Nike could be fined over $530m for misclassifying thousands of workers
Nike may have misclassified thousands of temporary office workers and faces potential tax fines of more than $530m, according to documents obtained by the Guardian.
The sporting goods company employs more than 79,000 people worldwide, and, like many large corporations, relies on an army of independent contractors to do much of the work, including business consulting, T-shirt graphics, photography and event planning.
According to independent reports compiled for the company and given to the Guardian, Nike management’s handling of independent contractors has left it open to potentially huge fines from tax authorities and the possibility of class-action lawsuits.
Nike did not return calls and emails for comment.
The US, UK and other countries have strict rules about the use of independent contractors, meant to protect workers’ rights and ensure fair tax collection. The Biden administration last year indicated it intends to crack down on companies that infringe them.
Companies can be liable for holiday pay, sickness benefits and pension contributions if they wrongly classify workers as freelancers when they should be designated as employees.Heavy penalties have been levied against companies found breaking the rules.
A July 2022 review of Nike’s independent contractors in the US, UK, Netherlands and Belgium concluded that the company faces a “misclassification risk” of more than $530m.
The report, compiled by People2.0, a workforce services specialist, looked at 3,670 entities – independent contractors, law firms, individuals and others – in the US who had been paid over $7.2bn over three years. It found that a quarter of those contractors may have been incorrectly classified. Those contractors received more than $1.2bn in payments. Nike’s potential liability for those payments in the US alone totals $293.2m, according to the report.
People2.0’s report found similarly large numbers of problematic payments to outside entities in the UK, Netherlands and Belgium, and concluded that Nike faced potential fines of $53.7m in the UK, $76.4m in Netherlands and $106.8m in Belgium – a total liability of over $530m.
“There is currently no [fully comprehensive] company-wide process for determining whether an independent contractor [IC] should be engaged as an IC or employee at Nike,” the People2.0 report states.
“People2.0’s risk assessment has revealed a variety of practices and circumstances at Nike, which, in many cases, indicate a high risk of audit failure under the scrutiny of a taxing authority,” the report concludes.
A second report compiled in 2021 by workforce management company Pro Unlimited, now Magnit, found that of the suppliers who received “non-employee compensation” in the US, 63% had been paid without being assessed by the company’s Flex Freelancers program, a program designed to ensure that payments meets the standards of the Internal Revenue Services (IRS).
In the US, freelancers, independent contractors, gig workers and others are issued a 1099 tax form to report payments to the IRS. Pro Unlimited looked at 1,855 1099 forms issued by Nike in 2020 and found that just 4.5% had been screened by Flex. It estimated that Nike face a potential tax liability of $2.4m for the cases it assessed.
The report opens with a picture of an iceberg. Under the heading “Potential costs of misclassification” the report warns: “Employers who are found to have misclassified workers as freelancers are also potentially liable for other potential costs.”
The report notes that misclassified workers could be entitled to unpaid overtime, sick leave, paid time off, health insurance and retirement plan contributions and interest among other things.
Pro Unlimited also noted that Nike could be vulnerable to a class-action lawsuit for retirement, medical benefits, stock options and other penalties if it was found that workers had been misclassified.
Using outside contractors allows companies to save billions in costs by avoiding expenses associated with fulltime employees such as paid time off and healthcare.
But a number of large US companies have been fined or sued for breaking the rules and misclassifying workers as temps when they should have been treated as employees:
Last year, Uber agreed to pay $100m after an audit in New Jersey concluded the ride-hailing company had misclassified its drivers as independent contractors.
In 2016, FedEx agreed to pay drivers in 20 states $240m to settle lawsuits claiming the parcel delivery company misclassified them as independent contractors. In 2000, Microsoft paid $97m to settle claims that workers had been classified as “temporary” workers for years, denying them standard benefits such as health insurance and participation in the employee stock purchase plan.
Nike’s situation has particularly angered some temporary workers affected by a scheme called “Dim the Lights” – where workers are given time off during quiet periods.
Nike staff continue to get paid during Dim the Lights but external temporary workers (ETWs) are not paid – a significant cost-saving measure for the company.
The scheme has traditionally run between Thanksgiving and New Year – three weeks – and for one week at the end of May, the end Nike’s fiscal year. It was extended to cover a two week “spring break” in March and a “wellness week” in August.
An internal report on the scheme given to the Guardian notes that Dim the Lights “may impact morale, as not all workers are salaried” and that there could be a “negative impact to the brand should ETWs voice concern about the forced time off”.
In Nike emails seen by the Guardian, executives suggested scrapping or amending the scheme because it is unfair to some temporary workers who have been on contracts with Nike for over a year. The report also suggests that the scheme may put off applicants.
“In more and more industries and cases, we are seeing people misclassifying individuals who really are employees,” said David Weil, dean of the Heller School for Social Policy and Management at Brandeis University, and the former administrator of the wage and hour division of the Department of Labor under Barack Obama.
The arrangement frees the employer of its “basic obligations” to its workers, said Weil. “That is really problematic. We are still in a world where workers need those protections.”