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Employee Misclassification: New Scrutiny Of An Old Problem

November 02, 2010 BY Def Admin

       The Employee Misclassification Prevention Act (H.R. 5107, S. 3254), or “EMPA”, was introduced in the United States Senate and House of Representatives on April 22, 2010 by sponsors, Representative Lynn Woolsey of California and Senator Sherrod Williams of Ohio.  If passed, this legislation would amend the Fair Labor Standards Act to make the misclassification of employees as independent contractors a violation of federal law. The law would require companies to keep record of nonemployees who work as independent contractors and to provide special penalties for misclassifying workers.  Perhaps motivating the introduction of the bill, it is believed that the recession has resulted in increased instances of misclassification by employers who are attempting to save money on payroll taxes and other benefits while operating accounts are lean.  Of course, the problem of misclassification is not a new one for employers.  However, this proposed law, along with an increased scrutiny of the issue seen in other venues, will certainly result in more grey hairs for employers and insurers.

             Similarly highlighting the new attention being given to the issue, Seth Harris, the Deputy Secretary of Labor, has stated that the issue of misclassification is one of the Obama Administration’s top employment-related priorities.  Doing their own part to root out the alleged abuse of the independent contractor designation, the U.S. Department of Labor and Internal Revenue Service recently set out on a new plan to address the issue of misclassification in a variety of target industries.  The Department of Labor’s Wage and Hour Division identified the following key industries of focus for their increased investigation: construction, janitorial, home health care, child care, transportation and warehousing, meat and poultry processing, and other professional and personnel service industries.  DOL has budgeted $25 million for the year 2011 to address misclassification.  This includes $12 million to increase enforcement of wage and overtime laws in cases where employees are misclassified, and also provides for the addition of 90 new investigators.  DOL has also stated that they will be working in tandem with other federal and state agencies to coordinate enforcement strategies.  Included in this coordinated attack, the IRS plans to conduct random employment tax audits on 6,000 employers over a three-year period which began February.

            Of course, there is no guarantee that the EMPA will pass, or that all of these agency actions and political rhetoric will amount to significant changes for most businesses with regard to use of independent contractors. However, these recent movements certainly underscore that employers are wise to carefully consider such arrangements.  Certainly, even prior to this recent press, employers and their insurers were well familiar with what is now a very old problem: designation of a worker as an independent contractor does not necessarily alleviate the obligations of the employer or insurer.  Instead, when push comes to shove, a court or government agency may well find an individual was an employee rather than an independent contactor, based upon their own analysis of the worker’s duties and the work agreement.

            What has made the analysis of worker classification so difficult is the absence of any reliable criterion for determining with assurance whether an individual is an independent contractor or employee.  Rather, at common law there developed an extensive ‘laundry list’ of potential factors to be examined.  These factors included: whether or not there was a contract reflecting the intent of the parties, the degree of control an individual exercised over the time, manner and method of his or her work, whether the individual was paid by the unit of work versus a unit of time, whether the individual performed work for a short or longer period of time, whether there was an agreement establishing a definite beginning and end of the period of employment, whether the individual furnishes his or her own tools and equipment, the level of expertise required to perform the work, whether the individual sets his or her own hours, whether he or she has autonomy to control their own employees, the existence of a separate and distinct business operated by the contractor, the withholding of taxes or tax filing declaration, and whether or not additional work would result in additional pay for the worker. Of course, the laundry list was problematic as a result of the great number of potential factors which could be examined, but also because courts or agencies could seemingly choose to place more or less value on any given factor at their own discretion.  Not surprisingly, this has resulted in inconsistent and unpredictable decisions.

            With regard to this uncertainty, there may at least be some trend toward a simpler analysis.  Some practitioners now suggest that DOL and other agencies will be employing the ‘control test’ more than any other common law factor.  To this extent, while it will still be prudent to have a written contract, it will be more important for employers to give their contractors freedom over their own work.  This means less management is better when it comes to setting hours for the work day and allowing greater freedom over the method and manner in which the work is performed.  Of course, this must be balanced against the employer’s need to ensure that quality and timely work are being performed by their contactors.  Moreover, employers are still advised to keep a file for their contactors including any documentation regarding the employment agreement, tax filings and certificates of incorporation and insurance provided by the contactor at the outset of the contract.  And finally, when there is doubt regarding the nature of a workers’ classification, the employer or insurer is wise to consider that in many settings, the benefit of the doubt will often be given to the worker when it comes to determining their entitlement to benefits.  Thus, where there is doubt, legal consultation may be the best course for preventing any penalties.

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley
(Editor-in-chief)