By Dean Bennett
Dolan Media Newswires
On Sept. 15, the U.S. Department of Labor announced it awarded more than $10 million in grants to 19 states to help improve efforts to detect employers who improperly classify employees as independent contractors.
The DOL contends these grants will strengthen state unemployment insurance trust funds by ensuring employers contribute to their respective state unemployment insurance tax programs for all workers who are employees. It is also the DOL’s position that the grants will help ensure that misclassified workers receive the rights and protections afforded under state unemployment insurance programs. Wisconsin received a nearly $500,000 Worker Misclassification Grant; some states received an additional “high performance bonus.”
These state grants are just the latest in the DOL’s initiative to crackdown on worker misclassification. Misclassification is high on the DOL’s agenda because it reduces the amount of employment taxes paid, including income taxes, Social Security, Medicare and state unemployment insurance contributions as well as state workers’ compensation premiums. In addition, independent contractors are not covered under many federal and state employment laws, including laws on wage and hour requirements, discrimination, family and medical leave, and health care coverage.
If your company is paying independent contractors, you should take steps now to audit whether those workers meet the tests for independent contractor status or if they should be classified as employees instead. Although no one single test or set of factors determines independent contractor status, the following five tips will help you maintain and document an independent contractor relationship.
Tip No. 1: Use a written independent contractor agreement. An agreement alone will not establish an independent contractor relationship as you must also treat the worker as a contractor in practice, but it sets the stage for documenting the expectations and understandings of the parties. Ideally, your agreement will be with an entity, such as an LLC or the trade name under which a worker offers his or her services.
The agreement should specify that the entity/worker (a) is retained to complete a certain project or task; (b) will provide its own tools, equipment and workers/assistants; (c) has its own insurance; (d) is responsible for payment of its own taxes; and (e) is not entitled to any company benefits afforded to employees, such as health care, retirement plans, workers’ compensation, or unemployment compensation.
Tip No. 2: Do not use independent contractors for work normally performed by employees. Independent contractors may be used to perform work that is tangential to your company’s main line of work, but not to provide the products or provide services that constitutes your primary business.
In other words, your company’s success and continuation should not depend on the work performed by independent contractors. For example, if your company is in the widget business, you should not classify the workers who make and sell widgets as independent contractors. You may, however, be able to use independent contractors for such services as cleaning your facility or mowing the lawn and plowing snow from the parking lot, as those services are not part of your primary business.
Tip No. 3: Do not direct and control how the work is performed. You may specify the details of the end result you expect to receive, such as what a remodeling job will entail or the landscaping work you expect to be completed. But you should not instruct, supervise or control the details of how each aspect of the work is performed.
Do not provide training to the independent contractor, and do not restrict the ability of the contractor to hire assistants or other workers to work on the project. Do not specify exact working hours, require compliance with company employment policies, or retain the right to discipline or terminate the worker (outside of terminating the contract). You must focus on the end result of the project to be performed by the independent contractor, not how he or she gets the project done.
Tip No. 4: Use contractors who hold themselves out to the general public. Independent contractors should be established in their own profession, trade or business. Check if they have a website, office, business card, business telephone number, proper licensing (if any), registration with the state secretary of state’s office, advertising and insurance as these are indicative of a separate business.
Allow independent contractors to work for other entities rather than having an exclusive work relationship with your company. In addition, independent contractor relationships typically should be of limited duration, or for regular intervals, rather than an ongoing, full-time work arrangement.
Tip No. 5: Pay by the job, not by the hour or day. Generally, independent contractors should be paid per project, not hourly, weekly or monthly. The contractor should be responsible for setting or negotiating their price, allowing for their own profit or loss on the work. Typically, any expenses are the responsibility of the contractor, unless the company agrees to reimburse certain expenses, which should be noted in the independent contractor agreement.
For long-term projects, interim or regularly scheduled payments to the contractor may be made, but again, the terms of such payments should be specified in the contract. Make your payments to the contracting entity, not to the name of an individual whenever possible. If you make payments to an independent contractor totaling $600 or more in a year, you must issue a Form 1099-MISC at tax time.
Follow these tips to help avoid misclassifying workers who should be treated as employees. A thorough audit, on your own or with the assistance of your counsel, will not only help keep the DOL and state labor enforcement agencies at bay, it also will help prevent costly lawsuits filed by independent contractors who claim they are entitled to overtime and other employee benefits.
Dean Bennett is a trial attorney at Holland & Hart LLP in Boise, Idaho, representing clients with complex contract and business disputes.