Dodging Bullets and Debunking Myths: Why Employee Classification Should be Factored into Your Business’s Risk Management Strategy

Written by Karen Price, CPA on August 19, 2019

Successful business owners understand that risk management is an essential part of a company’s infrastructure. Having an effective risk management strategy allows a business to dodge bullets that can cause harm to the company, its operations and its people. It’s only through identifying risks, assessing them and strategizing solutions that businesses are able to respond effectively—or even avoid—serious risk and repercussions. There’s always a catch though. It’s the bullet you don’t see that you don’t dodge. Or, put another way, it’s the risk you don’t identify that will end up causing lasting harm to your business.

While each business is uniquely different, certain risks appear across industry and operational lines as the most commonly overlooked. One risk in particular that I’ve noticed many businesses overlooking is their exposure to worker misclassification. Unfortunately, this commonly overlooked risk—or bullet—has the power to leave a lasting impact on companies.

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What is Employee Classification, and What is Employee Misclassification?

The Fair Labor Standards Act (FLSA) requires that most employees be paid overtime and minimum wage, though the FLSA also allows for exceptions to the rule. The Act sets employees into two categories: exempt and non-exempt.

Over the years, more and more employees, per their respective job descriptions, have migrated away from being classified as hourly employees to being classified as exempt employees. The trouble is that the FLSA requires that classification be based upon an employee’s duties—not a particular title or job description. It’s important to note that worker classification has a considerable impact on the wages and rights that your employees have through working at your business. If your business misclassifies employees, you’re open to risk in the form of lawsuits or Department of Labor investigations.

If you haven’t analyzed your employees’ classifications, you can’t begin to know or quantify the risk to your business. An unquantified amount of back wages, payroll taxes and penalties could be the unseen bullet headed your way, yet, many companies don’t recognize this risk or work to mitigate it.

That’s why I have outlined three common myths and misunderstandings about employee classifications and why you shouldn’t believe them.

Common Myths about Employee Classifications

Myth #1: The Department of Labor (DOL) would never bother to check my business.

Why it’s not true: The DOL may not have visited your business before, but that certainly doesn’t mean that it won’t or can’t. The DOL has made efforts to make many more face-to-face visits to businesses, so it’s best to not dismiss the possibility. One phone call to the DOL from a disgruntled employee or former employee could be enough for the DOL to come knocking.

Myth #2: My auditors would have caught a problem with employee classification.

Why it’s not true: Your auditors’ overall focus is to determine if your business’s financial statements are materially misstated—not to dig into the details of your business’s worker classification. Your outside auditors rely on your representation that your business has adequate systems and people in place to properly interpret and implement worker classification guidance.

Myth #3: My CFO is on the ball about these kinds of issues.

Why it’s not true: In my experience, more often than not, CFOs are not HR specialists. Most CFOs I know have their hands full elsewhere, and they aren’t intimately concerned with worker classification rules. Employee classification is one of the most convoluted topics in the HR universe, and a surface-level knowledge is likely not sufficient to ensure your business is compliant.

Moving Forward to Consider Employee Classification Risk

If these myths are part of your business’s culture, you’ll want to armor up and consider adding worker misclassification to your list of identified risks so you can manage it. The good news is identifying the risk is the essential first step to effectively dodging the bullet. To move forward, you’ll need to properly assess and measure the potential negative impact, understand the priority among the other risks your business is considering in its risk management strategy and strategize how best to minimize your risk in your business’s specific situation.

As you go about assessing your risk in this area and evaluating how you should manage it and strategize your plans, these may be helpful questions to ask to start the conversation:

  • How many of your employees’ job descriptions match what they do every day on the job?
  • Do your workers have written job descriptions?
  • When is the last time your business performed a thorough self-audit of worker classification?
  • Could some of your exempt workers technically fall into the hourly time-and-a-half category?

The answers to these questions can get you started with identifying your risk in this area and informing your strategy to manage it. After all, the bullet you see is the one you’ll successfully dodge.

You can learn more about employee exemption changes, learn more about the advisory assistance offered by Warren Averett Workplace, or you can have an organizational advisor reach out to you about your specific needs or concerns.

This article was adapted from “Dodging Bullets, Managing Risks & Identifying the Bullets,” which was originally written by Karen Price for The Westberry Group’s blog, HR Life Line. It was published by Warren Averett on October 14, 2014. It was most recently revised and updated with new insight and information on August 19, 2019.

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