Reclassifying Employees, Post-Pandemic: A Cautionary Tale

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May 23rd, 2021
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As we draw closer to a post-COVID crisis work world, businesses need to determine how or if employees who have been working from home will return to the office. A related issue is worker classification. There can be confusion about reclassification, and I caution all small businesses to pump the brakes before they move forward with any changes. Let’s take a look at why.

Pre-pandemic confusion

Worker classification before the pandemic was already fraught with confusion. All employers must correctly classify workers under state and federal laws. This means the Internal Revenue Service, United States Department of Labor, and each state department of labor and department of revenue all have the authority to reclassify independent contractors as employees. Each of the four may apply different standards.

Administration change-over confusion

The Trump Administration issued regulations with a fairly lenient standard on independent contractors. However, the Biden Administration has delayed the effective date, and the Trump regulations may not survive. The current federal government seems to be in favor of a position that classifies most workers as employees, not independent contractors, although the fight goes on in Congress.

Post-pandemic confusion

Now comes the question of returning to the office. Some employers may be tinkering with the idea of changing worker classifications if employees stay at home at least part of the time once the office is re-opened for business. For employers, reclassification will backfire if not considered within the law and not approached thoughtfully.

Consider the cautionary tale of what happened at The Washingtonian magazine earlier this month. The CEO, Catherine Merrill, published an opinion piece in the Washington Post lamenting how many employees prefer to continue working from home.

She suggested that by doing so, these employees are destroying office culture. She went a step further and stated that if they did not want to come to the office to work, perhaps they should be contractors instead of employees. By becoming contractors, they would lose health care, 401(k) matches, and the company-paid share of FICA and Medicare taxes.

The result? A revolt. The journalists at the magazine did not publish any articles the next day and issued a statement saying that her words were a threat to their livelihoods. They also expressed dismay that she did not consider her “dedicated employees who have been laboring around the clock under trying circumstances for more than a year” when she published the opinion piece.

Bottom line: The question of maintaining some form of remote work will be one many companies will face. Please do not succumb to pressure to reclassify your employees without knowing exactly why you are doing it, what effect it will have on your entire company, and what the law will allow.

I would suggest starting with current guidance found in the IRS 20-FACTOR TEST, which helps prevent companies from misclassifying employees as independent contractors.

And as always, if you are considering classification changes but still are unsure of your allowable parameters, please do not hesitate to reach out to your tax professional for up-to-date guidance.

Additional sources

Employer, Audit Thyself!

CEO dismissed working from home. Her employees went on strike.

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