HR Practice Pointer: Determining Worker Status- Independent Contractor vs. Employee
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- Published on Saturday, 11 February 2012 05:47
It is essential that employers properly classify employees, as the potential liabilities and penalties are significant. This is particularly important in light of the Department of Labor’s recent memorandum of understanding with the State of California, which is intended to “end the misclassification” of employees as independent contractors.
The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which deals with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which enforces wage and hour laws. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have requirements concerning independent contractors. Significantly, since different laws may be involved with a particular workplace situation such as a termination of employment, it is possible that the same individual could be considered an employee under one law and an independent contractor under another law.
Although there is no set definition of the term “independent contractor” it is important to note that the DLSE begins with the presumption that the worker is an employee. Labor Code Section 3357. This is a rebuttable presumption, however, and the determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be taken into account. Therefore, it is necessary to analyze the facts of each service relationship. For most matters before the DLSE, this means applying the "multi-factor" or the "economic realities" test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most important factor is whether the person to whom service is rendered (the employer or principal) controls the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:
1. Whether the person performing services is engaged in an occupation or business distinct from that of the alleged employer;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
Even in situations where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288).
It is important to note that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative of independent contractor status (Borello, Id.at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877). Read More.
NLRB Holds That Symphony Musicians Are Employees Not Independent Contractors
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- Published on Thursday, 29 December 2011 20:26
With the advent of the New Year, it is a good time for employers to ensure that they have properly classified their employees both in terms of exempt versus non-exempt status, and in terms of employee versus independent contractor status, particularly since failure to properly classify employees can be costly for an employer. In a recent decision, the National Labor Relations Board (NLRB) found that musicians playing for symphony orchestras in Pennsylvania, Massachusetts and Texas are employees, not independent contractors. As employees they are therefore eligible to vote on whether they want union representation. In a 2-to-1 decision in Lancaster Symphony Orchestra, which was issued on December 27, the NLRB reversed the Regional Director’s decision to dismiss an election petition and sent the case back to the region for further action. The NLRB then issued two unpublished decisions the following day, in which the Board cited Lancaster, and also found that musicians with the Cape Cod Symphony Orchestra and Plano Symphony Orchestra are employees. In Lancaster, the Board considered numerous factors regarding independent contractor status versus employee status and found the factors weighed heavily in favor of employee status. For example, although musicians have some control over their work by choosing whether or not to bid on programs, “once they are selected to work in relation to a particular program, the musicians’ control over their work time ends.” The Board also observed that orchestra management determines such things as work hours, payment schedules, dress codes and standards for behavior. Further, the Board noted that the musicians do not enjoy entrepreneurial opportunity or suffer risk because their fees are set and cannot be negotiated. Chairman Mark Gaston Pearce and Member Craig Becker voted to approve the decisions. In his dissent in Lancaster, Member Brian Hayes applied the same multi-factor analysis as the majority, but concluded that the factors weigh strongly in favor of finding the musicians to be independent contractors. In particular, on the right of control factor, Member Hayes argued that, under Board precedent, the relevant question is “whether the musicians retain discretion to accept or decline to work with the employer and to play elsewhere,” and concluded that, in this case, they do. In addition, Member Hayes found that the musicians’ ability to take as many or as few jobs as desired and to work for various employers evidenced their entrepreneurial opportunity for gain. Read More.
Bill Introduced to “End Misclassification of Employees as Independent Contractors”
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- Published on Tuesday, 18 October 2011 03:46
Rep. Lynn Woolsey (D-CA) has introduced a bill, the Employee Misclassification Prevention Act (EMPA) (H.R. 3178) intended to “end the misclassification of employees as independent contractors, a practice that strips workers of benefits and protections, puts responsible employers at a competitive disadvantage, and cheats taxpayers.” According to Rep. Woolsey, “Misclassification undermines workers’ rights by denying them access to important benefits and protections like workers’ compensation coverage, minimum wage and overtime protections, family and medical leave, and the right to organize and collectively bargain. This unscrupulous practice has gone unchecked long enough.” According to the IRS, misclassification deprives the federal treasury of about $2.7 billion a year in unpaid tax revenue. In addition, the General Accountability Office (GAO), estimates that least 10 million workers in the U.S. are classified (rightly or wrongly) as independent contractors. The Department of Labor (DOL) estimates that approximately 30 percent of companies nationwide misclassify their employees. The EMPA would do the following: (1) Require that employers keep records reflecting the accurate status of each worker as an employee or non-employee and clarify that employers violate the Fair Labor Standards Act when they misclassify workers; (2) Increase penalties on employers who misclassify their employees and are found to have violated employees’ overtime or minimum wage rights; (3) Require employers to notify workers of their classification as an employee or non- employee; (4) Create an “employee rights web site” to inform workers about their federal and state wage and hour rights; (5) Provide protections to workers who are discriminated against because they have sought to be accurately classified; (6) Mandate that states conduct audits to identify employers who misclassify workers and require that DOL monitor states’ efforts to identify misclassification; (7) Direct states to strengthen their own penalties for worker misclassification; and, (8) Permit the DOL and IRS to refer incidents of misclassification to one another. The full text of the EMPA is available at:: http://hdl.loc.gov/loc.uscongress/legislation.112hr3178. Read More.
Judge Rules Cascom Misclassified Employees As Independent Contractors; DOL Now Seeks Over $1.6 Million In Wages And Damages
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- Published on Wednesday, 12 October 2011 04:40
In Solis v. Cascom Inc. et al. Civil Action Number 3:09-cv-00257, Judge Thomas M. Rose of the U.S. District Court, Southern District of Ohio, Western Division at Dayton ruled that Cascom, Inc., which provides residential cable television, Internet and telephone installation services for Time Warner in the Dayton area, violated federal labor laws by misclassifying its employees as independent contractors and, consequently, not compensating them for overtime work, as required under the Fair Labor Standards Act (FLSA). Further proceedings will be held on November 22, 2011 to determine the amount of overtime back wages owed to approximately 250 installers. The Labor Department filed its suit two years ago seeking to recover back wages in excess of $800,000, with an equal amount in liquidated damages. "The misclassification of employees as independent contractors is an alarming trend. The practice is a serious threat to both workers, who are entitled to good and safe jobs, and to employers who obey the law and are undercut when others use illegal practices," said Secretary of Labor Hilda L. Solis. "The Department of Labor is committed to remedying employee misclassification and ensuring compliance to protect and enhance the welfare of the nation's workforce." This determination is on the heels of a memorandum of understanding Secretary Solis signed with the Internal Revenue Service on September 19, 2011, intended to improve the Labor Department's efforts to end the business practice of misclassifying employees in order to avoid providing employment protections. Read More.
IRS Offers New Voluntary Worker Reclassification Settlement Program
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- Published on Sunday, 02 October 2011 23:45
The Internal Revenue Service (IRS) has launched a new program, the “Voluntary Classification Settlement Program” (VCSP), which is intended to provide some relief to employers who have misclassified employees as independent contractors and, according to the IRS, “achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.” The new program affords employers with the opportunity to become compliant by making a minimal payment covering past payroll tax obligations as opposed to waiting for an IRS audit. The program is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain significant relief from federal payroll taxes they may have owed for the past, if they prospectively treat
workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly reclassify these workers as employees. To be eligible, an applicant/employer must: (1) Consistently have treated the workers in the past as nonemployees; (2) Have filed all required Forms 1099 for the workers for the previous three years; (3) Not currently be under audit by the IRS; and, (4) Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers. According to IRS Commissioner Doug Shulman, “This settlement program provides certainty and relief to employers in an important area…This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.” Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees. Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes. Read More.
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