EMPLOYEE MISCLASSIFICATION:  THE LABEL OF 'INDEPENDENT                 CONTRACTOR' IS NOT A BAR TO ACCESS TO JUSTICE

By Victoria Ni, Public Justice Senior Attorney

Do workers classified as “independent contractors” have a right to legal protections afforded only to “employees”?  For example, can they sue for age or race discrimination?  Can they obtain unemployment or worker’s compensation benefits?  The answer is “yes,” if they have been misclassified as independent contractors.  In other words, if they can meet the legal definition of an “employee,” regardless of what they are labeled.

Looking Behind the Label

Earlier this year, in Awuah v. Coverall North America, Inc., a Massachusetts federal judge found that janitorial workers labeled as “independent contractors” and “franchisees” were actually “employees” of defendant Coverall.¹  Coverall required its workers to enter into a “franchise agreement,” by which it purported to license to the workers its methods, procedures, standards, and equipment for cleaning commercial establishments.  The workers were required to complete mandatory training programs and wear approved uniforms and identification badges while on customers’ premises.  Coverall provided initial equipment and supplies.  It also had the exclusive right to perform all billing and collection on customers’ accounts, and deducted its franchise fees from these collections before remitting payment to the workers.  For the most part, customers contracted directly with Coverall, and not with the so-called “franchisees.”²  Because the workers performed services that were not outside of the ordinary business of Coverall, the court found that the workers had been misclassified – they could not be considered independent contractors under Massachusetts law.³

For Misclassified Workers: Fewer Rights, More Taxes

Employees treated as independent contractors, like the plaintiffs in Awuah, could be losing out on minimum wage and overtime protections, meal and rest breaks required by law, rights to a safe and healthy workplace, job-protection during family and medical leave, and legal protections against discrimination, harassment, and retaliation.  If they are injured on the job, they will have to successfully challenge their independent contractor classification in order to collect worker’s compensation benefits.  If they lose their jobs, they might not be able to collect unemployment insurance.  They usually don’t get employee benefits, like medical insurance or a retirement plan.  And, if that weren’t enough, they have to pay more taxes than they would if they were properly classified as employees, because their employers have dumped on them the burden of paying employer-side Social Security, Medicare, and unemployment taxes.  In low-skill or low-wage jobs, the fewer protections and added tax burdens of independent contractor status don’t come with corresponding higher pay or increased independence.  Instead, workers just take what they can get.

A Widespread Problem

The financial incentives for an employer to misclassify its employees are substantial.  Not only does the employer sidestep most labor and employment laws by misclassifying, but it also stands to save as much as 30% in payroll costs.⁴  In 1984, the U.S. Internal Revenue Service (IRS) estimated that 15% of employers had misclassified 3.4 million employees as independent contractors.⁵  In 2000, a study commissioned by the U.S. Department of Labor showed that 10 to 30% of employers audited had misclassified employees.⁶  Experts believe that the problem has become even more widespread in recent years.⁷  In sectors filled with low-wage and immigrant workers – such as in construction, janitorial services, home health care, and delivery services – employee misclassification is rampant.  For example, a whopping 45% of construction firms audited by Maine officials had misclassified at least some of their employees.⁸

Determining Who is an “Employee”

Generally speaking, true independent contractors bring specialized skills and their own tools to perform a service that is separate and apart from a company’s regular business.  The company can control the end product of the work performed, but not the methods used.  A classic example of an independent contractor would be that of an information technology specialist hired to diagnose the computer woes of a company dedicated to selling widgets.  Employees, on the other hand, typically perform tasks within the same line of business as the company’s business, using methods and during set hours subject to the control of an employer.  For example, a worker found to be an employee for Coverall (which held itself out as “Coverall Cleaning Concepts”), was given a list of cleaning assignments every day and was expected to check in with a Coverall representative when she arrived at work and to check out upon departure.⁹

In practice, the line between who is an employee and who is an independent contractor is not always clear.  The legal tests to determine who is and is not an “employee” vary from law to law and from agency to agency.  For example, the test used for federal anti-discrimination laws is different from the test used to determine if federal fair labor laws apply.  State laws also differ from federal law.  Moreover, the tests do not offer a bright-line assessment.  Rather, they require consideration of the totality of the circumstances, with no one fact being dispositive.  So even if workers agree on paper to be an “independent contractor,” courts and government agencies will look behind the label to determine if the reality of the work relationship shows that the workers were really “employees.”

The IRS has recently adopted a three-part test to determine employment status that captures the key concepts on which most of the various tests are based.¹⁰  The IRS considers: (1) the amount of behavioral control exerted by a company over the worker; (2) the amount of financial control exerted by a company; and (3) the type of relationship between the worker and the company.¹¹

Does the Company Exert Behavioral Control Over the Worker?

Behavioral control refers to the category of evidence that shows the extent to which a company has the right to control how a worker does his or her work.¹²  Although the totality of the circumstances must be considered, a worker is more likely to be an employee if the company:

      •  has the right to control when and where the worker must to do the work;

      •  provides tools and materials for the work;

      •  has the right to control what tools or equipment the worker must use;

      •  has the right to control where to purchase supplies and services;

      •  has the right to control who can be hired to assist with the work;

      •  has the right to control what work must be performed by a specified individual;

      •  has the right to control what order or sequence the worker must follow when performing the work;

      •  provides detailed instructions on how to do the work;

      •  evaluates the worker according to a system that measures the details of how the work is performed; or

      •  provides the worker with initial or on-going training on how to do the job.¹³

Does the Company Exert Financial Control Over the Worker?

Financial control means that the company has “the right to control the economic aspects of the worker’s job,” and includes consideration of whether a worker is economically dependent on the company for his or her livelihood.¹⁴  A worker who takes on business risk – both the upsides and downsides of being in business for oneself – and serves multiple clients is more likely to be considered an independent contractor.  On the other hand, a worker is more likely to be considered an employee under the law if he or she:

      •  lacks a significant investment in the equipment used for the job;

      •  receives reimbursement for expenses incurred in connection with the job;

      •  cannot make a profit or suffer a loss from performing the work (e.g., if expenses for the work exceed the income);

      •  can quit at any time without incurring liability;

      •  performs most of his or her work for that company and cannot seek out business opportunities for himself or herself; or

      •  is guaranteed a regular wage for an hourly, weekly, or other period of time, even if that wage is supplemented by a commission.¹⁵

What Type of Relationship Exists Between the Worker and the Company?

Finally, the IRS considers the type of relationship between the worker and the company, or, in other words, the “facts that show how the worker and business perceive their relationship to each other.”¹⁶  Under this category of inquiry, the agency will examine whether written contracts with the worker characterize the worker as an independent contractor, even though that alone is insufficient to determine the worker’s status.  If the worker receives employee benefits, if there is an expectation that the worker will continue working for the company indefinitely, or “[i]f a worker provides services that are a key aspect of the [company’s] business,” then the worker is more likely to be considered an employee.¹⁷

Conclusion

Workers who may be denied their rights due to misclassification should take note.  The label of “independent contractor” does not necessarily define a worker’s labor and employment rights or tax responsibilities, and too often the label has been misapplied.  The more control a company has over its workers, the more likely the workers will be considered employees.  By filing a claim in court or with a government agency, misclassified workers can seek to enforce their rights and obtain access to justice.

ABOUT THE AUTHOR

Victoria W. Ni, a Senior Attorney at Public Justice, is responsible for developing, handling, and helping Public Justice's cooperating attorneys litigate a diverse docket of public interest cases.  Her practice focuses on civil rights issues, and has included work on both class action and individual employment claims.  She is a current member of the Executive Board of the National Employment Lawyers Association.

 

¹   Awuah v. Coverall North America, Inc., 707 F.Supp.2d 80, 84 (D. Mass. 2010).

²   Id. at 81-82.

³   Id. at 84; see also Coverall North America, Inc. v. Commissioner, 447 Mass. 852, 857 N.E.2d 1083 (2006) (finding a worker was an “employee” of Coverall for purposes of an unemployment benefits claim).

⁴  Testimony of Thomas E. Perez, Secretary of the Maryland Department of Labor, Licensing and Regulation before HB 1590 House Economic Matters Committee on March 20, 2008, http://www.dllr.state.md.us/whatsnews/testimonymisclass.shtml.

⁵   United States Government Accountability Office, GAO-09-717, Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention10 (Aug. 2009).

⁶   Id. at 11.

⁷   Id. at 12.

⁸   Id. at 14.

⁹   Coverall North America, Inc., 447 Mass. at 854.

¹⁰   See Website of Internal Revenue Service, United States Department of the Treasury, Independent Contractor (Self-Employed) or Employee?, http://www.irs.gov/businesses/small/article/0,,id=99921,00.html (last visited Oct. 12, 2010).

¹¹   Id.

¹²   Website of Internal Revenue Service, United States Department of the Treasury, Behavioral Control, http://www.irs.gov/businesses/small/article/0,,id=179111,00.html (last visited Oct. 12, 2010).

¹³   Id.

¹⁴   Website of Internal Revenue Service, United States Department of the Treasury, Financial Control, http://www.irs.gov/businesses/small/article/0,,id=179113,00.html (last visited Oct. 12, 2010).

¹⁵   Id.

¹⁶   Website of Internal Revenue Service, United States Department of the Treasury, Type of Relationship, http://www.irs.gov/businesses/small/article/0,,id=179116,00.html (last visited Oct. 12, 2010).  

¹⁷    Id.