Category Archives: Independent Contractor

Avoid the Dangers of Misclassifying Employees as Independent Contractors

Contributed by Amanda Biondolino, March 13, 2018

A dangerous misunderstanding persists in the business community that an employer can choose to “1099” its workers, or classify them as independent contractors, so long as there is an agreement between the employer and employee and both are satisfied with the arrangement. This misguided belief can have dire consequences if blindly followed.

Independent contractorWhen a worker is classified as an independent contractor, the employer is not liable for federal tax withholding, payment of state unemployment tax, maintaining workers compensation insurance or compliance with state and federal wage and hour law. It is only logical that an employer would see this as an attractive option. The problem, however, is that the government may view this as opting to evade taxes and other statutory obligations.  Neither the employer nor the worker has the authority to choose to avoid legal duties, and an agreement between the employee and employer is not determinative of status.

Instead, state and federal government will use one of several “tests” to determine whether the worker is an employee or independent contractor. For example, the “ABC” test is frequently used under Illinois law. Under this test, a company defending its classifications is required to show that an individual providing services: A) is free from control and direction; B) performs services outside the usual course of business for the enterprise for which such service was performed; and C) is engaged in an independently established trade, occupation, profession, or business.

Other states, utilize the “IRS” test.  Under this test, twenty factors are weighed to determine whether a worker is an employee or independent contractor. To make it more confusing, the federal Department of Labor uses a six-factor “economic realities” test to determine liability under the federal wage and hour law, the Fair Labor Standards Act.  Other tests also are used, like California’s multi-factor “Borello” test, named for the lawsuit in which it was created. Generally speaking, the tests all turn on whether the employer has the right to control the worker. If the employer controls what work will be done, and how it will be done, then the worker is an employee notwithstanding any agreement, label or waiver to the contrary.

An employer who has misclassified its employees is subject to payment of back taxes and insurance premiums, unpaid wages and overtime, late fees and hefty penalties, not to mention civil lawsuits filed by misclassified employees, including class actions.  Government agencies often share information, resulting in a snowball effect that can have severe adverse effects on a business, and each has the power to audit an employer to ensure compliance. The burden is on the employer to defend its classification. Be advised, if an inquiry or audit is triggered by an “independent contractor” applying for unemployment, filing a workers compensation claim, or simply reporting non-compliance, strict anti-retaliation or whistleblower protections can result in significant liability if any adverse action is taken against the worker.

Employers should be aware that employment laws are passed for the protection of employees, and will be construed broadly in favor of finding employee status.  However, courts are willing to uphold an independent contractor designation, where appropriate.  Recently, a California federal court judge ruled that a Grubhub driver was correctly classified as an independent contractor because Grubhub exercised little control over the “manner and means” used by the worker to complete his job.  The court also considered a variety of secondary factors under the Borello test, but the scales tipped in favor of independent contractor status.

It is imperative for employers to consult with an experienced labor and employment counsel to determine if its workers are truly independent contractors to avoid the implications of misclassification.  This begins with understanding what test will be used, and evaluating each worker against the relevant factors.  Counsel should also be utilized to craft independent contractor agreements that do more than simply label the relationship as independent contractor, but also incorporate the language necessary to demonstrate that the contractor truly meets the applicable standards.

NLRB Finds Violation for Independent Contractor Misclassification

Contributed by Noah A. Frank, September 22, 2016

The National Labor Relations Board (NLRB) enforces the National Labor Relations Act, the law that allows private sector employees to address the terms and conditions of their employment (e.g., wages, hours, benefits) through collective action. Through a recently released Advice Memorandum, the NLRB expanded its role to include regulating independent contractor relationships.  Pac. 9 Transp., Inc., Advice Mem., No. 21-CA-150875 (NLRB 12/18/2015, released 8/26/2016).

independent-contractorIn Pac 9, multiple unfair labor practice charges were filed, alleging violations of the Act as it related to the company’s relationship with its independent contractor drivers. The NLRB Regional Director sought an opinion from the NLRB General Counsel as to whether the NLRB had jurisdiction and whether a complaint should issue. Recognizing that the NLRB “has never held that an employer’s misclassification of statutory employees as independent contractors in itself violates” the Act’s protection of an employee’s rights, the General Counsel nonetheless recommended that, absent a settlement agreement, the company should be ordered to:

  • cease and desist telling workers that they are independent contractors (rather than employees), and
  • rescind portions of its independent contractor agreements that purport to classify the workers as “independent contractors.”

The General Counsel confirmed that the traditional common law independent contractor test would apply. While no factor is determinative, control was the most important. Other factors include: a distinct occupation or business, direction of work, skill required, providing supplies & equipment, length of the relationship, method of payment, the company’s and worker’s regular businesses, the parties’ belief as to whether they were employee/employer or independent. The General Counsel found it significant that the workers lacked: entrepreneurial opportunity, realistic ability to work for others, ownership or proprietary interest in their work, control over important business decisions, and real investment of capital. Therefore, these factors militated towards an employment relationship.

The Bottom Line:

In a year of NLRB-activism in the non-union workforces (e.g., see our posts on employee handbooks), companies using independent contractors to supplement their workforce must now worry that the NLRB will come after them for a misclassification issue. This is in addition to complying with regulations and tests from the IRS, U.S. and state Departments of Labor, unemployment and worker’s compensation boards, and other agencies regulating the employment relationship. Pac 9 demonstrates that while independent contractor agreements are not the last word in defining the relationship.

Care must be used when engaging individual workers as “independent contractors.” Multiple governmental agencies’ independent contractor tests must be analyzed to confirm that the relationship is both structured and implemented correctly. This includes written contracts, proof of insurance policies, and following good corporate practices. Experienced employment counsel can assist with forming the relationship and ensuring compliance for best practices.

SUPER BOWL SPECIAL – NFL Teams Serve as a Reminder of Wage and Hour Issues

Contributed by Michael Wong

As many prepare this week for Super Bowl parties to cheer on their favorite team, NFL teams’ treatment of cheerleaders serves as a reminder to employers that no one can escape wage and hour laws. Moreover, it serves as reminder that if businesses/franchises worth billions of dollars have made the mistake of misclassifying an individual as an independent contractor instead of an employee, then so can you.

Over the past few years, more than five NFL teams including the Buffalo Bills, Cincinnati Bengals, New York Jets, Tampa Bay Buccaneers and Oakland Raiders have faced class action wage and hour lawsuits brought by their cheerleaders. In an industry, where many players and coaches make hundreds of thousands of dollars per game, it was “industry standard” to classify cheerleaders as independent contractors and only pay an appearance fee for each game.

Football stadiumDespite identifying cheerleaders as independent contractors, teams would typically exert significant control over how the cheerleaders performed – including their attire, dances, music, when and where they were to appear, participation in mandatory promotional events, and promotional materials. Additional mistakes included waiting to pay cheerleaders their appearance fees until the end of the season – at which time a team may unilaterally deduct fines. Similarly, many times expenses incurred by the cheerleader, such as travel, equipment, uniforms, etc., were deemed the sole responsibility of the cheerleader.

The Cost: The Oakland Raiders agreed to a $1.25 million dollar settlement; the Tampa Bay Buccaneers an $825,000 settlement, New York Jets a $325,000 settlement, Cincinnati Bengals a $255,000 settlement. Be aware, damages for wage and hour claims can grow very quickly and be enticing to pursue as they include liquidated damages, interest, and attorneys’ fees and costs.

What to Avoid:

  • Do not blindly follow industry standard. Class action lawsuits are changing the “industry standard” in many industries, including but not limited to construction contractors, truck drivers, limo drivers, taxi drivers, security guards, painters, cable installers, etc.
  • Understand if they are independent contractors – this means they must truly be independent from your control.  So, if you control the number of hours they work, where they work, how they work, their appearance, what tools they use, how much they charge, or what they must do, then you may really be their employer.
  • Are you the only company the individual does work for? If so, the scale just leaned a little more in favor of employee rather than independent contractor.
  • Finally, do not blindly follow the advice of your accountant. While some accountants are aware of the legal standards, your accountant may not be aware of the most recent changes or case law.

If you are unsure of the individual’s classification, seek the advice of legal counsel to determine whether the position is properly classified and what, if any, changes must be made to ensure you have a strong defense against a lawsuit or DOL audit.

Is Your Contractor Really Independent?

Contributed by Noah A. Frank

Recently, a California labor commissioner found that an Uber driver was an employee and not an independent contractor (“IC”), awarding the driver over $4,000 in expenses (Uber Techs., Inc. v. Berwick, CGC-15-546378 (Cal. Sup. Ct. June 16, 2015)). Similar lawsuits, including class action matters, are being filed around the country.  The implications for Uber are huge: unemployment taxes, workers’ compensation insurance, minimum wage, overtime, and third-party tort liability to start.

What is so surprising about this ruling is that Uber drivers seem to epitomize the IC relationship. They enter into explicit IC agreements, work when and where they want, accept the fares they want, supply their own vehicle, pay their own gas and maintenance costs, and work for competitors (i.e., Lyft and traditional taxi services). Uber generally requires drivers to complete an application, be safe drivers, and be knowledgeable about the city’s geography. Uber processes the fare, deducts its fee, and pays the remainder to the driver.

How did the IC relationship become so complex?  Well, the law favors the employer-employee relationship as the default.  It ensures workers receive minimum and overtime wages, are covered by workers’ compensation and unemployment benefits when the relationship ends. Of course, this also means that the government receives taxes (rather than hope an IC actually pays taxes), and will not become the guarantor of an unemployed or uninsured individual through social welfare programs like Medicaid.

ContractIt’s not so simple after all.  Here are five tips for engaging an Independent Contractor:

  • First, consider whether the IC arrangement is really best for your business. For example, if you want a lot of control versus an end product, it may be better to hire employees.
  • Second, will you be engaging individuals or companies?  Most employment law tests favor the IC arrangement when the two parties are independently established businesses.
  •  Third, have a good, tailored contract.  While not conclusive, contracts are meant to provide black-and-white evidence of the parties’ intent (which, by its nature, is drafted when things are going well to protect them for when things go south).
  • Fourth, perform an audit of the relationship under the various substantive laws governing your industry (e.g., special rules for construction, trucking, and temporary labor to name a few) before entering into the IC relationship.  The key is: would the relationship satisfy an administrative agency’s test if an IC complained?
  • Finally, seek the advice of counsel to ensure that the four steps above are conducted with an objective eye towards protecting your business now and going forward.  While most business deals can be made, upfront review may save costly legal fees in litigation and otherwise.

The ABCs of Independent Contractors and Unemployment Insurance

Contributed by Noah A. Frank

Good news: Unlike employees, an independent contractor (“IC”) is not eligible for unemployment benefits when the work relationship terminates.

Bad news: When a former IC files an unemployment claim (and they sometimes do) or the government disagrees with the IC status (either in approving a claim or performing an audit), whether the IC will be denied benefits often depends on whether the IC:

A. Is free from control and direction; and

B. Performs services outside the usual course of business for the enterprise for which such service was performed; and

C. Is engaged in an independently established trade, occupation, profession, or business.

This “ABC Test” exists in most states, though the elements/sub-elements may vary slightly. Typically, the party seeking IC status has the burden to prove that all three of these elements are satisfied.  Neither an IC agreement nor designation controls.

Worse news:  Administrative agencies (e.g., unemployment agencies, workers’ compensation/industrial commissions, and departments of labor and tax/revenue) may share information with each other regarding independent contractor misclassification.  This may increase the risk of an audit by one agency triggering an audit by others.

Recent Example:

An appellate court applied the ABC Test to IC window washers under a three year unpaid contributions audit, and found them to be employees, affirming an administrative finding of $64,051 in unpaid unemployment contributions plus $35,773 in unpaid interest. L.A. McMahon Bldg. Maint., Inc. v. Dept. Employment Sec., 2015 IL App (1st) 133227 (May 7, 2015).

The court found unpersuasive that the workers: were not exclusive or required to wear a uniform; used their own vehicles and supplies, for which they were not reimbursed; received no training or direction in their work process; advertised their own services; and hired their own helpers and employees.

Instead, the court found that the window washers were employees because their services were central to the business which could not exist without them (e.g., Element B). The company’s “place of business” extended to each location where the workers represented the company’s interests (customer’s homes), especially since the workers carried the company’s price card and invoiced under the company’s name.

Doing it Right:

Properly engaging independent contractors extends beyond an actual contract between the parties (helpful – if you ensure that the IC upholds its end of the bargain).  When using ICs to perform work central to your business (e.g., workers to pick-and-pack in your warehouse, or provide regular services to customers):

  1. Be sure that you have either engaged a separate company providing contract/temporary labor; or
  2. That all three elements of the ABC Test (or relevant statutory test) are fully and completely satisfied; or
  3. Ensure that the IC is a bona fide corporation or limited liability company.

Outside counsel should audit the relationship now to ensure that it is actually “independent” before a worker files a claim with any federal, state, or local administrative agency (triggering anti-retaliation protections!) and/or an agency initiates its own audit.