Hiring someone to work for your company that you call an independent contractor can be risky, particularly because making a mistake can lead to so many federal and state agencies pouncing on a mistake. The bottom line – to be an independent contractor, they really need to have their own company, that they have been operating for a while, that works for a number of others too, and that has its own insurance, ads, business cards, location, way of operating, documentation, business planning, and more. A single person who works mostly or all for your company is…..well….probably an employee. Sorry about that.
In June 2017, the United States Department of Labor (DOL) announced that it was withdrawing two Interpretations issued during the Obama Administration. Interpretation No. 2015-1 addressed the classification of independent contractors under the Fair Labor Standards Act (FLSA), and took the expansive view that most workers qualify as employees and are thus entitled to minimum wages and overtime pay. In January 2018, as we mentioned in our recent mailing on interns, the DOL has revised its test on whether an intern should actually be treated like an employee (and be paid). The new test allows an examination of the “economic reality” of the relationship in order to determine who is the “primary beneficiary” of the work that the intern is doing. The new test is more flexible than the DOL’s prior guidance, and is intended to be more in touch with the modern realities of the business world.
The test for whether an independent contractor has been misclassified (and is really an employee) will sound similar to that new intern standard. The DOL’s guidance uses an economic realities test that focuses on whether workers are economically dependent on the hiring company or are in business for themselves. The DOL states that a number of factors are helpful guides, including:
- If the work performed is integral to the hiring entity’s business. If so, it is more likely the worker is economically dependent on the employer and is an employee. Another way to look at it – is the independent contractor doing the same work as the hiring company? If so, they will look more like an employee. If your company sells certain products and the independent contractor sells those products for you, that is a sign they are more likely an employee. If they are a mason who works only on stone work and you are a general contractor, you have an argument. If you operate an office and need someone to come in and clean and your company is not a cleaning company, you’re in safer territory.
- If the worker’s managerial skill affects their opportunity for profit or loss. The DOL takes the position that this factor is not satisfied by a worker’s ability or decision to work more hours, for example. To be properly classified as an independent contractor, the worker’s managerial skills must include their decisions concerning:
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- hiring others;
- purchasing materials and equipment;
- advertising;
- renting space; and
- managing time tables.
- If the worker’s relative investment compares to that of the hiring entity. The worker’s investment should not be relatively minor compared to that of the hiring entity. Also, the comparison should not be limited to the parties’ investment in the particular job performed by the worker. Is the worker investing money into their own company? Do they have business cards, ads, jobs with others, equipment they had to purchase, the possibility that they won’t get paid for everything they do?
- Whether the work performed requires special skill and initiative. The worker’s business skills, judgment, and initiative are at issue, not their technical skills. Technical skills alone are not sufficient to demonstrate independence or business initiative. Are they running their own business or are they being employed by someone else for their skill and the business part is handled more by the company hiring them?
- If the working relationship is permanent or indefinite. If so, the DOL is likely to find an employment relationship. Think about the folks who do work on your house or that you hire to come to your office to fix the ventilation system: they are not there for months or years on end.
- The nature and degree of the hiring entity’s control over the worker. Generally courts and the DOL distinguish between control only over the outcome of the work (supporting an independent contractor relationship) and control over how the work is performed (supporting an employment relationship). Control factors may include:
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- setting the rate of pay and working hours;
- determining how the work is performed; and
- being free to work for others and hire helpers.
Misclassification of employees as independent contractors is also of interest to agencies like the IRS. Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages. The IRS looks at behavioral control, financial control, and the relationship between the parties:
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
- Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
- Degree of instruction, meaning that more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
- Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
- Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:
- Significant investment in the equipment the worker uses in working for someone else.
- Unreimbursed expenses – independent contractors are more likely to incur unreimbursed expenses than employees.
- Opportunity for profit or loss is often an indicator of an independent contractor.
- Services available to the market. Independent contractors are generally free to seek out business opportunities.
- Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
- Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
- Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
- The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
So how is this all working out for companies like Uber? Uber claims that it does not control its drivers but rather that the drivers are independent contractors. The courts aren’t seeing it the same way. See, e.g., O’Connor v. Uber Techs., Inc., 82 F.Supp.3d 1133, 1135 (N.D. Cal. 2015) (denying Uber’s motion to throw out the case); Mumin v. Uber Techs., Inc., 239 F.Supp.3d 507, 532 (E.D.N.Y. 2017) (holding that plaintiff stated a plausible overtime claim under New York labor law under theory that Uber misclassified its drivers as independent contractors); Razak v. Uber Techs., Inc., 2016 WL 5874822, at *5 (E.D. Pa. Oct. 7, 2016) (holding that Uber driver stated a plausible claim under state and federal labor law that they were employees of Uber). Malden Transportation, Inc. v. Uber Techs., Inc., No. CV 16-12538-NMG, 2017 WL 6757545, at *12 (D. Mass. Dec. 29, 2017). Bottom line? If a company as big as Uber can get it wrong, so can the rest of us smaller fry.
One tool to start with is the form that the Workers’ Comp Board would ask an employer to fill out if the Board got involved in a misclassification case (which they can). If you want us to send a copy of that to you, just email rwebber@sta-law.com.
Want a good update on this issue and other wage and hour issues? Join CMHRA on March 20 when both federal and state DOL come to LA to instruct employers on what to do and what not to do. Register here: http://cmhra.org/events/#!event/2018/2/20/wage-and-hour-minefields-beyond-the-basics
This article is not legal advice but should be considered as general guidance in the area of employment and corporate law. Rebecca Webber is an employment attorney; others at the firm handle business and other matters. You can contact us at 784-3200 (telephone). Skelton Taintor & Abbott is a full service law firm providing legal services to individuals, companies, and municipalities throughout Maine. It has been in operation since its founding in 1853.