independent contractor or employee? avoiding worker misclassification confusion

babc.com ALABAMA I DISTRICT OF COLUMBIA I FLORIDA I MISSISSIPPI I NORTH CAROLINA I TENNESSEE

Independent Contractor or Employee? Avoiding Worker Misclassification Confusion

Wednesday, October 7, 201511:30 a.m. – 12:15 p.m. CDT

Bruce Ely, John Hargrove, Summer Austin Davis

© 2015 Bradley Arant Boult Cummings LLP

Agenda Three-part program today

BABC tax partner Bruce Ely will review current tax issues relating to independent contractors and provide practical pointers

BABC labor and employment partner John Hargrove will review employment and employer-liability issues involving independent contractors

BABC labor and employment attorney Summer Davis will discuss best practices as relates to employee classifications


Tax Issues

Bruce Ely, presenting


Tax Issue Overview IRS’s early 20-factor test, the Revenue Act of 1978’s

“safe harbor,” and the IRS’s latest Voluntary Compliance Settlement Program

IRS’s coordinated efforts with state tax and labor agencies

Federal concerns for the employer, including Title VII (and related acts), the FLSA, the Affordable Care Act, benefit plans, and the new paid sick leave mandate

State concerns for the employer, including Workers’ Compensation, Unemployment Insurance, State Anti-Discrimination Laws, and more…


Federal and State Priorities

USDOL (Congress) and IRS made worker misclassification issues a high priority/target several years ago

States also realized money being lost to misclassification – became a priority

Point: It is now a priority at multiple levels!!!


Employee v. Independent Contractor

Common law test• Variety of factors• Key Issue: Control• Who controls method and result?

Can differ in different settings• Each federal agency• Each federal circuit court of appeals• Each state/state agency

IRS Independent Contractor Test• Key element still is control• Historical test - the 20 factors • The new test


Employee vs. Independent Contractor

Importance of Proper Worker Classification

• Federal Tax Ramifications

• State Tax Ramifications

• Potential Class Actions

• A Few Recent War Stories

• Possible State Legislative Efforts


Employee vs. Independent Contractor

Employment Tax Issues

• Withholding• Internal Revenue Code Definition• Regulatory Definition


Employee vs. Independent Contractor: What’s the Test for Tax Purposes?

Testing Worker Classification – FourTests

• The Common Law Test• The Newer IRS Test• Federal Statutory Provisions• State Statutes


IRS 20-Factors Instructions Hiring, supervising,

and paying assistants Continuing

relationship Set hours of work Full-time required

Training Doing work on a hiring

party’s premises Order or sequence set Oral or written reports Payment by the hour,

week, or month


IRS 20-Factors – continued

Payment of business or travel expenses

Furnishing of tools and materials

Significant investment Realization of profit

and loss Working for more than

one firm at a time

Services available to public

Right to discharge Hired party has right to

terminate Integration Services rendered

personally



Key: "Right to Control”

Dual Status Individuals• Insurance Agents• General Rule

Automatic Employees• Corporate Officers


IRS Simplified Test – 3 Areas Behavioral Control

• Instructions from business to worker• Training business provides to worker

Financial Control• Reimbursement of business expenses• Worker’s investment• Services available to relevant market• How worker is paid• Realization of profit or loss

Type of Relationship• Written contract• Benefits provided• Permanency of relationship• Services are key aspect of business



Form SS-8

• Review vs. audit• Beware the use of this form as a weapon by

former/unhappy contractor(s).• Guess how often the applicant is “found” to be an

employee?


Section 530 Relief

Statutory Rules

Additional Rules

Exceptions

No Alabama Equivalent


How Does the Affordable Care Act (ACA) Affect Worker Classification?

Section 4980H Excise Tax Penalties- Punitive

Does section 530 relief apply to ACA penalties?

So what if my company was exoneratedbecause of Section 530, not based on theCommon Law Factors?


Voluntary Classification Settlement Program (“VCSP”) In General

Eligibility

• Consistent Treatment• Not Under Audit• New Wrinkle – Disclosure of the Names and SSN’s of

the Target Group Members


Voluntary Classification Settlement Program (“VCSP”)

VCSP Agreements

Application

Waiting on Alabama DOL and DOR to Follow Suit


Recommended Action Convince your clients/company to review their

existing contractor relationships, including thepaperwork (hint, their independent contractoragreement must be consistent, internally andexternally) -- TODAY

Visit with experienced counsel to look atoptions (remember attorney-client privilege)

If at risk, consider VCSP with IRS

Working on ADOR and ADOL VCSP


Labor, Employment, and Employer-Liability Issues

John Hargrove, presenting


Significance of Worker Classification

So how can worker classification impact an employer?

• Status determines employee’s rights and employer’s obligations

• Status impacts rights of third parties


Economic Realities Test United States v. Silk, 331 U.S. 714 (1947)

Identified 5 factors• The degree of control exercised by the alleged

employer• The degree to which the "employee's" opportunity for

profit or loss is determined by the employer• The extent of the relative investments of the putative

employee and employer• The permanency of the relationship, and• The skill and initiative required in performing the job

Some courts add 6th factor:• Whether the service rendered is an integral part of

the alleged employer's business


Empolyment Issue Overview

Federal Discrimination Law

Federal Wage and Hour Law

State Workers’ Compensation Law

Third-party Liability

Miscellaneous Issues

General employee coverage issues


Worker Is Harassed


Federal Antidiscrimination Laws –Claim Issues

Ramifications if employee• Federal (or state)EEOC charge• Subsequent federal court lawsuit• Damage caps (usually)• Discrimination reporting policy defenses

Ramifications if not employee• Negligent hiring or retention• Defenses based upon notice and reasonable

care


Other Federal Employment Laws –Claim Issues (wage and hour)

Ramifications if employee• Pay for all hours worked• Time and a half for overtime• Tax and SS withholdings• Huge attorney fee awards

Ramifications if not employee• Pay according to agreement• None of the typical withholdings


Workers’ Compensation Legislative “contract” between employee and

employer• Coverage regardless of employee “fault”• Rule of exclusivity

Historically can be traced to 2050 B.C.• Law of Ur-Nammu, King of city-state of Ur• Code of Hammurabi around 1750 B.C.• Prussia and Europe had it• Originally lobbied for by employers in US• Wisconsin had it first

Bottom line: If employee, cannot sue in tort


Workers’ Compensation

Alabama uses “reserved right of control test”:

• The reserved right to control the “how” of the work and not just the “what”;

• Actual control of the “how”;• The method of payment;• The furnishing of tools and equipment; and• The right of termination.

One single factor does not control


Worker Seeks Workers’ Comp



Ramifications if employee• Covered by the Act• Payment of medicals, TTD, PPD, PTD

Ramifications if not employee• No coverage for accident• If no negligence, then no recovery at all

except against third parties


Worker Avoids Workers’ Comp



Ramifications if employee• Cannot sue in tort for negligence• No “failure to maintain a safe workplace”• Can sue a “co-employee”• Can sue third parties like outside parties

in the accident or product manufacturers Ramifications if not employee

• Can sue in tort• Pain and suffering• Punitive damages


Worker Injures Third Party


Typical Third-party Issues

Ramifications if employee• Agency or respondeat superior liability• Line and scope issues• Company’s insurance!

Ramifications if not employee• Not direct liability for the wrongdoer• Independent wrong like premises liability• Independent contractor’s insurance!


Miscellaneous issues

Unemployment Compensation• Business must pay the tax• Liability for benefits

Covenants Not to Compete• Do not apply to independent

contractors in Alabama• Must be during employment

relationship


Federal Employment laws -Coverage Issues

Title VI 15 employees ADA 15 employees ADEA 20 employees FLSA 1 employee FMLA 50 employees WARN Act 100 employees


Benefits or No Benefits ACA ERISA benefits are determined by plan definitions

Definitions generally describe eligibility in reference to hours worked (or something similar) per week

• If worker ≠ employee = not eligible• If worker = employee = eligible

Contract issues:• Severance• Sick pay• STD• Vacation


Best Practices

Summer Davis, presenting


Advantages to Employee Relationship

Clarity as to legal obligations Least likelihood of legal challenge Right to control is accepted and

understood Control of training Exclusivity protection under workers’

compensation laws

Presenter

Presentation Notes

Keys = Predictability and Control


Advantages to Contractor Relationship

No liability for third-party injuries (probably) No federal or state tax withholdings No liability for:

• Title VII and other employment laws• ADA obligations• FLSA compliance• Federal Paid Sick Leave requirements• FMLA obligations• NLRA protections• Workers’ Compensation coverage• Unemployment Compensation coverage

Affordability, Adaptability, Flexibility, and Experience/Expertise

Presenter

Presentation Notes

Beware – State antidiscrimination laws and other basis for liability might apply (e.g., iiee for harassment) Affordability: High expenses are associated with office space and the overhead cost of hiring full-time employees. Adaptability: Contract can provide for length of time work will be performed and can be crafted to adjust to staffing/business needs, as opposed to never having enough or having too many staffers on board at inopportune times. Flexibility: Hours/Schedule Experience/Expertise: Company can select experienced Ics, such that training will not be required. Selecting pre-vetted Ics eliminates the time-consuming process of hiring, as well as the costs associated with making a hiring mistake. If you need a short-term specialist, go with an IC. If you need a longer-term generalist, go with an employee.


Increased Scrutiny of “Contractor” Relationships NLRB redefined its standard for

determining joint-employer status. Federal DOL opined that thousands of

workers misclassified as independent contractors under FLSA. OSHA directed inspectors to consider

whether principal employers might be at fault for the safety violations of their subcontractors. Uber, Lyft, Fedex lawsuits

Presenter

Presentation Notes

August 27, 2015 In a 3-2 decision involving Browning-Ferris Industries of California, the National Labor Relations Board refined its standard for determining joint-employer status. The revised standard is designed “to better effectuate the purposes of the Act in the current economic landscape.” With more than 2.87 million of the nation’s workers employed through temporary agencies in August 2014, the Board held that its previous joint employer standard has failed to keep pace with changes in the workplace and economic circumstances. In the decision, the Board applies long-established principles to find that two or more entities are joint employers of a single workforce if (1) they are both employers within the meaning of the common law; and (2) they share or codetermine those matters governing the essential terms and conditions of employment. In evaluating whether an employer possesses sufficient control over employees to qualify as a joint employer, the Board will – among other factors -- consider whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, or whether it has reserved the authority to do so. In its decision, the Board found that BFI was a joint employer with Leadpoint, the company that supplied employees to BFI to perform various work functions for BFI, including cleaning and sorting of recycled products. In finding that BFI was a joint employer with Leadpoint, the Board relied on indirect and direct control that BFI possessed over essential terms and conditions of employment of the employees supplied by Leadpoint as well as BFI’s reserved authority to control such terms and conditions. Specifically, rights reserved by a company in an agreement with a third party supplier of labor services to set specific terms or conditions over workers who provide services can be sufficient control to establish a joint employer relationship with the third party labor supplier – and thereby expose the company to being swept into a union organizing campaign over the workers providing services – even if such rights are not exercised. http://www.washingtonpost.com/news/wonkblog/wp/2015/08/27/labor-board-moves-to-make-businesses-accountable-for-their-subcontractors/?wpmm=1&wpisrc=nl_headlines In June, the DOL unveiled a proposed rule that would expand federal overtime pay regulations and would more than double the minimum salary required to qualify for a white-collar exemption under the FLSA, taking that figure from $455 per week, or $23,660 annually, to $50,440 per year.


How to Manage Risk? Examine the relationship based on the IRS

factors

Every factor

Change what you can to make sure thefactors available are weighted towardscontractor status

Who really has control?

Is there another employer out there otherthan you???

Presenter

Presentation Notes

Who is ultimately responsible? Are there “dual employers” for purposes of certain federal statutes, like Title VII? Insurance?


How to Manage Risk? Always first consider using a corporation or legal business

entity! Written agreements:

• Memorialization of the contractor relationship

• Clear statement of tax obligations

• Company’s obligation to send form 1099

• No benefits like employees receive

• Standard contract termination provisions

• Consider dispute resolution provisions

• Indemnity, indemnity, indemnity

Perhaps consider staffing company or employee leasingarrangement

Live by the agreement(s), and do not start acting like anemployer

Presenter

Presentation Notes

Indemnity!!!!!


Control vs. Distance

Businesses can no longer have their cake and eat it too. To legitimize contractor relationships,

increase distance between parties to the contract. If the relationship is an

employer/employee relationship, minimize risk by exerting control.


Common-sense Cautions Don’t make some workers employees and

others independent contractors doing thesame job Don’t convert employee to independent

contractor doing same thing he/she didbefore Don’t pay by the hour Don’t require uniforms and a little badge

that says “Mike”

Presenter

Presentation Notes

Ramifications: legal costs associated with defending DOL investigations and class action lawsuits, which puts your business at a competitive disadvantage

babc.com ALABAMA I DISTRICT OF COLUMBIA I FLORIDA I MISSISSIPPI I NORTH CAROLINA I TENNESSEE

Independent Contractor or Employee? Avoiding Worker Misclassification Confusion

Bruce Ely, [email protected] Hargrove, [email protected]

Summer Austin Davis, [email protected]