We recently wrote about how employers make the mistake of misclassifying employees as exempt from overtime requirements simply because they are paid a salary. We turn now to another common employer pitfall – misclassifying people as independent contractors.
Some employers are eager to classify workers as independent contractors because then the employer does not have to provide unemployment benefits, workers’ compensation, or abide by employment and wage and hour laws.
But misclassifying employees can be very costly. If an employee or the Department of Labor sues an employer and wins, the employer can be required to repay all the lost wages and benefits with penalties and attorneys’ fees.
If you have classified workers as independent contractors, Davis Business Law’s employment attorneys can help you ensure your classification is correct. Call or email us today to set an appointment for a free consultation.
What Independent Contractors Aren’t
The law disfavors independent contractor status. The default is that someone working for your company is an employee. To be properly classified as an independent contractor, you have to meet the criteria of the test we discuss below. But first, we want to clear up some common misconceptions. The following things do not make a worker an independent contractor:
- Being called an independent contractor.
- Being paid with a 1099 tax form.
- Signing an independent contractor agreement.
- The worker is not on the payroll.
- The worker has their own LLC or EIN.
- Working remotely or off-site.
- Common industry practice is to call the worker an independent contractor.
What Independent Contractors Are
The employer-employee relationship under the Fair Labor Standards Act (FLSA) is tested by “economic reality” rather than “technical concepts.” An employee relationship exists when a person who hires an individual to perform services has the right to exercise control over the manner and means by which the individual performs his or her services.
In examining the economic reality of a relationship, the U.S. Supreme Court has provided the following factors that should be taken into consideration:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
Here is a practical example. If you want your bathroom remodeled, you invite a construction worker to give you a bid for that job. If you accept their bid, they bring their own tools and knowledge and begin work. They work when they want, often working other jobs too. They can hire other people to help them. If they do the work for the time and materials in their bid, they profit. If they go over their bid, they take a loss. This is a clear independent contractor relationship.
If, on the other hand, you provided this person with tools and training and kept them on call to exclusively do whatever handyman services you needed around your home, it would likely be an employee relationship.
Contact Davis Business Law Today to Examine Your Independent Contractor Designations
If you think you may have misclassified employees, we can help. You can fix the problem, properly classify them, and we can work to make it right with the employees to protect your business from liability.
The legal test for independent contractors is complicated. Davis Business Law’s seasoned employment attorneys are ready to help you sort it out. Call us now at (866) 950-7634 or contact us online to discuss how we can help your business.