independent contracting under attack: navigating the classification & compliance challenge, by...

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INDEPENDENT CONTRACTING UNDER ATTACK:

Navigat ing the Classi f icat ion & Compl iance Chal lenge

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PRESENTED BY

Lor i BrownPresident & COOCompl ianceHRbrown@compl iancehr.com

Tammy McCutchenPrincipal , L i t t lertmccutchen@li t t ler.com

VP, Strategic Solut ionsCompl ianceHRmccutchen@compl iancehr.com

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WHY IS INDEPENDENT CONTRACTING UNDER ATTACK?

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DOL BLOG – JULY 15, 2015

“Misclassified employees are often denied access to the critical benefits and protections they are entitled. Misclassification also generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. It forces workers to pay the entirety of their payroll (FICA) tax. It also tips the scales against all of the employers who play by the rules and undermines the economy.”

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CRITICAL BENEFITS & PROTECTIONS

Overtime Family & Medical Leave OSHA Protection Civil Rights Laws Affordable Care Act Unemployment Insurance Workers Compensation

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THE REAL REASON

• Loss of tax revenue Studies estimate that the federal

government loses between $2.7 to $4.3 billion annually

State studies have shown losses of employment tax, unemployment tax and workers’ compensation premiums

UI Losses WC Losses State Taxes

CA $194 million

OH $100 million $510 million $248 million

IL $54 million $98 million $207 million

MA $35 million $91 million $152 million

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THE IC COMPLIANCE CHALLENGE

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LARGE LIABILITIES

The news is filled with stories about companies paying millions in back wages to misclassified independent contractors.

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UNDER MULTIPLE FEDERAL & STATE LAWS

Taxes

Workers Comp

BenefitsOvertime

Unemployment

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COMPLEX RULES

IRS 20-Factor Test

FLSA Economic Reality

Test

Common Law Test

"ABC" Test

Federal law alone has three different tests for IC status

Layered on top of these, states often have different tests for different laws

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PRESSURE FROM ALL SIDES

Federal agencies, state agencies, unions and other employee advocates focused on stopping “wage theft”

A Perfect Storm

IRS

DOLStates

Agencies

Unions

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IC MISCLASSIFICATION: USDOL’S #1 ENFORCEMENT PRIORITY

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U.S. DEPARTMENT OF LABOR

2016 Budget RequestDOL seeks additional staff and a higher budget for enforcement

300 new investigators$31.7 million increase

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MISCLASSIFICATION INITIATIVE

Directed investigations in industries DOL views as frequently misclassifying employees as ICs.

In FY 2014: 44% of investigations were

directed (as opposed to responding to a complaint)

DOL collected $79 million in back wages for 109,000 employees

Child Care Construction Home Health Care Janitorial Landscaping Poultry and Meat Processing Professional and Personnel

Services Transportation and

Warehousing

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AGREEMENTS WITH STATE AGENCIES

DOL has agreements to share information with the IRS and 26 states

www.dol.gov/whd/workers/misclassification/

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NEW DOL GUIDANCE ON INDEPENDENT CONTRACTORS

www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm

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DOL CONCLUDES: “MOST WORKERS ARE EMPLOYEES”

“In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor.”

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ECONOMIC REALITY TEST

• Under the FLSA, an individual is an employee if, as a matter of economic reality, an individual is dependent on the alleged employer

• In contrast, independent contractors have economic independence and operate a business of their own

• Courts have adopted a six-factor test of economic dependence, and no single factor is determinative

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THE SIX FACTORS

1. Integration – An IC does not perform work that is integral part of the employer’s business

2. Profit & Loss – An IC’s managerial skill can affect the opportunity for profit or loss

3. Investment – An IC makes a significant investment in his or her own business

4. Skill and Initiative – An IC performs work that requires special skill and initiative

5. Length of the Relationship – An IC does not have an ongoing or permanent relationship with its clients

6. Control – A company does not control how, when or where an IC performs the work

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INTEGRATION

• Is the work an integral part of the employer’s business?

• If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. Work performed by cake decorators “is obviously integral”

to the business of selling cakes which are custom decorated

Picking the pickles is integral to the pickle business A worker answering calls at a call center along with

hundreds of others is performing work integral to the call center’s business

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PROFIT OR LOSS

• Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? An IC’s decisions to hire others, purchase materials and

equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job.

On the other hand, the worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and do little to separate employees from independent contractors

The effect on one’s earnings of doing one’s job well or being technically proficient is unrelated to an individual’s ability to earn or lose profit via his managerial skill

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INVESTMENT

• How does the worker’s relative investment compare to the employer’s investment? An independent contractor typically makes investments that

support a business as a business beyond any particular job. The investment of a true independent contractor might, for example, further the business’s capacity to expand, reduce its cost structure, or extend the reach of the independent contractor’s market.

The worker’s investment should not be relatively minor compared with that of the employer.

Investing in tools and equipment is not necessarily a business investment or a capital expenditure that indicates that the worker is an independent contractor.

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SKILL AND INITIATIVE

• Does the work performed require special skill and initiative? A worker’s business skills, judgment, and initiative, not

his or her technical skills, will aid in determining whether the worker is economically independent.

The fact that workers are skilled is not itself indicative of independent contractor status. Even specialized skills do not indicate that workers are in business for themselves.

The technical skills of cable installers, carpenters, construction workers, and electricians, for example, even assuming that they are special, are not themselves indicative of any independence or business initiative. 

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LENGTH OF RELATIONSHIP

• Is the relationship between the worker and the employer permanent or indefinite? Permanency or indefiniteness in the relationship with the

company suggests that the worker is an employee. An independent contractor typically works one project for

a company and does not necessarily work continuously or repeatedly for an employer.

However, a lack of permanence or indefiniteness does not automatically suggest an IC relationship. The reason for the lack of permanence or indefiniteness should be carefully reviewed to determine if the reason is indicative of the worker’s running an independent business.

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CONTROL

• What is the nature and degree of the employer’s control over the work? The worker must control meaningful aspects of the work. The control must be more than theoretical—the worker

must actually exercise it. Exercising control due to the nature of the business,

regulatory requirements, or to ensure customers are satisfied still indicates that the worker is an employee. 

The “control” factor should not play an oversized role in the analysis. The FLSA covers workers even if the employer does not exercise control if the workers are economically dependent on the employer.

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WHAT IS NEW?

• The worker’s investment should not be relatively minor compared with that of the employer.

• The fact that workers are skilled is not itself indicative of independent contractor status. Even specialized skills do not indicate that workers are in business for themselves.

• A lack of permanence or indefiniteness does not automatically suggest an IC relationship.

• The “control” factor should not play an oversized role in the analysis. The FLSA covers workers even if the employer does not exercise control if the workers are economically dependent on the employer.

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IRS & STATE LAW TESTS

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IRS 20-FACTOR TEST

1. Does the company control when, where and how the IC performs the work?

2. Does the company train the IC?3. Are the IC services integral to the

company’s business?4. Must the IC personally perform

the services?5. Are the IC’s assistants hired and

controlled by the company?6. Is there a continuing

relationship?7. Does the company set work

hours?8. Is the IC working substantially full

time for the company?9. Is the work performed on the

premises of the company?10. Does the company set the order

or sequence of the work?

11. Must the IC submit reports?12. Is the IC paid by hour, week or

month?13. Does the company pay the IC’s

business expenses?14. Does the company furnish

significant tools, materials or equipment?

15. Has the IC invested in facilities?16. Can the IC realize a profit or

loss?17. Does the IC provide substantial

services to multiple unrelated parties?

18. Are the IC’s services available to the general public?

19. Does the company have the right to terminate at will?

20. Does the IC have the right to terminate at will?

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FEDERAL DARDEN TEST

1. The skill required

2. The source of the instrumentalities and tools

3. The location of the work

4. The duration of the relationship between the parties

5. Whether the hiring party has the right to assign additional projects to the hired party

6. The extent of the hired party's discretion over when and how long to work

7. The method of payment

8. The hired party's role in hiring and paying assistants

9. Whether the work is part of the regular business of the hiring party

10.Whether the hiring party is in business

11.The provision of employee benefits

12.The tax treatment of the hired party

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DON’T FORGET STATE LAW

• States have different tests, that may be more restrictive that the FLSA “economic reality” test.

• To be regarded as an IC under a state “ABC” test, all of the following requirements must be met: IC is free from control and direction by the company; Services to be performed by the IC are either outside

the usual course of the company’s business or will be performed outside of the company’s place of business; and

IC is customarily engaged in an independently established trade, occupation, profession or business.

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THE WORST STATE LAW TEST?

And the winner is?

Wisconsin• 9 mandatory

requirements under workers comp law

• Under unemployment law, the IC’s work must be free from control by the company, plus an additional 6 out of 9 requirements must be met

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NAVIGATING THE CLASSIFICATION & COMPLIANCE CHALLENGE

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FEELING OVERWHELMED?

• Relying on the IRS 20-factor test alone is not sufficient to avoid liability

• Difficult to keep track of all the different tests

• More difficult to predict how the IRS, DOL, NLRB, a state agency or a state or federal court will apply the tests to the IC relationship

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BEST PRACTICES

• Be informed – understand the legal landscape of federal and state laws under all statutes

• Follow the Golden Rules (coming up)

• Make compliance a strategy priority, not an afterthought

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OUR SOLUTION

• Introducing CHR Navigator IC• An intelligent web-based

application covering all tests in all U.S. jurisdictions

• Based on Littler’s unparalleled experience and knowledge

• Powered by Neota Logic’s Revolutionary expert system software

• www.compliancehr.com

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COMPREHENSIVE, INDIVIDUALIZED ANALYSIS

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EXPRESS ANALYSIS – DONE IN AS FEW AS FIVE QUESTIONS

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JUST-IN-TIME HELP

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INSTANT RESULTS

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RISK BY JURISDICTION

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AUDITABLE REPORTS

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10 GOLDEN RULES

1. Never engage a former employee as an IC

2. Never engage an IC who was an employee anywhere within the last 18 months

3. Never be an IC’s first customer

4. Never engage an IC to perform the same work as employees

5. Never prohibit an IC from working for other companies

6. Never provide training to an IC

7. Never attempt to control how, where or when work is performed

8. Never provide tools or equipment

9. Never reimburse for business expenses

10. Never convert an IC to an employee

© 2 0 1 5 C o m p l i a n c e H R . A l l R i g h t s R e s e r v e d .

L o r i B r o w nPres iden t & COO

Compl ianceHRbrown@compl iancehr.com

Ta m m y M c C u t c h e nVP, S t ra teg ic So lu t ions

Compl i anceHRmccutchen@compl iancehr.com