An Employee By Any Other Name Is Still An Employee: Misclassification Woes

In late 2011, the U.S. Department of Labor (DOL) and the U.S. Internal Revenue Service (IRS) signed a memorandum of understanding (MOU) aimed at efforts to halt what they termed "the business practice of misclassifying employees in order to avoid providing employment protections." In other words, both the DOL and the IRS were tired of businesses identifying persons providing services to their companies as independent contractors for whom the business was not paying employment taxes and who were not provided the protections of the wage and hour and other laws to which they would have been entitled, had they been classified as employees.

Since then, individual state departments of labor and other state officials have also been signing MOU’s with the US DOL pledging to jointly investigate employee misclassification, coordinate activities to put a stop to such misclassifications, and engage in other actions to detect and eradicate these wrongful practices. What this means for US employers is that both the state and federal governments are taking closer looks at how companies are classifying individuals that provide services to the business. In short, the government doesn’t care what label the business attaches to the individual—under the law, an employee is an employee is an employee.

Labels do not matter to the DOL, the IRS and the other government agencies that care whether someone is an independent contractor or employee (such as Workers’ Comp or the Division on Human Rights). These agencies apply a "duck test" – looks like a duck, swims like duck, quacks like a duck? It’s a duck. The law determines who is a contractor and who is employee—not the business. It does not matter if the person wants to be classified as an independent contractor. If the relationship is one which, as a matter of law, should be classified as an employee—the law considers the worker to be an employee.

There are many different "tests" to apply to determine if someone is a contractor or an employee. But, think about the painting contractor you hired to paint your house or apartment. You ask her to come on Tuesday. She says she’s busy, but can be there Thursday at 4:00. If you are not available on Thursday at 4:00, you may not see the contractor for another two weeks. You found the contractor in the yellow pages, or on Angies’ List, or through a referral. The contractor advertises her services to the world at large, and chooses the jobs she’ll accept. She tells you what she’ll charge for the job—and not the other way ‘round. Sure, some contractors haggle, but if they don’t want your price, they don’t have to work for you. About all you can do is tell her when you don’t want her to come (not when she must be there), and what color you want the walls painted (but not what type of brush to use). She provides the brushes, ladders and drop cloths. You usually pay a contractor by the job, not by the hour. If she doesn’t schedule jobs to do, she starves. But that is her problem . . . not yours.

Once you’ve agreed to hire the contractor, she will then call her assistant and tell him to show up at your place on Friday at 8:00 am. She may even tell him what to wear. When he arrives, she’ll tell him how to mix the paint, what wall to start on, and which of her brushes to use. If he needs to wait for paint to dry, and she wants him on the job site, he still gets paid. He’s an employee of the painting contractor. She is not an employee of the person who contracted her to paint.

Of course, given the many types of situations where employers are now using individuals classified as "independent contractors," it is not always as clear cut as the above example. Is a graphic artist engaged "full time" for a six-month marketing campaign an independent contractor or a temporary employee? Is a computer software engineer hired on a project basis, but paid by the hour, who is assigned project after project after project by the same company a contractor or an employee? Is the independent sales person paid wholly on commission who is elevated to Director of Sales a contractor or an employee? Is a specialist dentist who comes in to a dental practice one day a month to provide services for that practice’s patients an independent contractor or employee? Many factors need to be weighed to make these determinations – and sometimes, as with most things legal, there will be arguments on both sides.

What these state and federal agencies will be doing is ferreting out positions filled by people who look more like "painter’s assistants" than "painting contractors" that have been, according to the agencies, incorrectly labeled (misclassified) as contractors. Businesses can be (and will be, and have been) hit with fines, fees, and penalties when they get it wrong, let alone be held obligated for unemployment taxes and workers’ compensation contributions. This does matter.

It behooves business to understand the distinctions (industry practice aside, because across-the- board misclassification does not make your identical classification correct), and to take what actions the business can to support arguments that their contractors truly are independent—or reclassify them now if the business has gotten it wrong.