO or company founder might not appreciate this legal distinction, doesn't understand the magnitude of the liability and doesn't have an appetite for the administrative hassle of forcing people to clock in and out and recording meal and rest breaks and accurately.”

‘The burden is on the company’

The legal nuances extend beyond just employee versus contractor distinctions. Increasingly, lawsuits are being filed for misclassifying non-exempt employees as exempt.

"No company is too small to be immune from this kind of liability,” Douglas emphasizes. “I've got clients with five to 10 employees who’re facing angry letters from attorneys who represent former employees - or in some cases even small class actions.”

As the word implies, exempt means that a person is exempt from something that would otherwise apply to them. Douglas advises HR people really get their head around that.

“In both these legal issues, the burden is on the company. The person is presumed to be an employee and it's the company's job to establish that they were properly classified as an authentic contractor. Similarly, an employee is presumed to be non-exempt and if challenged it's the employer's obligation to establish that the person qualifies for the exemption.

“I advise my clients to conduct that analysis before the person is even hired. If our goal is to hire an exempt employee, let's come up with an appropriate job title.”