Misclassification of Bizav Workers a Growing Concern

While the use of temporary pilots and flight attendants has long been a staple of business aviation, the question of whether or not those workers should legally be classified as independent contractors is part of a wider issue, pertaining not just to aviation but U.S. businesses in general, according to government agencies that are subjecting the practice to closer scrutiny.

 In July, David Weil, administrator of the U.S. Department of Labor’s (DOL) wage and hour division, issued a letter addressing the matter. “Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations,” he wrote. “Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.”

While misclassification, intentional or not, can present problems for the worker, including failure by the employer to pay unemployment tax and other benefits, government entities are clearly concerned about the potential for revenue lost to unreported income and improper tax withholding. “We’re not talking about nickels and dimes here,” said Gregory Ripple, an aviation employment attorney with Michigan-based law firm Miller Johnson. “The amount of money that the Department of Labor and the states think they are missing every year in tax revenue is in the tens of billions of dollars.” That missing revenue can have a knock-on effect, raising taxes for companies that do comply with regulations.

Misunderstood Label

For businesses, labeling a worker as an independent contractor can streamline matters in terms of tax withholdings and allow it to maintain a less formal relationship with the worker. As a result, noted Ripple, independent contractors generally can demand and receive a higher hourly wage than employees, because employers don’t have to provide them with benefits or pay payroll taxes.  “A lot of companies–and frankly a lot of independent contractors–operate under the assumption that if the company and the individual agree that they are independent contractors, then they are independent contractors. That’s not accurate at all,” Ripple told AIN, adding that this is a significant concern in the private aviation industry.

Also unwise is basing a worker’s status on what letters they have in their title. “[Employers] think that if somebody has an LLC after their name, they are eliminating employee misclassification, and that is not true,” noted Jim Hanchrow, client services manager with supplemental flight crew provider Corporate Aviators Inc.. “They are going to say ‘I’m an independent contractor,’ but the bottom line is if you look at the test for what determines an independent contractor, most of the time they are not going to pass that test.”

The DOL asserts that each situation must be weighed against several criteria according to the Fair Labor Standards Act (FLSA) to determine worker status, adding that courts will use the “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself (see below). “All of the factors must be considered in each case, and no one factor (particularly the control factor) is determinative of whether a worker is an employee,” Weil stated in his interpretation.

Once that analysis is applied and interpreted, the agency concluded that under the broad definitions of the FLSA, most workers should be considered employees. “In its guidance, the Department of Labor basically says it believes most people who are classified as independent contractors are misclassified,” Ripple told AIN. “They are going to assume that you are doing it wrong, so companies really need to do their homework to make sure they have a case for why they are doing it right.”

Further complicating matters, Ripple noted, is that the standard that the DOL uses to determine a worker’s classification might not be the same criteria that an individual state will use, which could present more hurdles for national companies. “If you are using or contemplating the use of independent contractors and you haven’t done so previously, you need to analyze whether or not these independent contractors meet the definition of an employee in your jurisdiction,” Ripple said, adding that auditors will likely be unmoved by justifications for misclassification of employees that consist of explanations of  “We’ve always done it that way” or “That’s the way everyone does it.”

Aviation-specific Concerns

Most, if not all, companies are aware of the consequences of employee misclassification in the wake of high-profile cases involving corporations such as Microsoft and Federal Express, but in the case of flight departments, and their somewhat insular position in most companies, regulations can and often do get overlooked. “[Companies] have policies, but when it comes to the aviation department, they sometimes operate like a little satellite,” said Hanchrow. “Sometimes they don’t follow all their HR policies to a T and if HR did know about it, they would probably make them not hire people as independent contractors.”

Discovery of misclassification can be innocuous enough. Ripple noted the case of a flight attendant who worked occasionally for a Part 135 carrier, and was told she was no longer needed after the company discontinued flight attendant service. She filed for unemployment and was told that the company had never paid unemployment tax on her behalf. “The problem, of course, is that all these agencies talk to one another, so the minute the IRS begins to investigate you, you can expect to receive letters from unemployment and your state taxing entity as well,” he said.

“The bigger the company, the bigger the risk,” said Hanchrow. “Once a company gets flagged for employee misclassification, say in the aviation department, it can extend company-wide if the IRS feels that company is a really big offender.” If companies are found in violation of the labor classification laws, they can be liable for back taxes, interest, fines and penalties from multiple agencies and jurisdictions. A company’s worker compensation insurance provider might also be displeased if it learns a company has more employees than were reported when it established its coverage.

When flight departments need contingent labor, they have several choices, the first being use of an aviation staffing firm, which is considered the employer of the flight crew, and in most cases will relieve the hiring company of the administrative burden. Such services generally come at a premium as the staffing firm will add its overhead and profit margin to the arrangement.

But even using a staffing provider is not always a guarantee of adherence to regulations, as some will label their workers as independent contractors (see box). In such situations, the end user can also be liable if regulators determine that the employee has been misclassified. The second is to hire independent contractors directly, in which case Ripple suggests consulting with a human-resources professional to avoid misclassification. The third option and the one most unpopular with employers is to hire the worker as a part-time employee, even if they work as little as one hour a week, to ensure compliance with the regulations.

Criteria for ‘Economic Reality’ Test

• Is the work an integral part of the employer’s business?
• Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
• How does the worker’s investment compare to the employer’s investment?
• Does the work performed require special skills or initiative?
• Is the relationship between the worker and the employer permanent or indefinite?
• What is the nature and degree of the employer’s control?

Check Your Staffing Provider

While rates for supplemental crews vary among providers, those offering a significant discount might not be providing for their workers under the correct classification, thus creating an unlevel playing field. There are several ways to make sure a staffing provider is following regulations, according to Margaret Vernet, founder and president of Connecticut-based Corporate Aviators Inc. The simplest is to ask how they are paying the workers they hire. Another option is to request documentation. “Because [staffing providers] are not paying them as a W-2 worker, they may not be able to show a certificate of insurance demonstrating that they have workers’ comp on the people they hire,” she told AIN. Lastly she noted, prospective customers should check the staffing company’s name. “If they are an incorporated business, an I-N-C, it’s federal law that all employees be paid as W-2 workers.”