EMPLOYEE OR “INDEPENDENT CONTRACTOR” – WHY IT IS IMPORTANT TO CLASSIFY CORRECTLY

The distinction between an employee and an independent contractor is becoming more and more important as employee entitlements grow, such as with legally mandated minimum wage, overtime pay, workers’ compensation and family and medical leave.  Recently, the Idaho Department of Labor and the U.S. Department of Labor (the “Department”) signed an agreement to coordinate and increase their efforts to prevent misclassification of Idaho workers as independent contractors.  Several other states have signed similar agreements just this year, with regulators claiming that 25 to 30 percent of all employees are misclassified as independent contractors.  Now more than ever, it is important for Idaho businesses who classify or plan to classify workers as independent contractors to make sure that classification is correct.

Improperly classifying a worker as an independent contractor, even by agreement and with the best of intentions, can expose a business to state and federal government action and penalties.  There are a wide range of civil and criminal penalties for improperly classifying employees, and the penalties depend on whether the infraction was willful or not.  Civilly, employers can be made to pay back wages and liquidated damages equal to the back wages.  Repeated or willful violations can bring civil penalties of about $1,000.00 or criminal fines of up to $10,000.00.  For instance, in April 2015, the Department obtained a settlement of more than $1.4 million in back wages and damages for more than 300 workers with a New York plumbing and heating company that was alleged to have underpaid and misclassified workers as independent contractors.  Employers should also be aware that in July 2015, the Department issued its own interpretation of how to classify workers under federal law, showing that the Department intends to apply the definition of employee as broadly as possible. 

There are separate state and federal standards that apply, but in practice, they both draw the same distinction.  Idaho law presumes that workers are employees unless the employer can show (1) that the worker is free from control or direction in performing his work, both under the worker’s contract and in fact, and (2) that the worker is engaged in an independently established trade, occupation, profession or business. 

Federally, the Fair Labor Standards Act (FLSA) has been interpreted by courts as defining employees according to whether or not they are economically independent from their employer.  The worker’s economic dependence is determined by weighing several factors, including (1) the extent to which their work is an integral part of the employer’s business, (2) the worker’s opportunity for profit or loss depending on the worker’s own managerial skills, (3) the extent of the worker’s investment relative to the employer, (4) whether the work requires special skills and initiative, (5) the permanency of the relationship, and (6) the degree of control that the employer has. 

Under either standard, independent contractors are generally described as workers with economic independence and who are operating a business of their own.

INSIGHTS FOR EMPLOYERS

Employers should guard against assumptions.  A worker is not defined as an independent contractor just because the worker asked to be treated as one, signed a contract, performs services for more than one company, is paid only by commission, or performs services on call or only sporadically.

An employee typically performs services for the company for an extended period of time, works under direction from the company regarding how, when and where work will be completed, receives incentives from the company such as insurance, vacation pay and retirement benefits, and receives payment at regular intervals on a salary or hourly basis.

An independent contractor, on the other hand, usually can hire others to perform the work for the company, has the possibility of a profit or loss on the project, is allowed to make the contractor’s services available to others, does not have set hours, is responsible for materials, equipment, travel and business expenses, advertises services, and is not required to work under a licensed individual while on the job.

If you remain uncertain about a worker’s status, seek legal advice.

 

Please contact a Gjording Fouser lawyer at 208.336.9777 if you would like any additional information about this topic or any other employment issues facing your company.