Administration to crack down on independent contractors: are you ready?

June 10, 2010

In light of widespread budget deficits, state and federal officials plan to start aggressively pursuing companies that try to pass off regular employees as independent contractors.  One study reportedly concluded that employers illegally classified 3.4 million workers as contractors.  The U.S. Department of Labor has estimated that up to 30 percent of companies misclassify employees.  Given these staggering numbers, President Obama’s 2010 budget assumes that the federal crackdown will yield an estimated $7 billion over 10 years.  To recover these proceeds, the Obama administration reportedly plans to expand federal investigations of employers by hiring 100 more enforcement personnel.  According to several sources, the I.R.S. has also begun to audit approximately 6,000 companies to determine whether they are in compliance with various laws.  In addition, many states appear to have increased enforcement against companies who misclassify workers as independent contractors.

What’s the incentive to classify a worker as an independent contractor?

So why would a business want to classify a worker as an independent contractor, rather than a regular, full-time employee?  The answer is simple: because it’s cheaper.  The distinction between employee and independent contractor affects a wide variety of a company’s legal rights and obligations, including liability for Social Security taxes, the right to workers’ compensation benefits, and the employer’s vicarious liability for tortious acts.  The distinction may also affect a company’s obligation to comply with minimum wage and overtime laws governed by the Fair Labor Standards Act, as well as a worker’s eligibility for benefits under any employee benefit plans provided under the Employee Retirement Income Security Act (“ERISA”).

Absent evidence to the contrary, Texas presumes workers are employees.

Under Texas law, the fact that a worker performs services peculiar to the employer’s business creates a presumption that the relationship is one of employer and employee, absent evidence to the contrary.  Therefore, should a worker’s employment status ever be challenged, the employer will have to show that the scope of the relationship is one of an independent contractor, and not an employee.

Although various factors are considered when determining whether a worker is an employee or an independent contractor, the critical factor is whether the employer has the right to control the details of the work.  In an employment relationship, the employer controls both the end sought to be accomplished and the employee’s means and details of performing the work as well.  On the other hand, an independent contractor is one who undertakes work for an employer and chooses the method of performing the work, without submitting to the employer’s control of the details.

If there is no express contract or the contract is indefinite as to the right of control over the details of work, an employer’s actual exercise of control over the details of work is relevant, but not necessarily controlling, evidence on the issue of whether a worker was an employee or an independent contractor.  Common examples of the type of control that an employer typically exercises include when and where to begin and stop work, the regularity of hours, the amount time spent on particular aspects of the work, the tools and appliances used to perform the work, and the physical method or manner of accomplishing the end result.

Although the right of control over the worker is an important factor to determine the status of a worker, no single feature of the relationship is determinative of whether a worker is an employee or an independent contractor.  However, at least the following factors been weighed by courts to determine whether a worker is an employee or an independent contractor:

  • The extent of the employer’s control over the details of work other than the final results under the agreement;
  • The actual control exercised by the employer;
  • The kind of occupation involved and whether the work is usually done with the employer’s supervision;
  • The skill required of the worker;
  • Whether the employer is or is not in business;
  • The employer’s ability to discharge the worker;
  • The permanency of the relationship;
  • Whether the worker supplies the instrumentalities of work such as the tools, supplies, materials, and place of work; and
  • The method by which the worker is paid.

Since the determination of whether an individual is an employee or an independent contractor is based on the facts of each case, companies should carefully review each of the above-referenced factors to properly classify independent contractors.  If your company is not absolutely sure whether it has properly classified workers as independent contractors, you should consider hiring an employment lawyer to audit your workforce and help you properly designate workers as employees or independent contractors.

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