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No clearcut answer on employee, contractor question

“For years, our small company has hired an ‘independent contractor’ to help us with very specialized work that members of our staff don’t have the expertise or the training to do. His hours are variable and he works from his home on different assignments using his own computer which I thought used to be the test of whether a worker was truly an independent or not. I don’t know how many other clients he has. Now I am worried that under the new laws, he may no longer be qualified to work as an independent contractor. I really value his work but I simply cannot afford to bring him on full time.”

Determining whether someone is an employee or independent contractor has been a confusing issue for years. Such confusion seems unlikely in an era when so many people “freelance,” work out of home offices, or participate in the “sharing” or “gig economy” in some way. Some surveys have estimated that there are roughly 30 million full-time and part-time workers in the gig economy.

“Trying to answer the ‘is he or isn’t he an employee?’ question has frustrated employers for years,” says Steve Modica, principal with the Modica Law Firm in Rochester. “A primary source of this frustration is that there is NO uniform definition of an employee or an independent contractor. The test for employment status varies depending on the law involved (federal wage and hour laws define these terms differently than comparable state laws; the test for unemployment insurance in New York is different from the test for Workers’ Compensation). Someone could be an independent contractor under some laws but an employee under others.”

Sharon Stiller, partner and director of the Employment Law Practice at Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara & Wolf, LLP, recalled representing a New York law firm that hired messengers to pick up checks at bank closings. The workers could choose whether or not to accept an assignment. They arranged and paid for their own transportation and could choose when to pick up the checks. They put the checks into pre-addressed FedEx envelopes to send them to the law firm, she says.

“The law firm gave them messenger bags with the law firm’s name on them, but other than that and the FedEx envelopes, the law firm had no involvement in how the messengers performed their jobs.”

The independent contractor issue came up when one of the messengers filed a claim for unemployment. In this case, an administrative law judge held that the worker was an employee, noting that while some of the factors (including the workers’ ability to set their own schedule, receive a 1099 IRS Form and pay their own expenses, etc.) supported independent contractor status, but that the “substantial evidence” indicated that the messengers were employees, Stiller says.

The hiring of independent contractors has become a hot issue among law enforcement agencies (including the U.S. Department of Labor) who consider the misclassification of employees as independent contractors “as one of the most serious problems facing affected workers, employers and the entire economy.” According to the agency, misclassification has grown substantially in many industries, including construction, janitorial and auto retailing. The Labor Department said its investigations in 2015 recovered more than $74 million in back wages for more than 102,000 workers in food service, janitorial, day care, hospitality and garment industries.

Labor Secretary Thomas Perez said misclassification deprives workers of overtime pay and benefits (including unemployment insurance, family and medical leave and others) and also undermines state and federal tax collections.

“The USDOL is working with the IRS and many states (including New York) to address this issue,” Modica says. In New York, Attorney General Eric Schneiderman is the lead prosecutor on the Governor’s Misclassification Task Force (http://www.ag.ny.gov/labor/misclassification).

It goes without saying that state and federal government agencies have become much more vigilant on the independent contractor issue. Many businesses used to believe that they could “anoint” workers as independent contractors, Stiller says, but that is no longer true.

Last July, the Department of Labor issued a new highly publicized “administrator’s interpretation” about misclassification of workers as independent contractors. “The DOL downplayed the significance of control (over the work),” Stiller says. “Instead, the key is to determine whether the worker is economically dependent on the employer or is in business for him or herself. The ‘economic realities’ factor helps lead to the determination of whether the worker is independent or is dependent on the employer, and therefore, an employee.”

Some of the factors considered in the “economic realities” test include:

  •  the extent to which the work performed is an integral part of the employer’s business;
  •  the worker’s opportunity for profit or loss depending on his or her managerial skill;
  •  the extent of the relative investments of the employer and the worker;
  •  whether the work performed requires special skills and initiative;
  •  the permanency of the relationship, with permanency suggesting that the worker is an employee; and
  •  the degree of control exercised or retained by the employer.

“Employees can work part time, employees can work on special projects and employees can work variable hours out of their home,” Stiller says. “If the worker in your company is operating like his own business, then it is possible that he is an independent contractor. However, if his work is integral to your business and the business provides him with supplies or reimburses him for them, the relationship has continued for a long time, the worker has no opportunity for profit or loss depending on his own skill and the business controls the timing of the work or its attributes, then the worker would not be properly classified as a contractor.”

In light of the new interpretation, Modica suggested that you review the situation with a qualified attorney. You should also explore whether any of your company’s existing liability insurance policies would protect it if someone later determined that the worker was truly an employee. “This type of insurance is commonly known as employment practices liability insurance (EPLI). If they don’t have EPLI, they may want to get a quote.”

Employers who regularly work with independent contractors should also consult the administrator’s interpretation (http://www.dol.gov/whd/workers/misclassification/AI-2015_1.htm).

Managers at Work is a monthly column exploring the issues and challenges facing managers. Contact Kathleen Driscoll with questions or comments by phone at (585) 249-9295 or by e-mail at kadriscoll@aol.com.

5/6/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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