By Mark Terman
The Issue: Misclassification of employees as independent contractors is common and it can have “quicksand” impact on employers. In addition to litigation expense, employer risks include compensation and penalties for Wage & Hour law violations, unfunded retirement plan obligations, no workers compensation coverage, liability for uninsured medical needs, statutory penalties for willful misclassification, and tax agency attack for lack of withholding. A company with multiple independent contractors could have big exposures.
The Solution: Companies should review the classification, with the help of counsel, of all independent contractor workers to determine if they are properly classified. If they are not, implement reclassification in a way that reduces the chances that the correction triggers disputes over the impacts of past misclassification.
Analysis: Here is a common scenario. An individual is engaged by a company as an independent contractor. The individual may like to receive a pay check without withholding taken out and a 1099 at year end. The company may like saving costs that come with employees, such as overtime pay, timekeeping and meal periods for non-exempt employees, employer-side employment taxes, medical plan premiums, pension plan contributions, Workers Compensation premiums, and responsibility for anti-discrimination and other employee-protective laws.
Then a big change happens. For example, the company ends the relationship; the worker is seriously injured on the job; the worker suffers a major medical problem; or the worker simply files with the EDD for unemployment insurance. At this point, the worker and government agencies are motivated to try to reclassify the worker as an employee to provide rights and recourse that contractors do not have.
In a recent matter we handled, in which only wage and hour issues arose, the client’s claim exposure was between 7 and 10 times the unpaid overtime wages allegedly owed to a misclassified contractor. Imagine the risk potential if the company had a legion of independent contractors. And this case unearthed only one area of classification risk.
Courts and government agencies have different classification tests; but, most center on this: Does the company have the right to control the manner and means of how the contractor accomplishes the job? Secondary factors include whether the contractor’s work is the same as the company’s primary work. Does the contractor have multiple clients of which the company is just one? Is the work done at a company worksite using company tools or equipment? Is the engagement long term? How has the worker’s status been described on business and promotional materials?
This area is so fertile for litigation that companies are wise to size-up the risks and take corrective action long before claims surface.