Workers' Compensation: Misclassification Threatens Workers' Rights

How Employee Classification Errors Compromise Workers' Compensation Protection

In 2012, Walmart agreed to pay $4.83 million in back wages to more than 4,500 workers after the Department of Labor found the retail giant had misclassified vision center managers and asset protection coordinators as exempt from overtime. The company paid these employees salaries without overtime compensation, incorrectly assuming they qualified as exempt under the Fair Labor Standards Act (FLSA). An additional $463,815 in civil penalties underscored the severity of these violations.

Today, this historical case remains strikingly relevant, as employee misclassification continues to impact not only wage and hour compliance but also workers' compensation coverage—creating gaps in protection for injured workers.

The Workers' Compensation Connection

When employers misclassify employees as exempt from overtime or as independent contractors rather than employees, the implications extend far beyond unpaid wages. These classification errors directly threaten workers' compensation coverage in several critical ways:

Coverage Gaps for Injured Workers: Misclassified workers may be denied workers' compensation benefits after workplace injuries. If an employer treats a worker as an independent contractor when they should be classified as an employee, that worker might not be covered under the employer's workers' compensation insurance policy. This leaves injured workers without access to medical treatment coverage, disability benefits, or wage replacement.

Premium Calculation Errors: Workers' compensation insurance premiums are calculated based on payroll and job classifications. When employers misclassify employees or underreport their true employment status, they pay lower premiums than required. This not only creates unfair competitive advantages but also leaves the insurance system underfunded when claims arise.

Increased Litigation Risk: Misclassified workers who suffer injuries may be able to file lawsuits against employers rather than being limited to workers' compensation claims. This exposes employers to potentially unlimited liability, including damages for pain and suffering—remedies not available under workers' compensation.

The 2025 Regulatory Landscape

The regulatory environment surrounding employee classification has shifted dramatically. In May 2025, the Department of Labor's Wage and Hour Division issued Field Assistance Bulletin 2025-1, announcing it would no longer enforce the 2024 independent contractor rule in its investigations. Instead, investigators now use the framework from the 2008 Fact Sheet #13 and 2019 Opinion Letter FLSA2019-6.

However, this change creates complexity: the 2024 rule remains in effect for private litigation. Workers can still use the more restrictive 2024 standard when filing individual or collective claims alleging misclassification. This dual-track system creates uncertainty for employers trying to ensure compliance across both DOL investigations and potential lawsuits.

Recent enforcement data reveals the stakes: the DOL's Wage and Hour Division recovered more than $259 million in back wages in fiscal year 2025, with the food services and healthcare industries showing particularly high violation rates. The food services industry alone resolved 4,088 violations, recovering over $42 million, while healthcare resolved 2,370 violations, recovering more than $53 million.

Critical Factors in Classification

The "economic reality" test examines several factors to determine whether a worker is truly an independent contractor or an employee:

Degree of Control: How much control does the employer exercise over how, when, and where work is performed?
Investment in Equipment: Does the worker invest in their own equipment and facilities?
Profit and Loss Opportunity: Can the worker realize profit or suffer loss based on their managerial skill?
Permanency: Is this a temporary engagement or an ongoing relationship?
Integration: How integral is the work to the employer's business?
Skill and Initiative: Does the work require specialized skills and independent business judgment?

Importantly, job titles alone do not determine exempt status. The DOL requires that specific job duties AND salary requirements (currently not less than $684 per week for most exemptions) must be met.

Protecting Your Workers—And Your Business

For employers, the lessons from the 2012 Walmart case and current enforcement trends are clear:

Conduct Regular Audits: Review employee classifications periodically, especially when job duties change or new positions are created.
Document Job Duties: Maintain detailed job descriptions that reflect actual responsibilities, not just titles.
Understand State Laws: Many states have stricter classification standards than federal law. California, New Jersey, and Massachusetts, for example, use the "ABC test" which makes independent contractor classification more difficult.
Verify Workers' Comp Coverage: Ensure your workers' compensation insurance policy accurately reflects your workforce composition. Misclassification that leads to inadequate insurance can result in denied claims and significant financial exposure.
Train Management: Supervisors and HR personnel should understand classification requirements and the consequences of errors.

The Cost of Getting It Wrong

Beyond back wages and penalties, misclassification creates cascading problems:

Workers' comp audits may reveal underpaid premiums, resulting in substantial retroactive charges
Injured workers denied benefits may sue for damages outside the workers' compensation system
Competitive disadvantages emerge when competitors properly classify workers and pay appropriate insurance premiums
Reputational harm can damage employer branding and recruitment efforts

Looking Ahead

As regulatory enforcement continues to evolve, one constant remains: proper employee classification is fundamental to both wage compliance and workers' compensation protection. The 2012 Walmart case serves as a reminder that classification errors are costly—and in 2026, with heightened regulatory scrutiny and an enforcement landscape that includes both federal and state standards, the risks are even greater.

Employers who proactively review classifications, maintain accurate records, and ensure proper workers' compensation coverage will be better positioned to avoid the penalties that come with misclassification—and more importantly, to protect their workers when injuries occur.

Resources

U.S. Department of Labor - Wage and Hour Division
https://www.dol.gov/agencies/whd

Worker Classification Guidance
For information on current DOL guidance on employee classification, visit the DOL's Field Assistance Bulletins and Fact Sheets at https://www.dol.gov/agencies/whd

*Jon L. Gelman of Wayne, NJ, is the author of NJ Workers' Compensation Law (West-Thomson-Reuters) and co-author of the national treatise Modern Workers' Compensation Law (West-Thomson-Reuters).

Blog: Workers' Compensation

LinkedIn: JonGelman

LinkedIn Group: Injured Workers Law & Advocacy Group

Author: "Workers' Compensation Law" West-Thomson-Reuters

Mastodon:@gelman@mstdn.social

Blue Sky: jongelman@bsky.social

Substack: https://jongelman.substack.com/

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