In early August of this year, New York Governor Cuomo announced that New York is set to recover a record amount of back wages and benefits owed to workers. Within the first seven months of 2015, the state recovered and distributed $18.1-million to nearly 19,000 workers whose employers failed to pay them the proper minimum wage, benefits and/or overtime. This was a 6% increase from the first seven months of 2014. The yearly total for 2014 was $30.2-million.
Part of the increase for 2015 is due to a growing number of lawsuits that allege companies erroneously classified their workers as independent contractors. The U.S. Department of Labor (DOL) offered guidance recently on how it interprets the tests to determine whether a worker should be classified as an “employee” or an “independent contractor.” The definition of “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The DOL directs employers to look at “economic realities” of the worker’s situation. The legal issues arise when employers hire workers as independent contractors, but then attempt to control them as they control employees. Independent is the operative word in independent contractor, and an objective analysis must be made.
The DOL determinations find that most people who do work for a company are employees under the Fair Labor Standards Act. An employer’s designation is not determinative of a worker’s status. The federal “economic realities” test is used to determine whether a worker is economically dependent on the employer (and therefore an employee) or in a business for him or herself. The DOL has issued guidance listing the following six factors as important indications to help decide whether a worker is “economically dependent” upon a company:
• Is the work performed an integral part of the business? • Does the worker’s managerial skill affect his/her opportunity for profit/loss? • What is the nature of the worker’s “investment” vs. the employer’s investment relative to the work? • Does the work require special skill or initiative? • Is the relationship permanent or indefinite? • What is the nature of employer control?
The factors should not be analyzed in a vacuum, and no single factor is dispositive. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself. It is likely that a very broad definition of employee will be used when the DOL is investigating a case. Employers generally engage the services of an independent contractor because they are cheaper for the company’s bottom line. Employers don’t have to pay for health benefits, fringe benefits, 401k, overtime or vacation. Independent contractors are not eligible for payments by the employer into the unemployment insurance fund or the workers compensation fund. The independent contractor is responsible for all the payroll taxes.
Independent contractors further have the ability to exercise autonomy when deciding when and how to complete work assignments, when to work and when to attend meetings. The lines blur when a company hires someone to do work that might be considered “integral” to the core of the business (i.e. that a full-time employee would normally do). Recently, the Department of Labor together with the Internal Revenue Service have cracked down on misclassification, resulting in employers being held responsible for large damages in various industries in 2014. Some of the industries are construction, meat processing, landscaping and personnel services. In general, the more an employer attempts to control a worker, the more likely it is that the worker is an employee by law.
Based on this growing trend, companies need to be even more careful when engaging an individual as an “Independent Contractor.” An employer’s own classification of a worker’s status is irrelevant. Employers should asses the relationship based on the above listed six factors.
PMP’s tagline, “Educate don’t Litigate,” encourages employers to be proactive in their compliance efforts. At minimum, employers should work with subject matter experts to assure that they have correctly classified their employees. By not doing so, you are exposing your company to large fines, litigation and a negative impact on your company’s bottom line.