In 2017 there was estimated to be over 10 million people operating as independent contractors. Small, medium and large companies all use independent contractors to remain competitive and to grow their businesses but understanding the differences between an “independent contractor” and a “regular employee” is neither easy nor trivial to the business. It is an area that is riddled with traps for the unwary.
According to a recent Department of Labor (DOL) study, approximately 38% of small businesses misclassify employees as independent contractors. But the problem is not limited to small businesses. Even large, more “sophisticated” companies, like Microsoft, FedEx and Walmart, for example, are not immune to this error. Given the current market conditions, it may be even more important for a business to get the classification correct. Tax revenues for all levels of government are down while budget deficits are up. In an attempt to bridge this gap, both the federal government and state governments are going to be taking a closer look at how companies classify their human resources.
In 2008, 35 state labor departments signed memorandums with the DOL. Many states have passed legislation to curtail misclassification. So, while it’s likely the DOL will pull back under Trump at the federal level, there is no reason to expect that state labor departments will be any less aggressive in their efforts to crack down on independent contractor (IC) misclassification, especially those states with democratic party governors. In fact, they are likely to double-down on enforcement if they feel that the DOL is backing away from it.
There are many reasons why this classification is often hard to get right. Realize that just because you, the employer, think of the person you hired as an independent worker, the contractor itself might state that he or she is an independent contractor and even the person thinks of themselves as an independent worker, but that doesn’t necessarily mean that they really are a true independent contractor. Furthermore, a person may actually be an independent contractor under one set of laws but will be considered an employee under another set of laws.
What most people forget is that there are wage and hours rules, unemployment rules and Workers’ Compensation laws. The tests to determine whether a person is an employee or an independent contractor may be different depending on whether it is for taxes, compliance with discrimination laws or the operation of respondeat superior or some other law (respondeat superior is a US legal doctrine which states that, in many circumstances, an employer is responsible for the actions of employees performed within the course of their employment).
If for nothing else, when determining whether the right taxes have been withheld, it is up to the company to prove that the person was properly classified as an independent contractor and should not have been considered an employee. For example, the state of New Jersey uses the “ABC” test for unemployment responsibility and hour and wage requirements. Under this test it is up to you, as the employer, to prove that the relationship is that of an independent contractor and not that of an employee.
Specifically, the state of New Jersey would look at the following: Is the person now and continues to be free from the control and the direction over the performance of the job? This condition not only has to be in contract but must be what occurs in fact. If the actual practice is different than what is set forth in the contract, the contract will have little weight. Are the services either outside of the usual course of the business or performed outside your location? Does the independent contractor work in your office space or do they work from their own location? Is the individual engaged in an independently-established profession or business? Are you the independent contractor’s only job, or does he or she perform work for several other companies?
The business must be able to prove that the independent contractor meets all three prongs of the ABC test, and it is important that a business gets the decision right. Failure to meet all requirements could result in the payment of all back taxes, penalties and interest. Such ramifications could transform a solid business to barely surviving (or worse). It may even open the business owner up to personal liability for the back taxes.
As a business owner, it is crucial that you fully understand the differences between a true independent contractor and an employee. If you want to bury this subject, you must put enough nails in the coffin lid so it doesn’t open again. You must fully understand what need you are trying to fill with the proposed relationship and then structure it to adequately meet all your business needs in order to avoid possible issues in the future.
The State of California has had a hodgepodge of cases since 2011. In fact, port drivers have filed over 800 cases. Drivers at Federal Express, Super Shuttle, Bimbo Bakeries, Lyft and Uber all got hit. Newspaper carriers such as the Sacramento Bee, the San Diego Union Tribune and the Orange County Register have all fallen into this quagmire, as well.
Even more recently, driver pay requirements have now come into play in California in a big Walmart case. Any carrier that pays California drivers on a system other than hourly pay should have their pay policies changed to conform to this recent case law hold that “Piece Rate” compensation only compensates for driving time. If you have a “Piece Rate” pay system, you need to separate pay from non-productive time, pre- and post-trip inspections and rest breaks, among other things.
The court found that the drivers, or any workers, must be compensated for all time where they are required to or may perform any work-related functions, including sleeping in their cabs during layovers, because they were not relieved of duty. Similarly, if the drivers are required to answer phone calls during layovers, they must be paid for that time, as well.
The solution to this problem is to join an association for the help you need to cope with these problems and to answer your questions – before it’s too late. NTA (www.ntassoc.com) is your one-stop transportation center. Visit us online today or call us at (562) 279-0557. We are here to help!