Misclassifying Workers as LLC “Members” Leads to Costly Settlements
The $700,000 paid to resolve a scheme for avoiding payroll taxes should remind contractors to go by the book in paying their workers.
The desire to avoid payroll taxes and other
employee-related costs by misclassifying workers (as, for example, independent
contractors) is nothing new. But a relatively recent scheme made the headlines
in April when 16 Arizona companies and individuals agreed to pay $700,000 in
back wages, employment taxes and penalties to resolve misclassification of more
than 1,000 employees as member/owners of LLCs that were fronting for various
In the News:
to Pay $48,000 in Back Wages, Damages (Arizona Republic, July 26, 2016)
In announcing the settlement on April 2, the U.S.
Department of Labor stated that the construction workers were building houses in Utah
and Arizona as employees one day and then the next day were performing the same
work on the same job sites for the same companies, but without minimum wage,
overtime, workers compensation, unemployment insurance, and other workplace
The Labor Departments five-year investigation began in
southern Utah and then moved to Arizona after Utah passed a law that required
LLCs to provide workers compensation and unemployment insurance to their members.
The settlement requires the defendants to:
pay $600,000 in back wages and liquidated
damages to employees in Utah and Arizona and an additional $100,000 in civil
stop using limited liability companies to
avoid Fair Labor Standards Act compliance;
treat themselves as employers and their
current and future workers as employees under the FLSA;
comply with the FLSAs minimum wage, overtime,
recordkeeping, and anti-retaliation provisions;
pay all applicable federal, state and local
work with the department to identify those
workers who were harmed by their misclassification scheme and determine proper
individual payment of back wages.
In a separate related investigation, last year the government obtained a
consent judgment against a Phoenix drywall contractor that was allegedly a
major client of the Arizona defendants in this case. That contractor was
required to stop using the Arizona defendants unlawful LLC business model and
to pay $600,000 in back wages, liquidated damages and civil money penalties.
Lesson for Contractors
While it is easy to differ with the federal government
on many issues, there is little disputing that, as a Labor Department
spokesperson noted, the resolution of this case should send a strong message to
any other employers, in any industry, contemplating such a scheme."
Nearly every company that has ever found itself in the
Labor Departments cross-hairs can readily attest that there is very little
chance of emerging unscathed. In most cases, whatever financial savings a
company achieves in the short term will pale in comparison to the devastating
financial costs of fighting a misclassification scheme and, at some point, being
forced to pay the piper.
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