Employers in an array of fields lament a shortage of talent. Sometimes employers are able to attract a flood of eager applicants, but few possess the skills and qualities needed. Other times, employers need people for special, short-term projects, and they don’t want to take on full-time, permanent employees to get the job done. No matter what the challenge, employers are increasingly turning to freelancers, part-timers, temporary, and other kinds of workers that don’t fit the traditional definition of employee.
In their quest to find appropriate solutions, employers can find themselves on the wrong side of laws affecting the employment relationship. And as the use of contingent workers continues to grow, employers need to understand the pros and cons, benefits and risks of using nontraditional workers.
One of the major threats that can put employers in legal hot water continues to be misclassification. As employers have stepped up their use of freelancers in recent years, those independent contractors sometimes too closely resemble an employer’s regular payroll employees. And that has spurred increased scrutiny from federal and state labor officials.
In some cases, entire business models are built around the use of contract labor, with nonemployees doing the core work of the business. Prominent examples include Uber and Lyft, the ride-sharing providers whose drivers are independent contractors rather than company employees. But just because freelance labor has become common doesn’t mean it always passes muster under state and federal employment laws.
“Misclassification remains a big concern, particularly as the lines blur in the gig economy,” Kara E. Shea, an attorney with the Butler Snow LLP law firm in Nashville, Tennessee, says. “While a middle category ‘dependent contractors’ has been legally recognized in Canada and some other countries, there is no such middle category in the United States on the federal or state level; every worker must be classified as either a contractor or an employee.”
In Canada, courts have recognized a dependent contractor category that hinges on economic dependence. If a nonemployee has worked for a company consistently for a long time and most of that person’s income comes from that job, that worker may be classified as a dependent contractor. Such workers realize more benefits than totally independent contractors. For example, they are entitled to severance when the work relationship ends.
Although there’s some thinking that the Trump administration’s Department of Labor may take a less rigid stance on misclassification than previous administrations, employers need to consider more than the climate within the Labor Department. “Misclassification is also an issue with respect to tax liability and may turn up as part of an IRS audit,” Shea says. Also enforcement related to misclassification continues to be stringent on the state level in many states.
“The fact that more and more companies are utilizing ‘contractors’ does not mean a company is less likely to be hit with a misclassification complaint,” Shea says. “The recent lawsuits involving Lyft and Uber demonstrate the dangers to employers who base their business model around use of nonemployee labor.”
Shea reminds employers that the fact than an individual agrees to a nonemployee arrangement has no legal impact and is not a defense. “This is an issue where you absolutely must get legal advice.”
More than misclassification to consider
Besides properly classifying employees and independent contractors, other legal issues come into play when working with any form of contingent worker—freelancer, part-timer, or temp. For example, Shea reminds employers that they need to be concerned about Affordable Care Act compliance with respect to part-timers.
Also, employers need to remember that they may be considered a joint employer of temporary or leased employees and therefore may be liable for noncompliance with respect to how employment laws apply to such individuals. Shea says employers should carefully review indemnification provisions in their agreements with vendors that supply temporary workers to ensure that the vendor takes appropriate responsibility for compliance with laws such as the Fair Labor Standards Act. Employers also need to make sure a vendor agrees to indemnify the employer should the employer be sued for a law for which the vendor has accepted compliance responsibility.
Another tactic employers use to gain the skills they need is training to upskill current employees or new hires. That, too, brings up legal concerns since selective upskilling could lead to discrimination complaints. Shea says employers should carefully consider which job groups and employees they are selecting for participation in upskilling programs to make sure there is no disparate impact on employees by race, gender, age, disabled status, or other protected criteria.
Need to learn more? Kara Shea will be presenting “Combating Talent Shortages: Flexible Staffing Models for Meeting Ongoing Challenges and Staying FLSA-Compliant” at the 2017 Advanced Employment Issues Symposium. Kara will discuss the long-term impact hiring contingent labor and upskilling may have on turnover and employee replacement costs, how to evaluate your organization’s business needs against your current workforce’s skills to determine where talent shortages are most likely to occur within your company, legal and economic obligations under federal laws, examples of training and educational programs that can keep talent shortages at bay, and more. For more information, click here.