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How to Fight the Rise of Department of Labor Audits and Lawsuits for Misclassification of Employees as Independent Contractors

above-the-bar-logo-no12In these difficult times, many companies are using a risky strategy by labeling their workforce as independent contractors to avoid paying overtime wages, employee benefits and obligations under soon to be implemented “Affordable Care Act” a/k/a Obama Care and to try to escape obligations contained in employment discrimination laws. This is causing more and more plaintiff’s lawyers and government agencies – including the NYS Department of Labor (UI Tax Division), US Department of Labor and Internal Revenue Service – to initiate investigations and/or lawsuits against companies who mistakenly (intentionally or unintentionally) misclassify a worker. Indeed, the US DoL – Wage and Hour Division created a “Misclassification Initiative” in 2011 and entered into a work sharing agreement with the Internal Revenue Service. These investigations, audits and lawsuits can result in substantial judgments, penalties and fines and can have far reaching consequences including how the company conducts in its business in the future and, quite frankly, the viability of its business model. It is critical that employers in all industries contact experienced employment law counsel to evaluate whether their workforce is properly classified before any claim is presented. Call our office at (800) 893-9645 to confidentially learn your options, how to protect your business and how to develop a strategy to defend against any such claims. We have helped many companies properly classify their workforce and protect their assets.

There are different tests using the government agencies and they vary by courts as well. In general, the following common law test used by the IRS is helpful for companies to consider in whether a worker is an employee or an independent contractor – it is a multi-part test that focuses at behavioral control, financial control and the nature of the relationship – it is important to do an careful internal analysis so that the strongest defense can be crafted and presented – intent is not required in these cases – even the well intending company can face some exposure:

Behavioral control

Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of–

• Instructions the business gives the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:

a. When and where to do the work b. What tools or equipment to use c. What workers to hire or to assist with the work d. Where to purchase supplies and services e. What work must be performed by a specified individual f. What order or sequence to follow
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

• Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own training or already are skilled professionals or specialists.

Financial control

Facts that show whether the business has a right to control the business aspects of the worker’s job include:

• The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their employer.

• The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

• The extent to which the worker makes services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

• How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

• The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

Type of relationship

Facts that show the parties’ type of relationship include:

• Written contracts describing the relationship the parties intended to create. Contrary to what most employers believe, a written independent contractor agreement does not guarantee success or make them bullet proof in terms of a claim. The underlying facts of working relationship will control.

• Whether the business provides the worker with typical employee benefits, such as insurance, a pension plan, vacation pay, or sick pay. By definition, independent contractors should not receive benefits.

• The permanency of the relationship. If a company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

• The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company’s regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

If you would like to discuss your specific employment situation or notice of audit, please contact our experienced employment lawyers to learn your rights, defenses and options.

Disclaimer: 

Thank you for visiting our Blog. This blog provides general information and thoughts about various employment law issues primarily in the New York Tri-State area and occasionally in other areas. You are welcome to read the posts. However, do not construe any content on this blog as legal advice or the creation of an attorney-client relationship. Again, we provide the content only for informational purposes. You should not make decisions based information on our blog since the application of the law depends on the facts and each situation may be different. In addition, the law in most jurisdictions is different and changes constantly and we make no representations that any information on our blog has been updated. The Blog should not be used as a substitute for competent legal advice from an experienced employment law attorney in your state or jurisdiction.