Tag Archives: Independent contractor classification

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.

California Dreamin’… of New Compliance Obligations for the New Year! (Part 1)

Contributed by Carly Zuba

With the New Year comes the inevitable slew of new legal obligations for employers.  This post serves as our “Happy New Year!” gift to California employers as it highlights some of the newest obligations that California employers in particular must keep in mind for 2012.

New NLRB Posting Requirement (applies to most private sector employers nationwide): Effective April 30, 2012, employers will be required to post a notice informing employees of their federal labor law rights – including the right to unionize – in all areas where the employer customarily posts notices to employees regarding personnel rules and policies.  The original effective date was January 31, 2012, but it has been postponed at the request of the federal court in Washington D.C. The poster itself as well as a copy of the rule requiring the posting can be found here.

Independent Contractor Classification: The Federal Department of Labor 2012 Budget includes $25 million for a joint Labor-Treasury initiative to strengthen and coordinate federal and state efforts to identify and deter misclassification of employees as independent contractors.  This “Misclassification Initiative” will specifically target industries with misclassification characteristics, such as the construction and technology industries.

Now, more than ever, employers nationwide must ensure that the individuals they are treating as independent contractors are truly independent contractors under the law.  In most states, it boils down to control: if the employer is exerting control over the when, where, and how of the independent contractors’ duties, they will probably be considered employees through the DOL’s eyes.

A new California law provides that a person, who for money or other value, knowingly advises an employer to treat an individual as an independent contractor in order to avoid employee status shall be jointly and severely liable with the employer if the individual is found to be an independent contractor.  Since this new law grants impunity to lawyers, this will primarily apply to HR consultants.

Stay tuned for our second post in this series discussing even more California compliance updates and for a comprehensive analysis of your company-specific 2012 compliance obligations, whether in California or elsewhere, you should always consult with your attorney.