Daniel R. Levine is a shareholder with the Boca Raton, FL-based law firm of Shapiro, Blasi, Wasserman & Gora, P.A.
The confusion may stem from greed, ignorance of the law, or a combination of the two in what basically amounts to a desire for a simple working relationship. These factors result in workers being classified as independent contractors even though the law may treat them as employees.
This tug of war between laborers and management is ongoing and one that is prevalent in many industries, perhaps, in part, due to the volatile and cyclical nature of the business. Many companies simply may not want the responsibility of having, for example, 10 roofers on the payroll with little work on the horizon.
The abuse of this designation runs much deeper, however. Management sometimes classifies workers as independent contractors simply because they don't want to offer health insurance, vacation or sick pay, and other benefits. Likewise, companies may wish to cut costs, such as payroll taxes and Social Security.
Oftentimes the abuse may go unreported simply because both parties are pleased with the relationship. Problems, however, surface when a disgruntled worker classified as an independent contractor files a lawsuit claiming, for instance, entitlement to overtime pay. The consequences that flow from this can have far-reaching and significant financial effects on a business because of the employee-friendly and penalizing nature of the law governing cases of this kind.
Once this type of dispute enters the court system, it frequently becomes clear that neither the worker nor the company clearly understood the legal definition of "independent contractor."
The legal penalties can be stiff and often involve the company paying back overtime wages, double-damage penalties, court costs, and attorney's fees. Additionally, these cases can turn into collective actions, involving more than just the one worker who was misclassified. Consequently, it is advisable for all companies to consult with legal counsel before entering into this type of relationship because the legal test for independent contractors may be very different from what they imagine.
To determine if a worker is an employee or an independent contractor not covered by the overtime law, courts apply the "economic realities" test, evaluating the following non-exclusive factors:
the nature and degree of control of the workers by the alleged employer
the alleged employee's opportunity for profit or loss depending upon his or her managerial skill
the alleged employee's investment in equipment or materials required for his or her task or his or her employment of helpers
whether the service rendered requires a special skill
the degree of permanence of the working relationship
whether the service rendered is an integral part of the alleged employer's business
While the courts consider these factors, keep in mind that most cases are determined on a case-by-case basis, depending on the "totality of the circumstances" (the whole picture).
One key factor is whether an employee is generally subjected to the business's instructions about when, where, and how to work, such as those regarding:
when and where to do the work
what tools or equipment to use
what workers to hire or to assist with the work
where to purchase supplies and services
what work must be performed by a specified individual
what order or sequence to follow
The more "controls" imposed on a worker, the more likely it is that the courts will not see the worker as an independent contractor.
Additionally, independent contractors aren't likely to be reimbursed for expenses. In most cases, expenses are part of the pricing of the job. These expenses could include mileage, materials, gas, etc. Employees typically are reimbursed for these types of costs.
Moreover, an employee usually has no investment other than his or her time. It is expected that independent contractors will have invested in machinery, tools, and materials.
True independent contractor relationships should be memorialized by a written contract defining the scope of the job and the duration of the relationship. However, the facts that a written contract exists and, similarly, that the worker is paid as a 1099 worker do not ensure that the worker will be treated as an independent contractor under the law.
Also, if a company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
Most significantly, beware of covenant not to compete clauses in agreements. While it may be possible to justify a non-compete in certain circumstances, oftentimes this is looked at as evidence that the worker is economically dependent on you, evidencing an employee relationship more so than an independent contractor.
Finally, there also may be IRS implications separate and apart from lawsuits for overtime and the like. And while the IRS looks at some of the same factors as the courts, the test is not necessarily the same.
There's no question that companies can save significant funds by using independent contractors — when the designation is applied accurately and legally. But it's certainly worth the time and money to make sure the method of hiring, controlling, and compensating is consistent with guidelines that are considered when these relationships enter the legal arena.
About the Author
Daniel R. Levine is a shareholder with the Boca Raton, FL-based law firm of Shapiro, Blasi, Wasserman & Gora, P.A. He is a Florida bar board-certified labor and employment law specialist, concentrating his practice on the litigation and defense of labor and employment law disputes, as well as on preventive labor relations, including employment training and drafting of employee handbooks, agreements, and covenants not to compete.
Levine received his Bachelor of Arts degree from the University of Florida and his Juris Doctor cum laude from the University of Miami School of Law. For more information, call 561-477-7800 or visit www.sbwlawfirm.com.
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