Federal Government to Crack Down on Misclassified "Independent Contractors?"
It's always risky to misclassify someone who should be an employee as an "independent contractor," but President Obama's 2011 budget proposal will increase the risks for employers. According to this budget summary from the U.S. Department of Labor, the misclassification of employees as contractors is estimated to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years. To help make up for this shortfall, the proposed budget includes funds earmarked for a "joint proposal" between the DOL and the Treasury Department to eliminate legal incentives for such misclassification, and an additional $25 million to target misclassification with 100 additional enforcement personnel and competitive grants to boost states’ incentives and capacity to address this issue.
If this budget provision goes into effect, employers will need to be particularly careful not to misclassify employees as contractors. Of course, it's already a risky proposition to misclassify employees as contractors. For example, as we reported back in 2008, FedEx was on the wrong end of a $14 million award after a California court concluded that the shipping giant misclassified hundreds of drivers as contractors. Lawsuits in this area are common, ranging from individuals seeking unpaid wages and overtime to multi-million dollar class actions. Federal and state governments are also known to go after employers for unpaid payroll taxes and associated penalties.
Are you concerned that your independent contractor might actually be a misclassified employee? The IRS has published this handy information on how to determine whether the employee is correctly classified. There is even an IRS form (Form SS-8) that you can file to seek the Service's help in determining if your employee is correctly classified. Of course, if you believe that you have misclassified employees working as contractors, it might be a good time to contact your labor and employment attorney.
9th Circuit: Independent Contractor Can Assert Disability Claim Under Rehabilitation Act
The Ninth Circuit Court of Appeals ruled recently that an independent contractor may assert a disability claim against an employer under the Rehabilitation Act. Click the link to read the opinion on Fleming v. Yuma Regional Medical Center.
The Rehabilitation Act prohibits discrimination on the basis of disability in programs conducted by Federal agencies, in programs receiving Federal financial assistance, in Federal employment, and in the employment practices of Federal contractors. The standards for determining employment discrimination under the Rehabilitation Act are the same as those used in Title I of the Americans with Disabilities Act (ADA).
In Fleming, an anesthesiologist who worked as an independent contractor sued the medical center at which he worked, alleging a discriminatory constructive discharge. The trial court dismissed the case on the basis that Fleming was an independent contractor and that the Rehabilitation Act applied only to employee-employer relationships. The Ninth Circuit reversed, holding that the Rehabilitation Act provides a cause of action to any individual subjected to disability discrimination by any program or activity receiving federal financial assistance. While the Rehabilitation Act adopts the standards that are applied under the ADA, it does not adopt the ADA's limitation to the employee-employer relationship.
Independent contractors are not considered "employees" for purposes of most employment discrimination laws, and many employers hire independent contractors to avoid potential liability under such laws. Fleming shows that, at least for employers covered by the Rehabilitation Act, independent contractors may still find ways to seek the protections of those laws despite their "non-employee" status. In addition, many employers incur significant tax and other liabilities by misclassifying people as "independent contractors" when they really should be treated as employees. For more information, the Internal Revenue Service offers this guidance for determining whether someone is or is not correctly classified as an independent contractor.
Oregon Musicians No Longer Presumed Employees for Unemployment Purposes
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Sine die! The Oregon Legislature's biennial session has come to a close, providing a perfect opportunity for the World of Work to take a look at what passed, what failed, and what flew under the radar.
One helpful new statute fixes a problem for employers who operate music venues. In late 2007, Mississippi Studios, a hip North Portland nightspot and recording studio, got nailed in an Oregon Employment Department audit for not paying unemployment taxes on musicians who played at the venue. Mississippi assumed that the musicians were not employees, but were independent contractors according to the Department's test. Not so fast. Mississippi was unaware of ORS 657.506, an obscure provision in Oregon statute that presumed musicians are employees unless otherwise stated in an employment agreement.
The new statute, which went into effect immediately on passage, repeals the old rule and treats Oregon musicians just like everybody else. The bill is simply drafted and repairs some bad lawmaking. Way to go, legislature! This time you were up there with the best.
Exotic Dancers Are Employees, Not Independent Contractors
Every now and then we need a reminder to illustrate the dangers of misclassifying employees as "independent contractors." Last week, the Montana Supreme Court provided such a reminder, ruling that exotic dancers were employees, not independent contractors. Click here to read the opinion in Smith v. TYAD Inc. d/b/a Playground Lounge & Casino.
In Playground, the employer required each dancer to sign a contract acknowledging that she would be considered an “independent contractor" who would pay a "stage fee" to “rent” the stage and a dressing room for every night she worked. In return, each dancer would retain all tips and dance fees. According to the Montana Supreme Court, not only were the dancers actually employees entitled to payment of minimum wage for all hours worked, but the "stage fees" were illegal kickbacks. It held the dancers were entitled to payment of hourly wages, overtime, repayment of the "stage fees" and penalties.
Does Playground have any lessons for the 99.99% of employers that don't employ exotic dancers? Absolutely: all employers should be careful when classifying anyone as an "independent contractor." Whether an individual is properly classified as an employee or an independent contractor is a complex question of both state and federal law. Besides being held liable for back pay and overtime, employers who misclassify employees can be charged with unpaid wage withholdings and unemployment insurance premiums. Worse yet, employers who don't pay workers' compensation insurance on misclassified employees can find themselves in a world of hurt if one of those employees sustains an on-the-job injury. (The Playground Lounge should be thankful none of its dancers fell off the stage.) For more information on the criteria courts and agencies use, check out this page on the IRS' Independent Contractor Status Test.
Fourteen Million Reasons Not to Misclassify Employees as Independent Contractors
A class of current and former FedEx Ground drivers misclassified as "independent contractors" will receive an additional $9 million in reimbursements for employment-related expenses, an appointed referee ruled October 20. This award will be combined with a previous award of $5.3 million the drivers received in 2006. The award will reimburse the drivers for such expenses as truck maintenance and registration, uniforms, fuel, and liability insurance. For more information on the drivers' lawsuit, click here.
As this case shows, employers run a substantial risk by misclassifying its employees as "independent contractors." Not only can the misclassified employees bring lawsuits (for any number of reasons, such as unpaid overtime, minimum wage violations, family and medical leave issues, and more), but state and federal tax agencies can bring collection actions seeking unpaid payroll taxes, unemployment taxes and penalties.
Concerned that your independent contractor might be a misclassified employee? The IRS has this handy information on how to determine whether the employee is correctly classified. There is even an IRS form (Form SS-8) that you can file to seek the Service's help in determining if your employee is correctly classified. Of course, if you believe that you have misclassified employees working as contractors, it might be a good time to contact your labor and employment attorney.
New Federal Legislation Would Penalize Employers' Use of "Independent Contractors"
The U.S. Congress is currently considering legislation that would impose significant penalties on employers who improperly classify employees as "independent contractors" to avoid paying for benefits.
The Employee Misclassification Prevention Act (S. 3648) was introduced in the Senate on September 29, and is sponsored by Senators Edward M. Kennedy (D-Mass.), Barack Obama (D-Ill.) and John Kerry (D-Mass.). Features of the bill include:
- Amending the Fair Labor Standards Act (FLSA) to prohibit the misclassification of an employee as an independent contractor, providing for liquidated damages and civil penalties of up to $10,000.
- Requiring employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification.
- Requiring state unemployment insurance agencies to audit employers who misclassify employees.
- Allowing the Department of Labor and the Internal Revenue Service to share information on cases where employers misclassify workers.
- Requiring the Department of Labor to perform targeted audits focusing on employers in industries that frequently misclassify employees.
- Directing the Department of Labor to establish a Web site that summarizes the rights of employees under the FLSA and other federal laws.
A companion bill, H.R. 6111, was introduced in the House in May. Don't expect this bill to become law as long as President Bush is in the White House, but with a likely democratic majority in Congress and a new President, passage of the bill appears very likely. Employers should be aware of the existing risks of incorrectly classifying employees as "independent contractors," including claims for unpaid overtime, minimum wage claims, benefits claims, workers' compensation liability, and tax penalties.
California Assembly Passes Four Employment-Related Laws
California employers take note: The California State Assembly recently passed four significant employment-related bills that you should pay close attention to:
- Medical Marijuana: A.B. 2279 would prohibit discrimination against an employee based on marijuana use, as long as the use was for medical reasons and did not occur at the workplace or during the hours of employment.
- Equal Pay: A.B. 437 would reject the "paycheck rule" established in the U.S. Supreme Court's decision in Ledbetter v. Goodyear Tire & Rubber Co., 127 S. Ct. 2162 (2007). Under the new bill, the statute of limitations for pay claims under the state Fair Employment and Housing Act would toll with each discriminatory paycheck an employee receives.
- Independent Contractors: S.B. 1583 would make paid consultants who advise employers to treat workers as independent contractors to avoid employee status jointly and severally liable with the employer if it is determined the workers are not independent contractors.
- Arrest Records: A.B. 3063 would prohibit employers from asking applicants about arrests that did not result in convictions, or about participation in pre-trial or post-trial diversion programs.
Will the Governator sign the bills? Right now, he and the state assembly are deadlocked over the state budget, and Schwarzenegger has said he will not sign any new bills unless and until a new budget is agreed on. However, if he does not sign the bills within 30 days of their passage, they automatically become law. Stay tuned to the World of Work for more updates!
