Maintain compliance and avoid penalties.
Agricultural operations face increased federal scrutiny of worker classification, which should motivate farmers to carefully document labor, experts say.
While labor is an issue year-round, the U.S. Department of Labor has been hiring additional investigators during the last two to three years to review suspected misclassification, says Joyce Grenis, Sikich LLP senior vice president of human resource advisory services in Naperville, Ill.
"We are also seeing a greater focus from the Department of Labor on the issue of independent contractor classifications," Grenis says.
At issue is whether workers are classified as independent contractors or employees. The Department of Labor estimates that up to 30% of employers incorrectly classify their employees, which significantly reduces the amount of tax revenue coming back to the federal government. Grenis says this has prompted the increase in investigative efforts.
If the Labor Department conducts an investigation and determines a person is an employee rather than a contractor, the employer must pay back taxes that weren’t withheld and additional penalties. These penalties can be costly to the farm.
Sikich Partner and CPA Tom Bayer adds that employers who misclassify 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.
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, Bayer explains.
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 employees have scheduled work hours, are given the tools to complete the job and generally aren’t paid using invoices, Grenis says. More often than not, those criteria mean a farm worker will be considered an employee.
Do you have control of the work performance that’s being done? Do you decide their work hours? Can you give a promotion to the worker? Are the services performed considered a core business of the company? A "yes" to any of these questions means the worker should be classified as an employee, says Laura Cornille-Cannady, a family business coach and human resources specialist.
Human resource professionals, such as Grenis and Cornille-Cannady, help farmers to review worker classifications, examine job descriptions to determine proper classification and help maintain compliance.
The challenge for employers is staying up-to-date on federal law as Grenis says there are 40,000 pages of employment law. Even if a farmer read for eight hours a day throughout the year, he or she still wouldn’t get through all of the material, Grenis adds, noting that employment law is constantly changing.
"If the people they employ do not meet some of the independence issues, it will be very difficult to classify those particular individuals as contractors, as opposed to employees, even if they are seasonal," Grenis explains.
Shelter Liability. Not only are there financial repercussions for failing to properly classify workers, but also legal ramifications. "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. This can help protect a business against individuals who are terminated and later try to draw unemployment, claiming that they were misclassified as a contractor, he says.
It also makes sense to review worker classification now because of the ongoing implementation of the Affordable Care Act, Bayer says.
Many small- to medium-sized businesses, including farms, are close to the threshold of 50 full-time or full-time-equivalent employees. At that point, they are 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.
Bayer believes worker classification will only increase in importance, especially if immigration reform facilitates more undocumented workers to remain in the U.S.
Several steps can help farmers avoid taxes, penalties and legal concerns. Tom Bayer, Sikich partner and CPA, recommends:
1. Consult an adviser who is familiar with the rules and laws surrounding employment and health care to get recommendations for properly 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 provide proof of insurance to you as the employer. Additionally, make sure 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.
For more information about properly classifying farm workers, visit www.TopProducer-Online.com/classify_workers.