For employers, using independent contractors to help with business operations is an important option.
Contractors typically offer flexibility and cost savings as they do not receive overtime pay or benefits such as health insurance and pension plans.
As a general rule, companies do not levy tax on indemnities paid to contractors. The explosion of the gig economy and the growing practice of “freelance work” has accelerated the number of people classified by companies as independent contractors rather than employees. With this trend, federal employment agencies are increasingly challenging employers’ classification of workers as contractors. The potential liability of employers found guilty of mistakenly classifying workers as self-employed can be significant.
Determining whether a particular individual is correctly classified is factual and depends on the circumstances. When deciding whether to classify a worker as an employee or independent contractor, an employer should consider the following factors:
• Nature and extent of control exercised by the employer.
• Permanence and duration of the relationship.
• The contractor’s investment in its own facilities, equipment, materials and tools.
• Degree of skill, judgment and discretion exercised by the contractor.
• Possibilities for the entrepreneur to make profits or incur losses on the services provided.
• Extent to which the contractor’s services are integrated into the regular operations of the employer.
Federal agencies are actively reviewing employer classifications. When an agency discovers that a person should have been classified as an employee, the results are significant. Examples include:
• Internal Revenue Service – the employer failed to make required tax deductions.
• Department of Labor, Wage & Hour Division – individuals owed overtime for a period of three years.
• National Labor Relations Board – persons classified as “contractors” were employees eligible to form a union.
• Department of Labor, Benefits Security Administration – people classified as “contractors” wrongfully excluded from health insurance coverage and included in the 401(k) plan.
In addition to federal agencies challenging the classification of individuals as independent contractors, state employment, benefits, and tax agencies are stepping in, and individual workers are suing employers for unpaid overtime and missed benefits.
Businesses should expect this trend to grow. Now is the time for employers to analyze whether their classifications of certain workers as independent contractors rather than employees can withstand challenges from federal agencies, state agencies or individual plaintiffs.
Charlie Plumb is a labor and employment lawyer McAfee and Taft.