The U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) recently renewed and updated a memorandum of understanding (MOU) to share information and work together “to improve compliance with laws and regulations administered by DOL-Wage and Hour Division (WHD) and the IRS-Small Business/Self Employed Specialty Employment Tax (SB/SE).”

The MOU provides for the WHD to share “investigative information and other data that WHD believes may raise Internal Revenue employment tax compliance issues related to misclassification,” as well as sharing of training materials between both agencies.

The WHD and the IRS first entered into an MOU in 2011 to reduce the illegal use of misclassification and the tax gap. Through the renewed MOU, the agencies remain committed to “identify and resolve labor violations by employers who benefit by misclassifying employees as independent contractors and deprive them of the protections of the labor standards laws we enforce,” Principal Deputy Wage and Hour Administrator Jessica Looman said in a news release.

For regarding independent contractors, employers may visit the WHD’s website, which also provides this helpful comparison table:

HEC members may also view our Summary of Independent Contractor Laws and Independent Contractor FAQs.

Other Common Misclassifications

Though not covered by the MOU, another common misclassification is exempt vs. non-exempt.

For employers covered by the Fair Labor Standards Act, all employees must be paid at least minimum wage, and overtime for hours worked beyond 40 hours in a work week, unless the employee qualifies for a specific exemption provided by the law.

The most common exemptions are the “white-collar” exemptions, which include:

• Executive;
• Administrative;
• Professional;
• Computer Employee;
• Outside Sales; and
• Highly Compensated.

For more information regarding these exempt categories, see the WHD’s Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act.

HEC members may also access our FLSA classification resources, including A Comparison of White-Collar Exemption Tests Under the Federal Fair Labor Standards Act & the Hawaii Wage & Hour Law, and Job Analyses for the following exemptions:

• Administrative Exemption
• Computer Exemption
• Creative Professional Exemption
• Executive Exemption
• Learned Professional Exemption
• Outside Sales Exemption (including Drivers who Sell)

Terminology Matters! Or Does It?

Many employers think they can apply a label of their choosing to a worker, and that label will determine that worker’s classification. However, “employee,” “independent contractor,” “exempt,” and “non-exempt,” all have legal definitions that will determine the worker’s true status. In addition, “salaried” is not a legal classification, and does not in itself determine whether or not a worker is entitled to minimum wage and overtime.

Employers should carefully review the applicable legal definitions to ensure proper classification of their workers. HEC members may contact their HR Consultant or call our hotline at 808-836-1511 with classification questions.