Are They Really Independent Contractors?

(The following information was derived from BLR HR Updates May 21 and 22, 2008)

These days, organizations frequently try to increase their workforce flexibility and decrease their benefit costs by hiring independent contractors to do required work.

All well and good … unless a court later determines that while you’re calling such workers independent, you’re really treating them as employees. In that case, and as names as famous as Microsoft have learned the hard way, penalties can be severe.

Often the issue revolves around how much control employers exercise over these workers’ job activities. The more control, the more likely the worker is actually an employee.

This point was highlighted recently in a case described by attorney Michael Curtis on the website, Mondaq.com. The case helps in understanding the reasoning that must be used in determining how “independent” workers are. (Curtis is with the California law firm of Thelen Reid Brown Raysman and Steiner LLP).

The facts were these:
Threatened with unionization of his drivers, a cab company owner contended that they were independent contractors and, thus, not a collective bargaining entity, because:
–They paid a fixed rental fee for the cabs.
–They didn’t have to account for fees or tips.
–They had no set work hours or minimum work requirements.
–They received no benefits and no tax or social security was withheld from pay.
–Lease agreements openly stated that the drivers were independent contractors.

Independent contractors, right? Not so fast. The court held that while all the above was true, the drivers also suffered a “lack of entrepreneurial freedom” (i.e. the chance to make money on their own).

The evidence:
–Drivers could only use cabs to respond to the cab company’s dispatches.
–They were prohibited from distributing private business cards and could not accept calls for service on their cell phones.
–They had to comply with company policy on how they drove and dressed, and they were subject to company discipline.
–They had to carry ads in their cabs that generated revenue for the company, but not for the drivers.
–Drivers were required to take more training than was legally mandated.

Taken together, those facts indicated that the company had a significant amount of control. This led the court to conclude that the cabbies did not have entrepreneurial freedom. And that, said the court, meant they were employees.

What the DOL Says
The U.S. Department of Labor (DOL) states that, under the Fair Labor Standards Act (FLSA), the employer-employee relationship is tested by “economic reality” rather than “technical concepts.” So just words in a leasing agreement, or a “little bit of independence” isn’t enough to classify someone as an independent contractor.

Furthermore, the U.S. Supreme Court has, on a number of occasions, indicated that there is no single test for determining whether an individual is an independent contractor under the FLSA. It’s instead the total activity or situation that defines. Besides the control and entrepreneurial freedom issues mentioned above, courts consider:

– The extent to which the services rendered are part of the principal’s business
– The permanency of the relationship
– The amount of the alleged contractor’s investment in facilities and equipment
– The amount of initiative, judgment, or foresight required
– The degree of independent business organization and operation

Bottom line on all of this: Before you seek the advantages of calling your workers independent contractors, consider their total situation carefully. And remember, it’s not what you call them that may count in the end.

The U.S. Department of Labor (DOL) points out the following particular problem areas for employers when it comes to determining whether a worker is an employee and, thus, is eligible for protections under the Fair Labor Standards Act (FLSA), or is an independent contractor, and therefore not covered under the FLSA. (And note that when DOL identifies problem areas, that usually means they’re keeping a keen eye on anyone in these situations.)

1. Construction. DOL notes that in the construction industry, many builders hire “so-called independent contractors,” who in reality should be considered employees because they do not meet the government’s tests for independence.

2. Franchises. Franchise arrangements can pose problems in the independent contractor arena as well. Depending on the level of control the franchisor has over the franchisee, workers may be considered to be employed.

3. Volunteers. A person employed by a for-profit organization cannot “volunteer” to perform the same services he or she performs as an employee. (Of course, DOL says, individuals may volunteer their services to religious, public service, and nonprofit organizations without contemplation of pay, and not be considered employees of such organizations.)

4. Trainees. Trainees, interns, or students may also be employees, depending on the circumstances of their activities for the employer. Are they doing the same work that regular employees do, as opposed to tasks that help them learn? They might then be considered employees.

5. Homeworkers. People who perform work in their own homes are often improperly considered to be independent contractors. FLSA covers such home workers as employees, and they are entitled to all benefits of the law.

HR Discussion:
One category not listed above that should be considered is sales. Many employers errantly believe that sales people can be classified as independent contractors. In most cases it comes down to an issue of control. If an employer demands total loyalty, and by that we mean prohibiting the sales person from selling other products it’s a good bet that sales person isn’t a qualified independent contractor.

Please contact the A Plus Benefits Human Resource Department if you have any concerns that you might have employees that are misclassified. A Department of Labor audit that occurs because of misclassification is time consuming and potentially very expensive.

It is our desire to assist our clients with being in full compliance with Department of Labor regulations. It is our goal to help you get back to business.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.

None of us are perfect. No matter how hard we try, weird things creep into the workplace.

Below, Scarlett Pruitt, brings to light 10 Signs of a Dysfunctional Workplace. I’ve added some comments because it’s great having the last word.

Can you see anything below that resembles your workplace?

1. Nothing can get done without the boss’s approval. Empower your organization by delegating, says Pruitt. There’s not much CEO work going on if the boss has to sign off on every little thing. And there’s a corollary …

1a. To get things done, you have to hide them from the boss. Now you know you’ve got a situation that is going to end badly.

The “Boss” sets the course and keeps the boat going in the right direction. If the boss can’t trust those whom he has hired to make daily decisions and when work is being done “in the dark” it won’t be long before employees will begin to abandon the ship. In short, the boss must allow people to do what they were hired to do. Bosses who micro-manage are not being efficient.

2. Who is the boss? The structure may be clear on paper, but no one knows who really makes the decisions. Everybody benefits from clarifying decision-making responsibilities.

An “empowered” employee must be allowed to use the power/responsibility that has been delegated to the individual. When a person is empowered by the boss and then not allowed to use the authority given, the message that is sent is…I don’t trust you, I’m afraid you’ll make a mistake. And the biggest mistake…the boss not trusting the employee.

3. Do-nothing meetings. If a meeting has no agenda or just rehashes previous discussions, axe it. And again, a corollary:

3a. IMing during meetings. Meetings are for brainstorming and discussing, not “snarky IM conversations,” says Pruitt. “Pull the plug” on cell phones.

I once worked for a company that became famous for the muffins that were served at meetings. I didn’t have to worry about breakfast or lunch because I knew that I was going to be in at least 2 meetings during the day where muffins would be the most important thing at the meeting. Some very successful companies have meetings standing up (get ‘er done). Use an agenda, if there is nothing on the agenda, cancel the meeting.

4. Cubicle co-workers IM instead of talking. Some topics require face-to-face discussion. Arrange some meetings (but don’t forget rule number 3.)

Please do some interactive things between departments. Allow employees the opportunity of building some interdepartmental relationships. And remember, if your department managers do not have good working relationships with other department managers you have an obstacle that is preventing your business from being great. The Boss must provide opportunities for department managers to build relationships. And Boss…never talk poorly about a department manager to another department manager, keep your complaints about department managers within your executive group.

5. There’s more than one “secret couple” around. They usually don’t stay secret for long, and tension and drama (and lawsuits) result if there is perceived favoritism. Write a policy and enforce it.

Those with authority can never date subordinates. You might know of some isolated examples of manager-subordinate relationships working out. However, the chance of this kind of relationship going bad is huge. Don’t allow it. As said above, make a rule against this kind of thing and enforce it.

6. IT rules are so tight that you’re not told your own password. Tech security is important, but there are limits. Find a reasonable middle ground.

How many hoops do your employees have to jump through to do their job? If your IT Department requires employees to dig tunnels, climb walls and break down metal doors to just start working, way too much time is being wasted. If nothing can get done without the IT Department being involved, you’ve given too much authority to IT and in fact IT is running the business. That’s not going to work long term.

7. There’s a “wall of shame” where employee mess-ups are posted and highlighted for the entire world to see. “Rewards should be public, but chastisement should be private,” Pruitt says.

Okay, do you want to instill fear into every employee? Just punish an employee in public and you’ll have every one afraid that they are next. If you have a manager who believes it’s effective to punish in public you are on the course to a law suit. A good manager does not make himself look big by making his staff look small. If someone in your organization is doing this, demand a change or find a new person who will not manage with fear.

8. The boss screams at staffers, for example, when there’s skim milk instead of half-and-half for the coffee. Authority should never be used to bully or intimidate. Counsel or call in the consultants.

Management rule #1 - Never yell unless the building is on fire.

9. Everyone has 10 weeks of accumulated vacation because no one can take a day off. “People are not machines,” says Pruitt. “Encourage them to take vacations, or they are likely to walk out one day and not come back.”

You know what all work and no play does to “Jack.” Of course there are times when you need all hands on deck. A special project, an emergency, etc. Time away from work is important. Want to impress an employee with how much you appreciate the person? Give the person an extra day off now and then. Send a group to the movie, close the shop for the afternoon and take everyone to the movie. The hero will be the person that showed appreciation to the staff, not the high priced actor on the screen.

10. What matters is not what you get done, but how many hours you are seen “working.” Don’t be impressed by the person who arrives early and leaves late just for show. Reward productivity, not hours, says Pruitt.

In order to know who is getting it done you have to go out and see it for yourself. The best thing a manager can do is to get out from behind the desk and go do the work with the staff. Give your employees an opportunity to show you what they can do, the result of spending time with staff is that they will show you a better way to get it done, ignore them and they will eventually go show the competition a better way to get it done.

Randall Barker is the VP of Human Resources at A Plus Benefits, Inc.