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Hospitality Industry Faces Hotbed of IC Classification Challenges

Apr 28, 2015 11:14:39 AM

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Many companies have run afoul of worker classification guidelines and have been forced to pay untold millions in penalties and back pay.  High profile examples from years past have included marquis brand names such as FedEx, Microsoft and others who you’d think would have the resources and experience to avoid getting ensnared in IC classification issues.  In these well-publicized cases, the plaintiffs defense focused on attempts to prove that their classification of workers as IC’s was not improper. Obviously, courts and the IRS did not agree.  In response, many organizations decided to play it safe and outsource the acquisition of contract labor to staffing agencies and other workforce management solution providers. The false sense of security this strategy produced has left many organizations vulnerable to the very misclassification challenges they sought to provide. 

The industry getting the most attention in this regard (and not the positive kind of attention) is the hospitality industry. Hospitality as an industry didn’t set out to intentionally defraud the government or stick it to its workers. Rather, as they increased their reliance on third-party sourcing and contingent workforce management, they fell into IC practices that were seemingly unchallenged by the authorities. The lack of any pushback from the government (at least initially) led hotels, restaurants and other hospitality users of contract labor to conclude that they were indeed compliant with the laws – or at least, that the payrollers or the ICs themselves were making sure they met the criteria for legal Independent Contracting. 

As the numbers of workers classified as ICs in the hospitality industry continues to rise, frequent violations in classifying workers as exempt vs. non-exempt prompted renewed attention from government agencies. The IRS and Labor Department has been auditing increasing numbers of hospitality organizations looking at tip credits, tip pools, pay deductions for uniforms, off-the-clock work, meal breaks, exempt status of first level managers, and other indicators of employee misclassification typical to hospitality workers.  

As the numbers of workers classified as ICs in the hospitality industry continues to rise, frequent violations in classifying workers as exempt vs. non-exempt prompted renewed attention from government agencies. The IRS and Labor Department has been auditing increasing numbers of hospitality organizations looking at tip credits, tip pools, pay deductions for uniforms, off-the-clock work, meal breaks, exempt status of first level managers, and other indicators of employee misclassification typical to hospitality workers.  

Many contractors employed in hotels and restaurants have met with these criteria but were still ultimately determined to be employees.  Consider the hotel valet parker who met with criteria to be an IC, but because he was made to wear a hotel uniform and work hours dictated by the hotel, was found to be an employee.  Or even consider the exotic dancers who by all measures seemed to be legitimate ICs. Yet the stipulation of the employer that certain wardrobe, makeup and work intervals led to the conclusion they were indeed employees. 

Whether sourcing through an EOR (payroller), a staffing supplier, or internally, all hospitality organizations should take great care in their usage of ICs to avoid getting penalized; especially given the extra scrutiny this industry currently faces. Ensure there is a written worker classification policy on file and that it is regularly revisited and updated as needed.  Consider providing the IRS test to each new contractor during onboarding and recording the results for audit should the need arise.  Educate hiring managers and engage solution providers to ensure continuity across all sources of IC talent.  The better you can record the efforts made to guard against IC compliance, the easier it will be to convince auditors that the organization was making all good faith efforts to ensure proper classification. 




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