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There are several benefits to a company using independent contract labor. In addition to tax benefits, many federal and state laws do not apply to independent contractors. For example, Title VII discrimination laws and the FLSA governing wages do not apply to independent contractors. Ordinarily, unemployment and workers' compensation laws only protect employees. The consequences for mislabeling an employee as an independent contractor may result in tax consequences, liability for overtime pay, unpaid benefits, unpaid expenses and unemployment benefits, as well as other liability under various federal and state laws. Independent contractors are individuals who essentially run their own business, and who provide services to several customers.
Although there is no one factor that controls whether someone is correctly classified as an independent contractor, there are three basic principle factors in determining the degree of control and independence necessary for a worker to be an independent contractor under the FLSA:
1. Behavioral: Does the company control or have the right to control the manner in which the worker performs the job? An independent contractor uses his own skill and experience to complete the job, and sets his own hours, rather than taking directions from managers.
2. Financial: Are the business aspects of the worker's job controlled by the company? (Consider how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.). An independent contractor uses his own tools and supplies, and ordinarily submits an invoice for work performed.
3.
Type of Relationship: Are there an independent contractor agreement between the worker and the company, and what type benefits are paid (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? While a well-drafted written independent contractor agreement is important, it is not dispositive. An independent contractor is generally not be paid and/or provided with company benefits, and is not hired exclusively by the company for a very long period of time, without the opportunity to accept other work concurrently. The DOL also considers whether the worker is performing a job that the company specializes in, such as a painting subcontractor hiring a painter because there is more likely to be supervision in that case, and thus, employee status.
Breakdown of Factors to Consider:
1.
The nature and degree of the alleged employer's control in terms of how the work is performed; (Tip - the company should exercise little or no control over details of the work performed. However, job specifications may be provided);
2. The worker's opportunity for profit or loss based on his or her managerial skills;
(Tip - the worker should be able to negotiate price for each job, and be able to accept other jobs from other customers. The worker is responsible for completing the job per specifications and/or in a good and workmanlike manner);
3. The worker's investment in the business (equipment or materials, etc.);
(Tip - the company should not pay for equipment or overhead items, such as cell phones, cars, computers, clothes, tools, etc., and should not pay any benefits or carry insurance for the worker for independent contractor status to apply);
4. The degree of skill and initiative required to perform the job;
(Tip - a worker must have the required education, certification, degree and/or skill to perform the job independently. If not, the worker will not qualify for independent contractor status, regardless of 1099 forms or written agreements);
5. The degree of permanency and duration of the working relationship.
(Tip - an individual who works exclusively for a company for a long period of time (about 1 year or more), without a meaningful opportunity to accept other customers, may be an employee).
The Misclassification Prevention Initiative:
The misclassification of employees as independent contractors has been recognized as a serious problem facing workers. This is because misclassified employees are denied many benefits and protections that apply to employees under various federal and state laws. To combat this problem, the Wage and Hour Division of the DOL and the Internal Revenue Service (IRS) have joined forces to cooperate by notifying each other of workers that are misclassified so that the appropriate actions can be taken against those employers. Some states have also agreed to participate by cooperating with the DOL and IRS to identify misclassified workers. Any worker who has a question concerning whether or not he or she is correctly classified as an independent contractor can go to www.dol.gov for assistance, or call an attorney experienced in this area of law.
Please note that the information contained in this article is not designed to address specific situations, and does not include rules or regulations that apply to all states. If you have questions concerning this topic, you should consult with legal counsel of your choice to obtain advice on fact specific matters.
Robin Foret is Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization. She is a Partner in the Houston office of Kennedy Law, LLP, and can be reached at rforet@saklaw.net or by telephone at (713) 491-4644.
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