It is critically important to evaluate the question of employment status carefully. Failure to properly classify someone as an employee could result in an expensive lawsuit or fine when either a labor department or worker decides to call out an actual employment relationship. This is especially true when converting a business to a worker-owned cooperative. We strongly suggest seeking the advice of an employment lawyer to ensure that workers are properly classified.
The importance of classification and broad implications of misclassification
Within a worker-owned cooperative, the conventional and legally-recognized employee-employer relationship can blur because of the distribution of ownership and control. It brings up the question: Should the worker-owners be classified as employees, or classified as owners? Additionally, if the business is going through a cooperative conversion and if the worker-owners remain employees, do all employment-related regulations continue to apply?
Generally, having employees comes with a list of obligations and requirements for the employer, including:
- Paying for overtime work;
- Ensuring proper work hours and breaks;
- Withholding and remitting payroll taxes and other withholdings;
- Maintaining workers compensation insurance;
- Complying with occupational safety and health laws;
- Allowing employees to organize and join unions;
- Verifying eligibility to work in the U.S.;
- Adhering to standards and practices that protect employee benefit plans;
- Posting notices and posters related to employee rights; and
- Adhering to certain recordkeeping requirements.
If the employment relationship ceases to exist upon conversion to a worker cooperative, most or all of the above requirements cease to apply. There are pros and cons to maintaining the employee status of worker-owners. On one hand, the requirements listed above offer protection to worker-owners in cases where the tyranny of some worker-owners would result in exploitation of other workers-owners. If this is the case, however, it is arguable that an employment relationship does exist, and the cooperative could not have sidestepped employment law to begin with.
On the other hand, the above requirements can be expensive, due to the administrative demands of compliance, the cost of workers compensation insurance, and the cost of payroll services. As a result, a worker cooperative without a conventional employment relationship may show increased profit margins by avoiding the above requirements, and may choose to invest the savings in other types of benefits and protections for non-employee worker-owners.
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