Employee or Independent Contractor?
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Key Issues
1. Why is the definition of “employee” so important?
2. How does an employer distinguish between an employee and an independent contractor?
3. Which key agencies have suggested criteria for determining if a worker is an employee or an independent contractor?
4. What is the most important factor in determining a worker’s classification?
5. What are the consequences of misclassifying an employee?
6. Various federal and state agencies have established standards for determining worker status. Below are there of the more important:
a. IRS common law criteria
b. Darden Factors
c. FLSA criteria
7. How do the standards above overlap?
8. [pic]Cases
Classifications of Workers – there are two general categories of workers: independent contractor or employee.
Independent Contractor: (read to Section Form SS-8)
Definitions vary based on specific regulations or laws. However, in general, the “payer” has the right to control or direct only the result of the work done by an independent contractor, not the means and methods of accomplishing the result. Misclassification is common and the consequences can be significant for an organization (payer). In most cases, a worker’s status is obvious, but can be complicated.
Other Worker Terms
Contingent or Temporary Workers: Worker’s job with an employer is temporary, sporadic, or differs in any way from the norm of full-time employment. Individual still likely to be an employee, not a contractor. Have most of the protections of permanent employee such antidiscrimination, safety, and Wage and Hour Laws.
• EEOC Enforcement Guidance
• ADA and Contingent Workers
• U. S. Department of Labor
Statutory Workers - independent contractors under the common law rules but treated as employees by statute (statutory employees) for certain employment tax purposes
Agent versus principal – In an agency relationship, the party for whom another acts and from whom she or he receives authority to act is known as a principal; the one who represents the principal is known as an agent. "Agency law is concerned with any principal-agent relationship; a relationship in which one person has legal authority to act for another. Such relationships arise from explicit appointment, or by implication. The relationships generally associated with agency law include guardian-ward, executor or administrator-decedent, and employer-employee.”
The law of agency is based on the Latin maxim "Qui facit per alium, facit per se," which means "he who acts through another is deemed in law to do it himself." Agency, in its legal sense, nearly always relates to commercial or contractual dealings. From: http://www.law.cornell.edu/wex/agency
Various Regulations and Potential Consequences - There is no single definition but considerable overlap. The following are legal considerations. When in doubt, rely on the IRS.
1. Tax law compliance (Employer’s Duty to Pay)
• Federal Unemployment Compensation (FUTA)
• Social Security (FICA)
• IRS federal income tax withholdings
• Medicare
• State and local taxes
• Other state and local mandates
2. Discrimination (Federal: USERRA, Title VII, E.O.11246, ADA, IRCO, and ADEA; states and municipalities) - Only employees are protected by most statutes
3. Affordable Care Act - Starting in 2015 (maybe), the ACA will impose penalties on large employers (those with at least 50 full-time employees or full-time equivalent employees) that misclassify workers and consequently fail to offer certain full-time employees a minimum level of health insurance coverage. Many employers will be tempted to misclassify workers to avoid paying penalties or purchasing medical insurance.
4. Vicarious Liability - Employer is vicariously liable for negligent acts of his/her employee, which cause injuries to a third party, if such acts were committed during course of and within scope of employment. Generally, the risk of liability is less for acts of independent contractor. Respondeat superior - More about this in the Torts outline
• Fair Labor Standards Act of 1938 (FLSA) Employment Relationship under the Fair Labor Standards Act $10,000 fine and/or imprisonment for willful misclassification "Am I an Employee?"
• U.S. Department of Labor, Employment Standards Administration Wage and Hour Division - Supreme Court has found no single rule or test for determining if individual is independent contractor or employee for purposes of FLSA. FLSA "Economic Realities Test":
1. Extent to which the services rendered are an integral part of the principal's business.
2. The permanency of the relationship.
3. The amount of the alleged contractor's investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor's opportunities for profit and loss.
6. Level of skill and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
6. Labor laws (NLRA, IRCA, FMLA, OSHA, and WARN).
7. Government Contractors - Darden Factors - "The application of the Darden factors is a fact–specific, case–by–case assessment, not a simple, bright–line test. If a contractor believes that a worker may not be an employee, the contractor must assess and weigh each of the Darden factors with respect to its relationship with that individual. While no one factor will necessarily be decisive, the factors that indicate the extent to which the contractor controls the manner and means of the individual’s performance of his or her work will typically be most important in the Darden analysis."
8. State laws - University System of Georgia Summary - 5.5.1 - Factors in Determining Whether a Person is considered an Employee or Independent Contractor (based on IRS 20 Factors).
• Workers’ Compensation - Georgia
• Unemployment
What Determines If Individual Is an Employee (no single standard)
Common Law – (The legal system that originated in England and is now in use in the United States. It is based on judicial decisions rather than legislative action). Adopted by IRS, based on the “20 Factors”. IRS "Three Prong" Test
• Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
1. Type of instructions given
2. Degree of instruction
3. Evaluation systems
4. Training
• Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
1. Significant investment
2. Unreimbursed expenses
3. Opportunity for profit or loss
4. Services available to the market
5. Method of payment
• Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
1. Written contracts
2. Employee benefits
3. Permanency of the relationship
4. Services provided as key activity of the business
Sample Cases
[pic]Lancaster Symphony Orchestra - NLRB ruled musicians were employees based on the level of control Lancaster had over musical selections, style of performance, which musicians would perform, and rehearsal scheduled. The board was not swayed by the following facts: musicians signed a non-exclusive agreement stating IC status, used their own instruments, or influenced how and when they performed.
[pic]Boston Bicycle Couriers v. Deputy Director of the Division of Employment and Training, 778 N.E.2d 964 (App. Ct., Mass., 2002) - Appeals court held that when the state looks to determine if a worker is an employee and thus entitled to unemployment compensation, the determination is be based on the circumstances of the relationship, not the assertions made in boilerplate contracts. Read case summary.
BOSTON BICYCLE COURIERS INC v. DEPUTY DIRECTOR OF THE DIVISION OF EMPLOYMENT AND TRAINING Argued Aug. 29, 2001. -- November 18, 2002
BBC contends that it was exempt from contributions to the fund because delivery couriers working for BBC, such as Anthony DiMare (the claimant for unemployment benefits in this case), were independent contractors. BBC is in the business of providing same-day pick-up and delivery services on an on-call basis. BBC engages approximately twelve drivers for these courier services, of which DiMare was one. Letters and packages to be delivered between offices.
The term “employment' is inclusive. The trigger for an employer's contribution liability to the unemployment compensation fund is whether there exists an employment relationship between the employing unit and an individual performing services. The legal framework is of broad reach. Exceptions are limited in number and scope.
The worker may still be deemed in employment for purposes of unemployment even if considered to an independent contract under common law. The three-part test for the independent contractor exemption is commonly known as the “ABC” test. The elements are conjunctive. In order to qualify for the independent contractor exemption, the employer must prove that the worker (a) is free from direction and control by the employing unit; (b) performs services outside the usual course of, or places of business of, the employing unit; and (c) the worker-albeit performing services of the same nature as the employing unit-is engaged in an independently established trade, occupation, profession or business wholly apart from the employing unit. In 1971, two new elements were added. We will focus upon that exemption to determine whether the board decision that BBC failed to satisfy the test. The board concluded that BBC had failed to meet its burden with respect to all three statutory requirements.
We apply the overarching principle of administrative law that “[i]f the findings of the board are supported by substantial evidence, and if there is no error of law, the court must affirm the board.” With respect to such deference, a reviewing court will accord “due weight to the experience, technical competence, and specialized knowledge of the agency, as well as to the discretionary authority conferred upon it.” This requirement is most commonly referred to as the “independent trade or business requirement.” That DiMare, as one of its drivers, was “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed,” BBC was required to adduce evidence to establish that (1) DiMare customarily engaged in an independent courier delivery service on his own; (2) DiMare's courier delivery service operated wholly independently of his work for BBC; and (3) DiMare's business was established and running.
Factors in the analyses include, but are not limited to, that: (1) the individual worker is free both to operate an independent enterprise and to perform services without hindrance from the employing unit; (2) the independent enterprise was created and exists separate and apart from the worker's relationship with the particular employing unit; (3) the worker's independent enterprise is not interconnected with, and is not dependent in any way upon, engagement by the particular employing unit, or other companies engaged in the subject industry; and (4) the worker's independent enterprise would survive as an ongoing business entity, notwithstanding the termination of the relationship with the employing unit. Is the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.
We conclude this administrative determination was supported by substantial evidence. BBC would have had been required to prove that DiMare performed other courier delivery services on his own behalf that were completely apart from those performed for BBC, and that this other separate courier delivery work exhibited economic independence such that DiMare's business would continue as an ongoing enterprise, notwithstanding the end of work for BBC. The board found BBC did not meet these standards. The record demonstrated not independence, but rather an intertwining and an interdependent working relationship between a driver, such as DiMare, and BBC as the employing unit.
There was also no evidence that DiMare had his own clientele, utilized his own business cards or invoices, advertised his services or maintained a separate place of business and telephone listing. Indeed, when DiMare's relationship with BBC terminated, so did his work in the delivery business. BBC's evidence did not show that DiMare was able to operate a delivery business without the benefit of his relationship with BBC. BBC did not make an adequate showing that DiMare held himself out as an independent businessman performing courier services for any community of potential customers. Simply put, there was no evidence that DiMare had a proprietary interest in a going concern which could have been sold or transferred.
The risk of loss for nonpayment of the delivery charges fell squarely on BBC. BBC, moreover, voluntarily purchased workers' compensation insurance for all of the delivery drivers. BBC provided DiMare, pursuant to a rental agreement, with both a radio and a pager, essential equipment in the on-call delivery business. The evidence manifested DiMare's intertwined and dependent role as worker, rather than as independent entrepreneur. The right to terminate at will without liability is strongly suggestive of an employee-employer relationship). Finally, BBC retained the right to terminate a driver and end the relationship for any reason upon thirty days' notice. BBC guarded its customer list through nonsolicitation and noncompetition contractual provisions. BBC's customers contracted with BBC for delivery services, and not with particular drivers, such as DiMare. BBC set the commission rates paid to drivers, such as DiMare, and set the prices charged for delivery services. Indeed, without delivery drivers like DiMare, BBC could not operate-a factor supporting the finding that DiMare was an employee of BBC. Further reflecting the dependent intertwining between BBC and its drivers, the services provided by DiMare were an integral part of BBC's business. While a contract expressed in terms of engagement on an independent contractor basis may be relevant to a status determination, the existence of such a contract is not controlling. This document was provided by BBC, which required all drivers to sign it. To counter the weight of this evidence reflecting employment subject to the Act, BBC relies heavily on language contained in a document styled as an agreement “between the client [BBC] and independent contractor.” So viewed, boilerplate language replete with designations and labels incorporated into form contracts by the employing unit may not be used as a subterfuge to avoid liability to the unemployment compensation fund when the agreement lacks any real foundation in the facts of the actual working relationship.
Here, the totality (preponderance) of the evidence of the working relationship between BBC as the employing unit and DiMare as the worker failed to meet the criteria. [pic]
