Independent Contractor or Employee: An Old Question Continues to Haunt Employers

December 23, 2009

In recessionary times like these, employers often rely more heavily on independent contractors to avoid the personnel costs associated with hiring regular employees. Doing so, however, creates risks. Now is a good time to make the effort to determine whether your independent contractors are really independent contractors. Just don’t expect the answer to come easily.

The issue of who is properly classified as an independent contractor (as opposed to employee) has been giving employers headaches for decades. As the United States Supreme Court noted over 60 years ago: “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent entrepreneurial dealing.” N.L.R.B. v. Hearst Publication, 322 U.S. 111, 121 (1944). It is little wonder that even the Supreme Court is troubled by this legal issue given the difficulties involved in the analysis. For starters, courts and government agencies (both state and federal) use different legal tests to make this determination. As a result, a single set of facts can produce different legal conclusions. Moreover, none of the tests utilized relies on definitive factors. As the Internal Revenue Service (“IRS”) states on its website, “[T]here is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”

Although the issue is old, it has continued vitality. There has been a significant increase in litigation, government enforcement and legislation over the misclassification of independent contractors in recent years. It is equally clear that the focus on independent contractor misclassification, far from slowing down, will only continue to pick up steam. The remainder of this blog summarizes some recent developments demonstrating that employers need to be very careful when using independent contractors.
 

New York State’s Joint Enforcement Task Force on Employee Misclassification (“Task Force”), formed in 2007, continues to address, among other things, the problem of employers who inappropriately classify employees as independent contractors.  According to the Task Force’s most recent Annual Report, it has uncovered approximately 12,300 instances of employee misclassification resulting in more than $157 million in unreported wages. Partly in response to the Report, Senate Labor Committee Chairman George Onorato, D-Queens, and Senate Insurance Committee Chairman Neil Breslin, D-Albany, renewed their push for passage of a bill which would, among other things, levy fines of up to $5,000 per employee for any construction company that misclassifies its workers as independent contractors. The bill also creates a presumption of employment status in the construction industry unless certain factors are established.

On August 21, 2009, the Massachusetts Supreme Judicial Court held in Somers v. Converged Access, Inc. that an employee who has been misclassified as an independent contractor is entitled, under Massachusetts law, to recover any wages and benefits he proves he was denied because of his misclassification, including holiday pay, vacation pay, and overtime. In so doing, the Court rejected the employer’s argument that it should not have to pay any damages because had it known the individual was an employee instead of an independent contractor, it would have paid him a lower hourly rate than he received as an independent contractor.

New York Attorney General Andrew M. Cuomo, Montana Attorney General Steve Bullock, and New Jersey Attorney General Anne Milgram have announced their intent to sue FedEx Ground Package Systems, Inc. (“FedEx Ground”) for violations of state labor laws stemming from the Company’s alleged misclassification of its drivers as independent contractors. The Attorneys General claim that such misclassification deprives drivers of workers’ compensation and other labor and employment legal protections received by FedEx Ground’s employees.

In Mohel v. Commissioner of Labor, a decision dated November 17, 2009, the New York Industrial Board of Appeals found that drivers of a limousine service were employees as opposed to independent contractors under the “right to control” test used by the New York State Department of Labor.

Finally, Beginning in early 2010, the IRS will launch an audit initiative that will audit the federal tax returns of 6,000 companies to assess compliance with tax and labor regulations. As part of this audit, the IRS will examine independent contractor misclassification. The initiative was prompted, in part, by advice from the United States Government Accountability Office to the IRS and United States Department of Labor to step up efforts to reduce the misclassification of independent contractors.