Independent contractorsAri Karenmisclassification, class action lawyers and government regulators
Once the solution, now a vulnerability
Employers over the years have relied on the independent contractor
classification, in part to avoid a host of obligations to employees
under state and federal laws. Indeed, the independent contractor
classification allows employers to avoid payment of employment
taxes, unemployment and workers' compensation premiums, minimum
wage and overtime pay, while also rendering various discrimination,
union, immigration and employee benefits laws inapplicable. In
essence, the independent contractor classification has been used as
a cure-all, enabling employers to avoid a myriad of difficult and
potentially expensive statutes and regulations.
Unfortunately, class action lawyers and government regulators
have more than caught on to this problem-solving concept. Class
actions alleging misclassification and seeking millions of dollars
in back pay and benefits are now commonplace. States such as New
York, Connecticut and New Jersey have initiated formal task forces
and passed stricter laws to investigate and punish employers as a
means of deterring misclassification. Federal authorities have also
placed an emphasis on punishing employers. In fact, recent state
and federal legislation and enforcement actions have now attempted
to impose criminal sanctions on employers, including imprisonment,
for immigration violations, tax evasion and even money laundering,
all of which could be utilized to attack improper
misclassification.
Furthermore, it is no longer as easy as having both parties
agree to an independent contractor classification for it to apply.
In recent years, courts have ruled that the parties' agreement to
create an independent contractor relationship is "completely
irrelevant." Instead, courts have decided that the independent
contractor classification is dependent upon an analysis of
"economic realities" such as the employer's control and
supervision, the employer's payment of expenses and the worker's
assumption of risk and incurring of expenses. Courts also look to
the ability of contractors to maintain numerous clients
simultaneously, as well as to whether the worker is carrying on the
core duties of the employer's business. While not specifically
enumerated as a factor in the analysis, a distinction between the
worker's terms of service as opposed to those of actual employees
is often critical, as is avoiding having contractors supervise
employees or relying solely on contractors to perform the
employer's operations. Hence, it is essential for employers to
carefully analyze and assess the basis and circumstances of their
classification of certain individuals as independent
contractors.
Fortunately, employers need not abandon the independent
contractor classification altogether, as long as it is used wisely.
In many cases, minor modifications to the form of the relationship
will render the classification lawful without substantially
affecting the substance of the relationship. Similarly, carefully
drawn contracts can establish not only the basis of the
classification, but also serve as substantial evidence in support
of it. Proper constraints on its use can frame the relationship in
such a manner as to make it presumptively lawful. In short, with
correct guidance, employers can still use the independent
contractor classification; however, they must rely upon well
drafted contracts and implement such contracts in a prudent and
reasonable manner.
Failure to do so can be more expensive to an employer than
simply paying fines, penalties or damages. It may also result in
criminal sanctions. Hence, employers who wish to maintain the
independent contractor classification should only do so after
analyzing and implementing the classification in a well planned and
deliberate manner.
Ari Karen is a partner with Washington, D.C.-based Venable LLP, a law firm
specializing in corporate and business law. He may be reached at
(202) 344-4649 or e-mail
[email protected].
