Employers Beware: Increased Focus on Independent Contractor Classification
February 18, 2010
Led by Vice President Biden, the Obama administration is increasing enforcement of independent contractor misclassification by employers. The federal government expects to net over $7 billion dollars through this initiative, including recoupment of unpaid taxes and penalties. In addition, several state governments, including New York, California and Ohio, also are cracking down on employers' misclassification of employees as independent contractors. The dual efforts of federal and state governments mean that employers can expect increased scrutiny of individuals currently classified as independent contractors. Employers who misclassify employees as independent contractors face liability and penalties for state and federal taxes, unemployment insurance, social security contributions and Medicare deductions. Also, the workers’ compensation system, the Fair Labor Standards Act, Title VII, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and similar state statutes apply to misclassified independent contractors.
There is no bright-line test to determine whether an independent contractor is an employee. Instead, there are no less than eight different tests depending on the applicable law and jurisdiction. The analysis is always fact specific. The existence of a written agreement is not controlling. Past practice and industry custom are not controlling. Control over the manner and means of work is often the major focus.
Employers should conduct independent contractor audits and focus on, among other things, whether a written contract accurately describes the requirements of the contractor, has a beginning and end date, cannot be terminated except for material breach or on written notice, is negotiable, pays on an output basis, has a risk of loss or additional profit, does not pay business expenses, and explicitly states contractors have the right to perform the same or similar services for competing and non-competing companies. Also, supervisors must be trained to correctly handle independent contractors, e.g., independent contractors should not perform the same duties that employees perform, supervisors should not control an independent contractor’s performance, and tools and equipment should not be provided to the independent contractor for free.
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