Many cases are filed that involve reasonable interpretations of the law on both sides. But on occasion, a case comes along that appears to have limited room for argument. A recent case involving independent contractor misclassification appears to fit in that category. Every factor considered by the court clearly suggested that the workers were employees, not independent contractors.
These types of cases remind attorneys to sound a clarion call to employers to carefully review their independent contractor relationships and to get a second opinion just in case. It is better to pay several hundred dollars ensuring compliance than to pay thousands of dollars defending or settling a poor business decision.
The primary issue in determining whether a worker is an employee or independent contractor is who has control over the material terms and conditions of the work relationship. But employers should keep in mind that the Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) use different tests to determine independent contractor status, and the consequences are different.
The IRS groups its factors into three categories when analyzing independent contractor status.
- Behavioral control (who controls what the worker does and how s/he does it);
- Financial control (who controls how the worker is paid, reimbursed); and
- Type of relationship (whether a contract exists, are benefits provided).
The IRS notes that there is “no ‘magic’ or set number of factors” that determine the nature of the relationship, but that businesses must weigh the different factors together to determine whether the worker is an employee or independent contractor.
The DOL places emphasis on the economic realities of the relationship. The DOL paraphrases the U.S. Supreme Court to note that “there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA). The Court has also said that determination of the relation cannot be based on isolated factors or upon a single characteristic, but depends upon the circumstances of the whole activity.” There are six factors that the DOL considers in its analysis.
- Are the worker’s services integral to the employer’s business?
- How permanent is the relationship?
- How much has the worker invested in facilities and equipment?
- What is the nature and degree of control of the business?
- Does the worker have opportunities for profit and loss?
- What level of skill is required to be the worker?
No factor is determinative in the analysis, although a single factor could potentially create an employment relationship.
Consequences of Misclassification:
Employers are reminded that misclassifying independent contractors may result in significant liability. The employer may be liable to the IRS for employment taxes, as well as back wages, liquidated damages, and civil money penalties under the FLSA. And remember, the DOL and IRS have a memorandum of understanding to share information relating to misclassification.
- Identify all independent contractor relationships;
- Carefully review the independent contractor relationships for compliance with IRS, DOL, and state law standards;
- Assess possible misclassification liability; and
- Implement appropriate resolutions for any misclassification.
Please do not hesitate to contact us if you have any questions or concerns regarding these issues.