Misclassifying independent contractors has serious consequences
In makes good business sense for many employers to use independent contractors, but labor and employment lawyer Sarah Bryan, Littler Mendelson P.C., warns that misclassifying workers has serious consequences.
In her article “The Fundamentals of Independent Contractors,” Bryan shares examples of both large and small companies paying out big money for their classification errors. FedEx settled a case of improper classification for $3 million, while a much smaller company, a Southern California maid service, recently paid out $3.5 million for similar violations.
Generally speaking, an independent contractor retains a certain amount of control over her working conditions, unlike an employee, whose working conditions are more restricted by the employer. Despite the simplified definition, determining employment status is not as easy as it may seem.
“Assessing whether or not a worker is accurately classified as an independent contractor is a fact-intensive analysis,” says Bryan, advocating the IRS’ 20-factor test test as a good starting point.
“Assessing whether or not a worker is accurately classified as an independent contractor is a fact-intensive analysis,” says Bryan, advocating the IRS’ 20-factor test as a good starting point.
Some of the factors include level of control, method of payment, the provision of work tools, the availability of the worker to the public and the amount of training the employer provides the employee.
Evaluating an employee with the IRS test is just a starting point. “Many courts have developed their own test,” warns Bryan. “Although they are similar across different jurisdictions, they are not identical.
“To complicate matters even further, different federal statutes use different tests,” says Bryan, citing the “right to control” test under the National Labor Relations Act and the “economic realities” test under the Fair Labor Standards Act. “Finally, attorneys, companies and workers should be aware of state and federal laws that supersede any of these analyses.
“No one factor is outcome determinative,” concludes Bryan. Determination of employment status is a judgment call. “Given the real risks of large penalties, it is prudent to resolve close cases in favor of employment status.”
“The Fundamentals of Independent Contractors” is an article from the Young Lawyers Division 101 Practice Series, an online resource for new lawyers covering basic training in both substantive and practical aspects of law practice.