What’s in a name? Classification of independent contractors and employees
Pro Bono Publico
Almost everyone works or has worked for a business, and most businesses will at some point use the services of various classes of workers, including employees and independent contractors.
The classification of a worker is an important matter from a legal perspective, and the onus is mostly on the owners and officers of a business to properly classify workers and follow the laws and regulations relating to the classification. To help us understand the particularities of this area of the law, this month’s column is a Q&A with Anna Itenberg, a local litigation attorney who specializes in employment law and who has graciously offered to answer a few general questions on the classification of workers and the attending legal implications.
What’s the difference between an employee and an independent contractor?
The primary difference is the degree of control that the business exerts over the worker. An employee is subject to the supervision and control of the business. In contrast, an independent contractor performs certain services for the business but maintains a higher degree of control over the means and methods of performing the work. Also, an independent contractor typically offers services to the public at large, not just to the business in question.
Why does it matter?
An employee is protected by wage and hour laws and anti-discrimination statutes and is entitled to statutory benefits such as unemployment compensation and workers’ compensation. These laws generally don’t apply to independent contractors. An employee has a duty of loyalty to the employer. An independent contractor does not.
Independent contractors generally require no training or supervision, no payroll withholdings, and they typically use their own tools and equipment. Once the project for which the independent contractor was hired is completed, the relationship terminates.
Both classifications offer potential benefits and detriments to the business owner.
As far as employees go, what are the key differences between so-called exempt and nonexempt employees?
Under the Fair Labor Standards Act (FLSA), nonexempt employees benefit from certain rights and protections, such as minimum wage and overtime requirements. Nonexempt employees must receive overtime pay for hours worked in excess of 40 in a week of at least one and one-half times their regular rate of pay. These rights and protections do not apply to exempt employees. Therefore, classifying a full-time employee as exempt can be a huge benefit to the employer when the employee frequently works more than 40 hours per week because the employer does not have to pay the employee overtime. On the other hand, subject to certain exceptions, the employer must pay an exempt employee their full salary for any week in which he or she performs any work without regard to the number of days or hours worked.
What determines the classification of a worker? Can a business simply hire workers using a job description that classifies the worker one way or another and be done with it?
Job titles do not determine the classification of a worker. Rather, it’s a facts and circumstances analysis under various state and federal labor laws and court decisions. Unfortunately, there are several different tests, depending on the context, and each test is fact specific.
For example, with few exceptions, to classify an employee as exempt, the employee must be salaried, paid at least $455 per week (although the Department of Labor recently proposed more than doubling the minimum weekly salary amount to $921 per week), and be a bona fide executive or management-level worker, a member of a so-called learned profession, or an outside sales employee.
The factors generally distinguishing employees and independent contractors are discussed above.
What are the consequences of misclassifying a worker?
It depends on the context. Under the FLSA, a worker who is misclassified as an exempt employee or an independent contractor (and who should have been treated as a nonexempt employee) can recover unpaid wages or overtime, plus an equal amount in “liquidated damages” as defined by statute, and attorneys’ fees.
If a business misclassifies a worker as an independent contractor, the business may be subject to income tax liability for various state and federal wage withholdings, state unemployment insurance tax payments, liability for on-the-job injuries, and other civil penalties and fines.
The cost of failing to follow the law in this context usually outweighs the benefits.
When is it advisable for an employer to seek legal counsel with regards to employment issues?
Just like a business lawyer and an accountant should be consulted when forming a business, an employment lawyer should be consulted before a business hires its first worker. Businesses that already have employee or independent contractor relationships should likewise consult an employment attorney if they haven’t already to educate themselves and to establish effective and lawful employment-related procedures.
As a general matter, an employment attorney can provide essential information with regards to hiring, classifying and terminating workers, drafting employment contracts, employee handbooks, confidentiality and non-compete agreements, and standard operating procedures. Human resources professionals are helpful in navigating the employment maze, but even HR directors benefit from legal counsel to ensure that they are running the employment aspects of the business in accordance with the law.
Businesses should consult legal counsel to draft employment agreements, independent contractor agreements, and other such contracts. Once drafted, these documents can often be used and reused by the employer under appropriate circumstances. Finally, businesses should strongly consider consulting legal counsel when terminating employees, especially when certain “red flags” are at issue, such as when terminating an employee who is in a class protected by a state or federal anti-discrimination law or who has, prior to termination, lodged a complaint with the employer about work related rights or privileges.
The good news is that once an employment attorney is familiar with the business, checking in with the attorney for routine advice does not need to take a lot of attorney time or be especially costly.
Aside from knowing and following the rules, what can a business owner do to minimize risk in this area?
As a general matter, insurance policies are available that can help protect a business from certain employment-related claims, such as wrongful termination, sexual harassment and other similar matters. Talk with your employment attorney and insurance carrier to determine if an employment insurance policy is appropriate for you.
Matthew Trinidad is a transactional attorney at Karp Neu Hanlon PC. He defers to Anna Itenberg, also at Karp Neu Hanlon PC, on all employment-related questions. They can be reached at (970) 945-2261 or http://www.mountainlawfirm.com.
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