Some business owners prefer to hire independent contractors as there are fewer expenses (taxes) and often less overhead. What these business owners don’t realize is that if an employee is classified as independent contractor there can be dire consequences. Many of the new gig economy companies such as Uber and Lyft, as noted it the CNN Money article titled ”California ruling puts pressure on Uber, Lyft and other gig economy employers,” may be feeling the consequences of such decisions. Legally, here is how to differentiate between an employee and an independent contractor.
Who Controls the Worker?
The question of control is not always easy to answer. According to the Internal Revenue Service, there are three distinct categories that evidence the degree of control and independence of a worker:
- Type of Relationship: Does the employer have written contracts, employee-type benefits such as vacation pay, sick pay, insurance or a pensions plan with that person? Will the relationship with the worker continue indefinitely? Is the work performed a key aspect of the business?
- Behavioral: Does the company control or have the right to control how a worker performs their job or what the worker performs during the job?
- Financial: Does the business owner control business aspect of the worker’s job? Such business aspects includes who provides tool/suplies, whether the worker’s expenses are reimbursed, and how the worker is paid.
Using an example involving Tina, Tim, and Tom, where all three work at XYZ repair shop, let analyze whether each is an independent contractor or employee.
- Tina, who works at the reception desk, earns $12 per hour, has a set schedule of 8 a.m. to 5 p.m., and takes complete direction from her supervisor for all her duties.
- Tim, a mechanic, receives some direction from his supervisor, uses the repair shop’s tools, earns $17 an hour, but on works on an “on call” basis when the repair shop needs his services.
- Tom, who is a master mechanic, generally works 8 a.m. to 5 p.m., gets paid based on the complexity of the job, uses his own tools, takes very little direction and guidance from the supervisor and decides which projects to work on.
Which of these workers is an independent contractor and which could be considered an employee? With the information we have above, the answer depends.
- Tina. It is very likely that Tina is an employee because she takes all of her direction from her supervisor.
- Tim. Tim could be an employee because he uses the repair shop’s tools, but because takes some direction from his supervisor and works on an on-call basis, these characteristics make it less certain that Tim would be designated as an employee.
- Tom. Tom is likely an independent contractor due to the facts that he uses his own tools, is not compensated at a fixed rate, and takes little direction from the supervisor.
Employers should keep in mind that any change in the relationship that Tina, Tim or, Tom have with XYZ could change their status as an employee or independent contractor. The U.S. Department of Labor, the misclassification of an employee as an independent contractor is one of the biggest issues facing employers, workers, and the general economy.
The Department of Labor can for employers to pay for minimum wage, overtime compensation, family and medical leave costs, and employment insurance for a misclassified employee, not only going forward, but retroactively as well. For instance, FedEx created a $228 million fund to cover the settlement claims from a long running class action lawsuit with 2,000 of its employee drivers who were misclassified as independent contractors. Each appellate court circuit will have a say in how independent contractors are defined until the Supreme Court makes new case law regarding the advent of new gig economy startups.
Employers should thus play it safe and discuss these important classification issues with an experience business law attorney who can guide them through how the proper determination and characterization of independent contractors versus employees should be made. Contact the Soto Law Firm today for a free consultation to discuss your options.
Source: money.cnn.com, May 3, 2018, ”California ruling puts pressure on Uber, Lyft and other gig economy employers.”