Classify Farm Workers Properly to Avoid Penalties

March 26, 2013 12:00 AM

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.

A review of standard industry practices can help a farm operation evaluate classification decisions. Doing so can protect a business against employees who are terminated and later try to draw unemployment claiming they were misclassified as a contractor.

Another reason it makes sense to review classification now is the ongoing implementation of the Affordable Care Act, Bayer says. Many businesses, including farm operations, are close to the threshold of 50 full-time or full-time-equivalent employees, at which they would be required to provide health insurance to all workers or pay penalties. In some cases, employers might be tempted to keep some workers classified as independent contractors to avoid triggering the insurance requirement.

Several steps can help farmers and farm workers avoid taxes, penalties and legal concerns, Bayer says:

  1. Consult an adviser who is familiar with the rules and laws surrounding employment and health care to get their recommendations for classifying workers.
  2. If it makes sense to hire someone as an independent contractor, work with an attorney to develop a written agreement documenting the contractual relationship.
  3. Verify independent contractors are carrying insurance on themselves and that they are providing proof of insurance to you as the employer. Additionally, ensure that contractors name their employer as a secondary insured to protect you as the employer from liability in the event that they are injured on your property.
  4. Know who you are doing business with, and avoid employers who you suspect aren’t paying the appropriate taxes or might be skirting the rules in other ways.

The issue of classification will only grow in importance, particularly if immigration reforms in the future enable more undocumented workers to remain in the U.S., Bayer says.

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