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Gambling on independent contractor status? Stack the deck in your favor

by Gary S. Fealk

Smart businesspeople are adept at finding ways to reduce their costs. However, cutting costs associated with employment by using independent contractors is a big risk unless you take great care to make sure you aren’t misclassifying employees as independent contractors. 

What’s all the fuss about?
Various government agencies have been increasingly scrutinizing employers’ use of contingent labor to ensure that no employment laws are being violated. An employer may end up under the spotlight because of a complaint by an employee or an audit by the U.S. Department of Labor (DOL), the IRS, or some other agency. Plaintiffs’ lawyers are also mindful of potential claims, including class actions, that might be available if it appears that a company has misclassified workers.

Some of the potential problems with misclassification
Misclassification can lead to actions by the IRS or state agencies to recover back taxes, penalties, and interest. Also, if you have benefit programs that provide health insurance or pension or 401(k) plans for your employees and you’ve misclassified someone as an independent contractor, you could be liable for claims that you improperly failed to pay benefits due under your plans.

You can also be subject to claims under the Family and Medical Leave Act (FMLA) if you misclassify employees. For instance, if you fail to offer or provide FMLA leave in qualifying circumstances, you could face FMLA interference claims. Claims for unpaid overtime may also arise out of misclassification. If an individual is misclassified and would have otherwise qualified as a nonexempt employee under the Fair Labor Standards Act (FLSA), failing to pay him 1½ times his regular hourly rate carries considerable liability under the FLSA.

The National Labor Relations Board (NLRB) has made it a priority to prosecute unfair labor practice charges when it believes employees have been misclassified as independent contractors. The NLRB generally seeks “make-whole” remedies, which means it might seek damages for lost pay and benefits connected to the misclassification. It may also claim that the misclassification interfered with the individual’s right to organize a union.

How do I know if I’m properly using independent contractors?
Federal and state agencies use somewhat different tests for determining employee status. However, a general rule of thumb is, if workers aren’t employed by an outside company contracted to perform the work and the work lasts longer than a quick project, is supervised in any way by your managers, is associated with your core business, and poses no profit/loss risk for them, they are likely your employees rather than independent contractors. You should analyze employee status on a case-by-case basis, paying careful attention to the legal standards used by various governmental agencies.

Using a staffing company that provides contingent workers can minimize much of the risk associated with misclassification because there will be an entity that’s withholding taxes, compensating employees for overtime work, and performing the other common functions of an employer. Don’t use independent contractors unless they have a special skill that isn’t associated with your core business, perform specific short-term work that isn’t managed by your company, or service other businesses in addition to yours (e.g., calling a plumber to fix a problem in your restroom).

Bottom line
When assessing whether you can properly classify work as independent contracting, closely examine the GaryFealktasks that will be performed, the length of time the worker will be performing it, the amount of control you will maintain over the work, and whether the worker is truly operating his own independent business. Misclassification can lead to significant legal fees and potential lability.

Gary Fealk is an attorney and shareholder at The Murray Law Group, P.C., in Detroit and a member of the Employers Counsel Network. You can reach him at gfealk@murraylawpc.com.

Need to learn more? The “Uber” model of doing business has thrust independent contractors, dependent contractors, and freelancers into the legal spotlight. Join us November 15-17 for the 2017 Advanced Employment Issues Symposium, where an Employers Counsel Network attorney will present ‘The Uber Effect’: How to Conduct Wage and Hour Audits to Determine Proper Classification of Contractors and Employees.’ This 3-hour workshop will cover how to tell which multi-factor tests your company should use based on where you’re located and, importantly, where your employees are located, the process for conducting an effective audit to determine independent and dependent contractor misclassifications under the FLSA, and much more. For more information, click here.