MISCLASSIFYING EMPLOYEES AS INDEPENDENT CONTRACTORS CAN BE HAZARDOUS TO YOUR BUSINESS HEALTH

Posted: 03/19/2010 in Member Experts
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State and federal agencies are becoming increasingly vigilant in examining independent contractor relationships of businesses.  The State of Michigan and many other states have, at the behest of the federal government, been busy brainstorming ways to locate and inspect the legal relationships workers maintain with companies.  The focus of these efforts is to prevent misclassification of employees as independent contractors because such classifications tend to restrict revenue streams to various agencies and insurance programs operated by governmental entities, including workers’ compensation and unemployment compensation agencies.  To the extent that a business utilizes independent contractors, it would be wise for that business to take a second look at the lawful status of such arrangements to avoid potential liability.

What is at Stake?
A company which misclassifies workers as independent contractors when it should have classified the workers as “employees” under law, is liable not only for unpaid taxes and governmentally mandated insurance premiums (including penalties), but also for any “damages” those workers can demonstrate due to their having been improperly classified. 

Ordinarily, a worker classified as an independent contractor is not eligible for company fringe benefits.  However, such a worker could, upon a showing of improper classification, become eligible for those fringe benefits.  Moreover, the misclassified worker would most likely be allowed to recover past damages calculated from the date the worker began working for the company.  These damages would appear to extend back 6 years, which equates to the statute of limitations on contract damages.   For businesses which have lucrative fringe benefit programs including benefits such as paid time off, stock options, and health insurance coverage, these damages could obviously become quite substantial, especially where the misclassification is widespread throughout the company and the challenge is brought in the form of a class action.

 What Should a Business Do?
Any business which utilizes independent contractors should examine whether or not those workers are truly “independent” workers.  This examination should be undertaken both for workers who individually understand their relationship as that of an independent contractor and for those workers who work for the company through an employee leasing agency.

Over the decades, courts and government agencies have used various specific “tests” when examining independent contractor relationships.  However, all of these tests share the same basic, common sense inquiries.  As a start, a company should ask the following questions:

  • Is the worker part of a business entity separate from our company?
  • Does the worker work for others, or just for our company?
  • If the worker enjoys fringe benefits, are they established by or provided by our company?
  • Is the kind of work performed by the worker integral to our business (i.e., is it the sort of work that would generally be performed by employees)?
  • Can the worker (or other business entity) hire assistants without our involvement?
  • Do our managers control the manner that the work is performed?
  • Does our company provide the tools and equipment to complete the task?
  • Are changes to the work dictated by our company or are they negotiated between us and the worker or business entity?
  • Is the worker paid without opportunity for profit or loss (such as paid hourly) or does the worker have the opportunity for profit or loss on the job (such as paid a contract amount dependent upon completion)?
  • Is the work performed on our company site?
  • Is there an identifiable end to the relationship or is it at will?

Simply put, the more control your company has over its workers, the more likely those workers are to be classified as “employees” under the law.

For assistance in determining whether your independent contractors might be mislabeled and what to do about it, please contact the Masud Labor Law Group, 4449 Fashion Square Boulevard, Suite 1, Saginaw, MI, 48603; (989) 792-4499; www.mpslaborlawyers.com.

About the Author

Kraig M SchutterKraig M. Schutter is a partner with the Masud Labor Law Group.  He earned his law degree from Thomas M. Cooley Law School where he was awarded the Certificate of Merit in Labor Law.  He also obtained his Masters of the Law degree in labor law from Wayne State University Law School.  Kraig has vast experience consulting and representing clients in wage and hour concerns, union contract administration, grievance arbitrations, implementation and application of personnel policies, and compliance with the numerous federal and state labor and employment laws.

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Comments
  1. Jim McGuinness says:

    Kraig – no doubt you will field plenty of inquiries from employers who want to use the “independent contractor” ruse to avoid the cost of group medical insurance required by the PPACA. This could be a very expensive mistake once it is uncovered in a DOL audit. We should have plenty of examples once the regs kick in for you to use as exhibits.

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