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FedEx settled a case involving the improper classification of employees as independent contractors for $3 million. In an unrelated case, a small construction company in Massachusetts was fined nearly $55,000 for improper classifications of worker status. A southern California maid service was ordered by the court to pay $3.5 million for similar violations.
These stories – and many others – reveal the dangers of misclassifying employees as independent contractors. Frequently, both employers and employees are unaware of the consequences of this distinction. An attorney, even a young attorney, has the ability to make a big difference for his or her client if he or she is able to effectively spot this issue and counsel the client on this distinction.
Simply put, an independent contractor is a worker who in theory retains a certain amount of control over his or her working conditions. In contrast, an employee’s working conditions are more restricted by the company.
There are advantageous reasons for a company to use an independent contractor, or a fleet of independent contractors, as opposed to employees. For example, using independent contractors, companies may avoid certain types of federal and state taxes, providing employee benefits, or setting aside funds for worker’s compensation and unemployment insurance. Independent contractor status can also offer benefits to workers: they can set their own rules of business, develop a network of clients, have the ability to be their own bosses, and retain exclusive copyright ownership of any work created.
Nonetheless, uncovering that workers have been misclassified as independent contractors can be a company’s nightmare (or a plaintiff’s attorney’s dream). It may start with an IRS audit of the company (or of the putative independent contractor), the putative independent contractor’s request for worker’s compensation or unemployment payments, or a worker who believes he or she is being improperly denied overtime payments or other benefits. It can end with investigations by the IRS, state Attorney Generals or the Department of Labor, class action lawsuits, and large judgments, like those mentioned above.
Assessing whether or not a worker is accurately classified as an independent contractor is a fact-intensive analysis. For the young lawyer, the IRS’s 20-factor test is a good starting point. Some of these factors include:
Notably, these factors are just considerations and are not litmus tests.
These inquiries are just a starting point. Many courts have developed their own “tests.” Although they are similar across different jurisdictions, they are not identical. Additionally, courts frequently take into account other factors unique to the individual situation in determining whether a worker is properly classified as an independent contractor. Altogether, hundreds of different facts can go into this inquiry. Case law should be consulted to determine other questions frequently asked by the courts in similar situations.
To complicate matters even further, different federal statutes use different tests. For example, when applying the National Labor Relations Act, the NLRB uses a common law “right to control” test with special emphasis on the degree of investment by the worker and the opportunity for the worker to gain (or lose) money.
Under the Fair Labor Standards Act, the courts apply an “economic realities” test. This test looks at both the right to control and whether or not the worker is economically dependent on the company.
Title VII uses yet a different test. Title VII’s hybrid test mixes the NLRA and the FLSA tests and takes into consideration both the common law “right to control” test as well as the “economic realities” test.
Finally, attorneys, companies, and workers should be aware of state and federal laws which supersede any of these analyses. For example, under Virginia law (and in many other states), workers that deliver newspapers are, by statute, independent contractors. Similarly, licensed real estate agents working under a written contract on a commission basis are independent contractors for federal tax purposes.
After investigating the relevant inquiries (and, if a legal action has already begun, the applicable law), the young attorney should further research how the company uses the worker and if the “independent contractor” designation is appropriate. No one factor is outcome determinative; rarely are all of the factors indicative that the worker is one or the other. In most cases, the determination boils down to a judgment call. Given the real risks of large penalties, it is prudent to resolve close cases in favor of employee status.
When approached with counseling questions from a company or by a potential plaintiff with an employment-related concern, keeping this area of the law in mind is critical. Though it is rarely a client’s primary concern, this issue can prove to be a huge liability – or resource – for companies and workers.
About the Author
Sarah P. Bryan is an associate at Littler Mendelson, P.C. in Philadelphia, PA. She practices labor and employment law, and can be reached at email@example.com.