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Classify Farm Workers Properly to Avoid Penalties

March 26, 2013
By: Nate Birt, Top Producer Deputy Managing Editor google + 

Increased federal scrutiny of worker classification on agricultural operations should motivate farmers to carefully document labor on their farm, experts say.

While labor is an issue year-round, the U.S. Department of Labor has been hiring additional investigators for the last two to three years to review suspected misclassification, says Joyce Grenis, senior vice president of human resource advisory services at Sikich LLP in Naperville, Ill.

"What we are also seeing is a greater focus from the Department of Labor on the issue of independent contractor classifications," Grenis says.

At issue is whether farm workers are classified as independent contractors or employees. Information reported by the Labor Department estimates that up to 30% of employers misclassify their employees. That results in a significant decline in tax revenues coming back to the federal government, which has prompted the increase in investigative efforts, Grenis says. If the Labor Department investigates and determines a person is an employee rather than a contractor, the employer must pay back taxes that weren’t withheld and additional penalties, which can be costly.

Employers who mistakenly classify hourly workers as salaried would be responsible for paying them time and a half or more per hour for any overtime, starting from the date of hire, says Tom Bayer, CPA and partner at Sikich. Employers who mistakenly classify employees as contractors would have to pay Social Security and Medicare taxes at a rate of 15.3% on all contractual payments, plus interest and penalties.

While a farmer might be tempted to hire someone as a seasonal, independent contractor to avoid the time and cost required to add an employee to the payroll, several factors should be evaluated first.

According to the federal Fair Labor Standards Act, an employer must determine the degree to which a worker exercises control over their activities. In general, farm workers have scheduled hours of operation, are given the tools required for the job and generally aren’t paid using invoices, Grenis says. That means more often than not, a farm worker will be considered an employee, not a contractor.

Human-resource professionals such as Grenis work with farm employers and others to ensure they are reviewing worker classifications, examine job descriptions to determine proper classifications and aid farm employers in maintaining compliance.

The challenge for employers is staying up to date on federal law. There are 40,000 pages of employment law in existence, Grenis says, and a farmer reading for eight hours a day over the course of a year still wouldn’t get through all of the material. Employment law is constantly changing, which places a greater burden on employers.

"If the people that they are employing do not meet some of the independence issues … it’s going to be very difficult for them to classify those particular individuals (as contractors) as opposed to employees even if they may be seasonal," Grenis says.

There can also be legal ramifications for failing to classify workers properly, Bayer says.

"It can really hurt a company and create a huge liability for them," Bayer says.

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