Hiring Practice Issues with Employee Eligibility and Worker Classification

Hiring Practice Issues with Employee Eligibility and Worker Classification

September 2, 2015 | Symphona

Hiring practices in the United States are of growing importance as regulations grow more complex.   This is especially true with identifying people eligible for employment and how to document good faith compliance with the applicable laws.  The pitfalls of not having a strong hiring system in place are consequential and are growing with the implementation of additional regulations, like the Affordable Care Act.  Employees should be eligible for employment and classified correctly to prevent businesses from generating large, outstanding legal and financial liabilities.

Let’s start with the rules for employment eligibility.

Current law is largely based upon the 1986 Immigration Reform and Control Act.  Based upon this law, the only people eligible to work in the United States are US citizens, noncitizen nationals, lawful permanent residents, and aliens authorized to work.  This law introduced Form I-9.  Form I-9 is used to verify employment eligibility.  Form I-9 must be completed by all employees on or before the third day of employment.  Form I-9 also must generally be accompanied by the following documents or combination of documents:

US passport

Certificate of US citizenship

Certificate of naturalization

Endorsed foreign passport

Resident alien card


If the worker does not have one of the previously mentioned documents, documents evidencing authority, in addition to documents establishing identity must be provided.

Documents evidencing authorization:

Social security card

US Certificate of birth


Documents establishing identity:

US state driver’s license

It is important to note that it is illegal to request a specific document.  Based upon fears of potential discrimination, it is entirely up to the prospective employee to determine which document he or she  wishes to provide..  A photocopy of the I-9 and the supporting documentation must be retained for potential future inspection.  The documents should be retained for the length of time that is longer:  one year after an employee leaves the company, or three years after hire date.

Why is it important to follow the rules on documenting employee eligibility?

The consequences of violating the law on this include civil penalties of $375 per undocumented worker paid as well as a potential $16,000 penalty in case it was deemed a flagrant disregard of the law.  Criminal penalties can include an additional $3,000 per employee and imprisonment of up to six months.

Civil and criminal penalties are not the only reasons to follow immigration law with regard to employees.  United States income tax law administered by the Internal Revenue Service does not allow deductions for wages paid to unauthorized aliens.  With labor being a large component of most business expenses, your company would have to pay income taxes on profit that was not achieved.  Does your company require an audit for purposes of loans or other obligations?  Can your auditor sign off on your financial statements with expansive payroll tax liabilities outstanding?

Simply calling the potential workers independent contractors does not work, either.  If you have either behavioral control, financial control or a significant relationship with the worker, then this makes the worker an employee.  These identifying factors are large, inclusive measurements that define employee versus independent contractor.

Behavioral control is based upon how much decision-making authority the company has over the worker.  If the individual is instructed or trained in when, where and how to work, this would be indicative of an employer/employee relationship.  Common indicators used by courts include whether the individual sets his or her  own hours, chooses which tools or equipment to use, hires own employees and purchases own supplies.

Financial control refers to the ability of the worker to influence or control the financial aspects of his or her activity.  Does the individual provide the majority of tools or workspace for the job to be completed?  Can the individual do the same work in the open market for other payers?  Is his or her  success or failure dependent on entrepreneurial skills?  Can the worker lose money on a job?

The relationship aspect of employee versus independent contractor arrangement essentially focuses on how the two parties perceive each other and how they present this relationship to outsiders.  The following factors should be considered: How are contracts written up?  Does the person work exclusively for the company?

There are a significant number of considerations in determining whether a worker is an employee or an independent contractor and the considerations are subjective in nature;  however, categorization is usually straight-forward from a general perception standpoint.  The phrase, “if it walks like a duck, quacks like a duck, then it is probably a duck” comes to mind.  This is largely how judges have approached this subject in case law.

The legal and financial consequences are as substantial for improperly classified workers as they are for having ineligible workers on your payroll.  The employer improperly classifying his worker as an independent contractor is immediately liable for the employee’s FICA withholding taxes.  This is in addition to penalties for failure to pay and report wages.  What’s more, a 100% penalty may be assessed personally on a “responsible person” for the employee withholdings and employee’s portion of the FICA taxes.  With the rollout of the Affordable Care Act, if the misclassified employees cause the company to exceed the 50-employee threshold and violate the 95% coverage rule, there’s an additional $2,000 penalty.  This penalty is for all employees, not just employees without health insurance coverage.  Another consideration is the costly benefit plan adjustments that have to be made for misclassified workers.

It is important that you stay in compliance with proper I-9 documentation and employment practices.  You should also give more than just a tacit look at the documentation.  According to the I-9 instructions, an employer should only accept documents from the I-9 lists that reasonably appear on their face to be genuine and to relate to the person presenting them.  If you find information after hiring an inappropriate employee, you should act on it.  An employer can be held liable not only for actual knowledge of a worker’s incorrect status, but also “constructive knowledge.”   If you had reason to know, then the authorities treat the situation as if you did know.  A well-constructed I-9 compliance policy is a strong way to show good faith with regard to the law and minimize any liability.

What should a business do when needing to hire in a tight labor market?  Perhaps a premium needs to be paid in order to retain eligible talent.  If the labor is that important, the company could sponsor the prospective hire for lawful permanent residency through the current immigration regime.  This would take a consequential amount of time and resources, but there are law firms that specialize in “normalizing” immigrant labor.

Every situation is different.  If you have any questions regarding employment practices, please feel free to give us a call.

Written by Chad Reese