Misclassifying a worker as an independent contractor, rather than an employee, is becoming a heated topic among authorities, and misclassification suits are drawing increased attention. A new emphasis on state investigations and correcting misclassification of workers is drawing concern for labor and employment lawyers. A prime example is FedEx Ground, which has faced a wave of litigation by current and former driver-contractors challenging FedEx's classification of the drivers as independent contractors.
On February 1, President Obama released his federal budget for the coming fiscal year, including $117 billion for the United States Department of Labor (DOL), of which $25 million was set aside expressly to help combat employee misclassification. This includes identifying and litigating against employers who categorize workers as independent contractors when, in fact, they are employees. The DOL will use much of these funds to hire hundreds of new investigators and other enforcement staff, creating heightened vulnerability for employers.
Classifying a worker as an independent contractor has a definite appeal for the contracting party (employer) and the service provider (independent contractor), particularly in difficult economic times. Plaintiffs' lawyers and management attorneys have reported a surge in misclassification lawsuits.
Benefits to the employer include decreased payroll tax obligations, freedom from minimum wage and overtime requirements, no medical insurance or retirement benefits costs, and other administrative savings. Advantages for the independent contractor include flexibility, more money up front, and tax benefits unavailable to employees, including deducting legitimate business expenses.
Classifying a worker as an independent contractor removes almost all employment rights created by federal and state law to which employees are entitled. Thus, behind the financial benefits of an independent contractor arrangement lies a minefield of possible liability for the employer. For example, the company that engages a worker as an independent contractor who is later determined to be an employee can be liable for unpaid taxes. Further, as an employee, the worker would be covered by wage and hour laws, and could make a claim for unpaid overtime.
There is no single federal agency or statute that prohibits or regulates employer misclassification. The Internal Revenue Service has final authority for deciding whether a worker is an independent contractor for federal tax purposes, while other federal and state agencies, including the Equal Employment Opportunity Commission and the National Labor Relations Board, have final authority for purposes of the statutes within their jurisdictions.
More significant than federal and state activity is the presence of the plaintiff's bar and a disgruntled independent contractor. Litigation, and ultimately liability, can stem from an injured independent contractor who fails to appreciate that there is no entitlement to workers' compensation until after the relationship sours. Similarly, discontinuing the relationship can give rise to disputes regarding alleged employment discrimination, unemployment compensation, and minimum wage and overtime obligations. A complaint by a disgruntled independent contractor opens the relationship to judicial examination.
Employers can minimize liability by engaging legal counsel to assist in assessing the relationship. Entering into an independent contractor agreement, wherein the independent contractor acknowledges the rights and obligations of the relationship, also provides some protection. Companies should refrain from relying upon industry practice to avoid liability for worker misclassification.
An independent contractor relationship can provide a seemingly win-win financial exchange for both parties. However, ultimately the risk of liability for misclassification lies with the employer. With misclassification suits on the rise, and drawing more attention from authorities, it behooves companies to carefully and thoroughly assess the situation thus avoiding costly misclassification investigations and lawsuits by the DOL.
Originally published in The Miami Herald on February 22nd 2010.
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