What do short stories by O. Henry and independent contractor analysis have in common? You’re left guessing the outcome until the very end, says attorney Deanna Brinkerhoff. The federal Department of Labor (DOL) is cracking down on classification, and that makes now an excellent time to evaluate your organization’s classification decisions.
DOL estimates that 30 percent of employers misclassify some employees as independent contractors, says Brinkerhoff, and misclassification can get expensive.
Brinkerhoff is with law firm Holland and Hart in its Las Vegas office. She was joined by Dora Lane of the firm’s Reno, Nevada, office, in a presentation at the Advanced Employment Issues Symposium held recently in Las Vegas.
DOL is taking an aggressive stance on misclassification, says Brinkerhoff. It has:
- partnered with states to share information
- set misclassification as “Strategic Goal #1”
- assigned 100 new investigators to the misclassification initiative
- budgeted $1.6 million for 10 attorneys just to handle misclassification cases
Targeted Industries
DOL is particularly targeting the following industries as areas likely to misclassify employees:
- delivery companies (newspaper, oil, packages)
- construction companies
- companies with installation workers (satellite TV, roofers, carpet retailers)
- sales organizations
- companies that provide on-site computer technicians (and the businesses that hire those companies)
- cleaning franchises
Why Do Companies Want to Use Independent Contractors?
It’s easy enough to see why companies like independent contractors, says Brinkerhoff:
- flexibility
- preference of workers
- central to some business models
- useful on “as needed” basis to supplement regular workforce
- cost savings
- workers are already trained
- no Social Security and Medicare (FICA) or federal unemployment insurance payments (FUTA)
- no state unemployment fund contributions
- no benefits
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The Risk
The risk of misclassification, of course, is that the IRS or another governmental agency could conclude that the worker (or often a class of workers) is actually an employee. If that happens, you could be subject to:
- income tax liabilities
- FICA and contributions
- overtime pay or other wage liability
- FUTA
- state unemployment insurance payments
- workers’ compensation payments
- workers’ compensation benefits
- benefits issues if benefits were improperly denied.
- other civil or criminal liability
How to Make Your Classification Decision
The IRS is primarily responsible for making this determination, says Lane. The agency uses the “Common Law Test,” also known as the “20-Factor Test.” The test looks at three basic areas:
- behavioral control
- financial control
- relationship between the parties
Here are the most important issues:
Behavioral Control
Does the company control, or have the right to control, what the worker does and how he or she does it? Right to control, in and of itself, may indicate employee status. This holds true even if the company does not exercise that right.
Financial Control
- Who controls the business aspects of the worker’s job?
- How is the worker paid?
- Are the worker’s expenses reimbursed?
- Who provides the tools and raw materials?
Relationship Between the Parties
- Is there a contract?
- Does the worker receive employee-type benefits (paid
- vacation, insurance, etc)?
- Will the relationship continue indefinitely?
- Is the work performed a key aspect of the business?
However, Lane notes, no single factor is decisive. The degree of importance of each factor depends on the facts and circumstances.
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More Tests
Although the Common Law Test is the most well-known test, it is not the only one. The EEOC, for example, has a 16-Factor Test.
The EEOC’s test generally parallels the other tests, but it adds an inquiry as to whether the work is highly skilled or requires expertise. The lower the skill and expertise, the more likely that the worker is an employee.
Then there’s the DOL, with its Economic Reality Test that is used for FLSA enforcement, says Lane. It asks the following questions:
- Is the work performed an integral part of the employer’s business?
- How permanent is the relationship?
- How great is the worker’s investment in facilities and equipment?
- How much control does the company have over the worker’s work?
- Can the worker make a profit or sustain a loss?
- Does the work require initiative, judgment, or foresight to be successful in open market competition?
- Is the worker’s business organization and operation independent?
In tomorrow’s CED, a detailed look at the test California uses, plus an introduction to a comprehensive wage/hour resource—specifically for California employers.
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It’s important to remember that simply designating a worker as a “contractor” in your records or even executing an “independent contractor agreement” won’t decide the matter for courts and the various agencies. They look at the actual circumstances of the relationship.
It’s important to remember that simply designating a worker as a “contractor” in your records or even executing an “independent contractor agreement” won’t decide the matter for courts and the various agencies. They look at the actual circumstances of the relationship.