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Building multiple bridges to greater opportunity

National Mortgage Professional
Oct 19, 2007

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 akaren@venable.com.
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