If your company relies on at-home workers to perform some of your company's job responsibilities, you may be doing two things: You may be categorizing the cottage labor as independent contractors, and you may be paying them for "piece work," and not paying them for overtime or benefits, no matter how many hours they work.

If this is the case, and the federal labor board catches up with you, you could be in big trouble.

Somewhere around the mid-1990s a lot of U.S. companies got the idea that, if they reclassified their workers as independent contractors, they could avoid paying income and social security taxes, unemployment insurance, and a host of worker benefits, from health insurance to pension payments. Thousands of workers found themselves out of a stable job and in the position of being considered contract workers, suddenly responsible for paying their own income taxes and both their own and their former employers' share of social security and Medicare taxes. At this point the federal government cracked down, defined the difference between employee and contractor status very strictly, and set about enforcing the rules.

One of the biggest distinctions between an employee and a contract worker is whether a worker has any flexibility in performing his or her duties. If workers are expected to keep to a regular schedule at the discretion of the company, if they have to perform the work according to specific parameters, and if they cannot turn down work without negative consequences (for instance, being barred from additional work when available), then they are employees and need to be treated as such. Contract or freelance workers should have much more flexibility in their work arrangements, should be able to define what work they will and will not perform for the company involved, and should be able to accept or reject assignments, within reason, without being cut off from further work. The relationship between a contract worker and a company is more of a professional service provider / client relationship.

Another mistake commonly made by employers of at-home workers is not keeping track of the hours put in by cottage laborers, and taking that into account regarding compensation and benefits. The danger comes when an employer utilizes both in-house and at-home employees, and offers overtime and benefits to their in-house employees but not their cottage labor.

An example: A particular company employs about 30 in-house employees, paying them an hourly wage, paying their income, social security, and Medicare taxes, and offering health insurance, a 401K plan, vacation pay, and an Employee Assistance Program (EAP). The company also employs 30 at-home workers, offering them a combination of hourly wages and "piece work" wages, on a per-job basis. The at-home workers receive no overtime if they work over 40 hours in a week, no benefits, and may or may not have employee status. They don't know when or if they will receive work in the course of a particular day, but are expected to be on hand to do the work if called. The work may arrive at 9 a.m., at noon, at 2 p.m., or at the end of the day.

This employer is breaking the law.

While employers can choose whether or not to provide benefits such as health insurance, vacation pay, etc., for employees, they cannot offer these benefits to one group of employees and not another; if in-house employees who work 40 hours a week are entitled to benefits, so are the at-home employees who work an equal number of hours. Even if the at-home employees are paid entirely by piece work, the employer is required to keep track of the hours they work and use a formula to come up with an hourly equivalent, based on the rate of pay to determine if the hours worked make the worker eligible for benefits.

The employee is also eligible, by federal law, for overtime for work in excess of 40 hours a week; this is not an option. If an employee must wait for work during the course of a day, that employee is entitled to pay for the time spent waiting for work, from the beginning of the work day, up to the time they pick up the work. So if a workplace begins work at 8 a.m. and the at-home employee doesn't receive work until 2 p.m, and spends six hours thereafter performing the work, that employee must receive six hours' pay for waiting and another six hours' pay for the work actually performed, or a total of twelve hours. It's not hard to see that if an at-home employee is expected to be available for work five days a week it's very easy to qualify for overtime and benefits.

Employers ignorant of these facts or who choose to ignore them are vulnerable for severe sanctions. A disgruntled employee who chooses to drop a dime on such an employer can single-handedly initiate a complete federal audit which can result in payment of back pay and benefits for every employee affected, on top of some pretty stiff fines.

The lesson? Know the law, obey the law, and treat your employees - all of your employees - fairly. The alternative can be pretty grim.