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.