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NY Department of Labor Audit – Tutor Was Misclassified as an Independent Contractor and Was an Employee

Female.Freelancer.Employee.Checkbox.DPC.2.28.16.jpgHave you checked off the correct box for your workers? Are they employees or independent contractors (i.e., freelancers)? Today’s post discusses a rising problem for small businesses – misclassification of workers – and a recent case. Ivy League Tutoring Connection Inc. (the “Company”), a tutoring referral and billing service, provided in-home tutors to clients to help with test preparation and school work. The Company had treated its tutors as independent contractors and issued them 1099 tax forms. The Company’s practices came under review in 2012 and, after a hearing, the Department of Labor ruled that tutors were employees and unemployment insurance contributions were due regarding tutors from 2009-2012. A determination like that can have a significant impact on any business. The Company’s appeal to the Unemployment Insurance Appeal Board was denied as the initial determination was upheld. The Company then appealed to the Appellate Division, Third Department and we discuss the court’s decision generally today. We previously discussed another decision involving tutors before and it can be found here.

The Company placed advertisements and postings online to recruit
tutors. The Court stated that the Company screened, interviewed and conducted criminal background checks on applicants. Further, it stated that the Company paid the tutors by the hour and assigned tutors work that they could not assign to a third party. Moreover, the Company had signed agreements with the tutors that included a non-solicitation clause that prohibited them from soliciting the Company’s clients for three years after the work relationship ended. The Court considered all of these factors among others and affirmed the determination of the Department of Labor. It stated that “an organization which screens the services of professionals, pays them at a set rate and then offers their services to clients exercises sufficient control to create and employment relationship.” Let’s look at some of the factors below.

The Company’s approach to recruiting the tutors was similar to hiring an employee. In general, a contractor is a skilled worker or company who does not complete an application process whereas an employee completes an application, interviews and is screened. The manner in which the Company set the rate of pay also tipped in favor an employee finding. Typically, a contractor is not paid by an hourly rate; ideally, a contractor submits an invoice on company letterhead (containing the entity’s tax identification number) with an explanation of its services and its billing. In an employee-employer relationship, the Company generally dictates the pay structure but with contractors it should be genuinely mutually agreed upon and can be a flat fee. In addition, a contractor typically offers his or her services to the general public. Here, the Company specifically restricted, in part, the worker’s ability to offer its services. Finally and importantly, the type of work performed by the tutors was integral to the Company’s business and the Company engaged in sufficient direction and control of the worker.

As a result of the Court’s decision, the Company was required to pay all unemployment insurance contributions from 2009-2012 (unless it could show it did not have any employees or contractors during that time period). This is just the first of the dominos to fall though. The Court’s decision was in May 2014 so the Company’s practices in 2013-2014 may also be impacted as well as its overall business model. Other dominoes that may fall in this process include additional governmental investigations by the State and/or the Federal agencies. For example, the IRS may require unpaid federal payroll taxes, if any and may require re-filing tax returns and related documents to reflect the workers were employees and not independent contractors. Finally, the Company may get sued by its misclassified workers for not being provided employee benefits, non-payment of overtime pay and more. These consequences can be substantial and that is one reason why it is important to get experienced employment law counsel from the outset.

Best.Practice.Light.Bulb.DOL.Audit.Dollar.Photo.1.18.16.jpgContact our Award-Winning NY Employment Law Attorney to learn your potential exposure, how to defend your business and how to implement best practices. Proactive steps are paramount and can help you fight back in an audit.

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