Worker Misclassification and the Freelance Economy

by Lisa Higgins, Contributing Editor

The freelance economy continues to grow, and from many indications, workers and companies each enjoy the benefits. A few that come immediately to mind include:

• Flexibility for companies whose work ebbs and flows
• Flexibility for workers who choose not to (or can’t) work a standard workweek
• Savings in payroll-related costs for companies
• The ability to accept or decline work, as workers see fit

There are more, of course. But many agree that the use of contract labor is with us for the long term, and with good reason. In fact, the 2017 Workforce Productivity Report from WorkMarket and KRC Research found that 83% of business leaders believe their contract workers are as or more productive as their full-timers. The same report in 2016 indicated that 96% of respondents said their companies use independent workers to get the job done.

Who Is a Contractor?

Before you jump on the bandwagon and hire a contract workforce, though, it’s a good idea to take a step back and be sure you understand exactly who is an employee versus who is a contractor.

Why? Here are just a few good reasons, all from January 2017:

• Mittl v. Lowe’s Home Centers LLC. A class of more than 450 installers that Lowe’s considered to be contractors rather than employees filed for redress in New Jersey, seeking $2.85 million.
• Venegas v. Global Aircraft Service, Inc. The aircraft maintenance company agreed to pay more than $1 million to a group of 33 workers to settle their class action suit in Maine.
• Luviano v. Multi Cable, Inc. Class status was granted to cable installers and technicians who say they were misclassified as independent contractors rather than employees.

Misclassification of workers can be costly. Besides the threat of class action lawsuits, misclassification of workers can lead to liability for unpaid tax withholdings, unemployment insurance taxes, workers’ compensation premiums, overtime, minimum wages, sick and vacation pay, among others. Penalties and interest may also be assessed.

Sometimes misclassification is intentional. But often, it occurs unintentionally as a result of poor planning and documentation, lack of attention, and the complexities involved. For example, there is no single definition of “independent contractor” that applies to every law or jurisdiction. Not only are tests and definitions different from law to law and state-to-state, there are differences between federal and state laws, and many definitions and tests are subject to interpretation.

Some states use the ABC test to determine whether or not an individual worker is covered by a state’s unemployment, workers’ compensation, overtime and minimum wage rules. Some use a combination of these or other factors, but one example of the ABC test (where if all factors are met, the individual is considered to be an independent contractor) is as follows:

1. The worker is free from control or direction in the performance of the work under the contract of service and in fact;
2. The service is performed either outside the usual course of the business for which it is performed or is performed outside of all places of business of the enterprise for which it is performed; and
3. The individual is customarily engaged in an independent trade, occupation, profession or business.

Learn More to Avoid the Risks

In a white paper by by attorney Richard Reibstein (The 2015 White Paper on Independent Contractor Misclassification: How Companies Can Minimize the Risks), the author provides a comprehensive discussion of the background, the cost, and the avoidance of risks in misclassifying workers. The paper, regarded by some as the gold standard on the subject, states that there are at least 48 different factors considered by various decisionmakers seeking to properly classify contractors.

An online search of “IC diagnostics” can help you find resources to make your own determination about worker classifications. But with the great potential for error and corresponding penalties, what is a well-meaning company to do?

Pepper Hamilton attorneys urge companies to consider three strategies: restructuring, re-documenting and re-implementing the independent contractor relationship; reclassifying; and/or redistributing independent contractors through a workforce management or staffing company.

Common Myths (and Facts) About Misclassification

Workers are interested in the subject of misclassification, too, because it has a direct impact on their finances. That’s one reason the Wage and Hour Division of the U.S. Department of Labor has stepped up enforcement in recent years on the misclassification of workers. They recently released a list of common misconceptions you (and they) may find useful. Here are some highlights:

Myth #1: If I am an independent contractor under one law, I am an independent contractor under other laws. Not necessarily, says the agency. “It is possible to not be an employee (and be, for example, an independent contractor) under one law, but be an employee under a different law (especially the FLSA, FMLA, or MSPA),” says the DOL’s list.

Myth #3: I received a 1099 tax form from my employer, and this makes me an independent contractor and Myth #6: I am not on the payroll, so I am not an employee.  Both of these dispel common ideas about pay and independent contract workers. In refuting these myths, the agency pointed out that the tax form you send to a worker at year-end is irrelevant to their employment status. “What matters,” says the agency to the worker, “is whether the person receiving your services has the right to control how you perform your work.”

In other words, whether the worker’s check comes from your payroll department or accounts payable makes no difference. What matters, says the DOL, is whether or not the work falls within a law’s definition of employment.

Misclassification of workers impacts employees, employers and the economy as a whole, says the U.S. Department of Labor. Learn more about how you can comply with the law while continuing to use contractors to benefit your business by visiting the DOL’s website.