Organizations that retain freelancers might want to take a second look to assess whether the Department of Labor would deem these workers independent contractors or employees.
It’s an issue that some labor and employment attorneys are counseling their clients on with increasing frequency, as cases continue to make headlines both regionally and nationally, including litigation surrounding Uber drivers.
“In the last year, the number of cases, instead of 10 a year, I’m seeing more than 20 or 25 — it’s more than doubled,” said Mark Reinharz, a member of Bond, Schoeneck & King, a law firm in Garden City, N.Y.
Douglas Rowe, a labor and employment attorney and a partner at Certilman Balin Adler & Hyman, in East Meadow, N.Y., has a similar experience.
“The issue has always been there, but there’s definitely been an increase over the past five years,” Rowe said.
Misclassifying employees as independent contractors is nothing new. But experts say that departments of labor at both the federal and state level are taking more aggressive stances, and the change could affect not only employers but also workers and the general economy.
“It’s attributable to the continuation of employees knowing their rights, and having access to information through the Internet and also really to the state and federal government needing to raise revenue,” Rowe said.
According to the labor department, when employees are misclassified, they do not receive benefits and protections mandated by law, overtime compensation, family and medical leave, unemployment insurance, safe workplaces and even minimum wages.
All this could result in losses for federal and state agencies, including lower tax revenues and diminished payments into state unemployment-insurance and workers’ compensation funds.
“The state and federal government is looking to raise revenue in any way they can, and see this as an opportunity to do so,” Rowe said. “If they are not receiving the revenue that misclassification causes, (agencies) suffer revenue losses because employers are circumventing tax obligations. So if I’m an employer and hire an individual and don’t have to pay payroll (taxes) for that person, then I don’t have to pay workers compensation and unemployment insurance.”
“The penalties can be staggering,” Reinharz said. And it’s not just circumnavigating expenses such as unemployment insurance. “The real issue is unemployment compensation. If someone gets injured on the job, the penalties can be huge.”
Still, Rowe said, the government is now “becoming more militant in auditing, going after industries that are notorious in misclassifying.”
By Adina Genn
In the construction and trucking industries, misclassification grew “so rampant” that certain states have enacted laws so that “anyone who works for a contractor is deemed to be an employee” unless that person has a separate business entity.
Through an audit, the government considers a number of factors — what’s known in Internal Revenue Service and other government circles as a “common law test.” It is a test that looks at factors such as whether a company supervises a person and whether it requires that same person to attend meetings, work in the organization’s office and use its equipment, according to Rowe. Other measures, he points out, include whether the organization provides business cards, requires reports and even offers fringe benefits such as vacations and the covering of expenses.
Other considerations can be taken into account, Reinharz said, including whether someone has a desk or an email address that has been provided by a company. Also under scrutiny is whether an organization requires a person to work a regular schedule and fill out timesheets. Is the person required to undergo training, such as what to do if subjected to sexual harassment? Training of this sort is something an organization might require of a person who is an employee, but not an individual contractor.
There could be as many as 20 factors that a government agency looks at to decide if an individual is an independent contractor or an employee.
But, as Rowe explained, “all 20 factors don’t have to be satisfied.” In some cases, it could be just “one factor that a judge could say it’s an employee.”
But in some instances, organizations are pushing back. For example, in a rare decision, The New York State Court of Appeals recently determined in Yoga Vida v. The Commissioner of Labor that yoga instructors at a Manhattan studio were independent contractors — not employees. The case sought to overturn an earlier decision in which the yoga studio was liable for additional unemployment contributions based on findings that the non-staff instructors were employees.
“In the law, it is not black and white,” Reinharz pointed out.
“In the past, the court has been deferential to the Department of Labor,” he noted. But the outcome was different in the Yoga Vida case. Here, the court said that because the instructors created their own schedules and decided how they were paid, and that there were no restrictions on where they taught and did not receive training, they were not employees. It wouldn’t be surprising to “see more litigation from employers who start challenging” court decisions, Reinharz said.
On a national level, a case is still pending against Uber in which the company may have to pay as much as $100 million in damages in a dispute over whether its drivers are independent contractors or employees.
There’s a term for the kind of worker organizations might want to retain on a limited basis. That designation?
“Part-time employee,” Rowe said.