August 2019 Volume 1

OPERATIONS & MANAGEMENT

Employee or Independent Contractor - It’s More than a Name By Johanna Fabrizio Parker

For nearly 20 years, I have had an insider’s view into work -- from small companies in one location to large, multi-state (or country) operations; from employers with a dedicated legal/HR staff to those where the HR function is one of many hats worn by a member of the leadership team; and from concerns related to hourly employees on the production floor to issues within the C-suite. With this view, I have

significant weight to your right to control Ms. Smith’s work – here, the less control, the better, to have her be recognized as an independent contractor. (This test applies 20 secondary factors.) 1 Federal courts -- in addressing claims under the Fair Labor Standards Act (FLSA) -- use the “economic reality” test. 2 (The FLSA is the federal law that

mandates minimum wage, and overtime for non-exempt employees who work more than 40 hours in a workweek. Individuals who claim to be improperly classified as individual contractors bring claims under the FLSA, and comparable state law, for minimum wage and overtime.) The economic realities test has six factors, and it’s a “totality of circumstances” test. In other words, the following factors are all considered, but no one controls: 1. The degree of control that you have over the manner in which Ms. Smith's work is performed; 2. Ms. Smith’s opportunities for profit or loss dependent on her managerial skill; 3. Ms. Smith’s investment in equipment or material, or her employment of other workers; 4. The degree of skill required for the work; 5. The permanence of the working relationship; and 6. The degree to which the services rendered by Ms. Smith are an integral part of your business. States also have gotten involved here. A somewhat-recent study (2015) put the number at 22 states having passed statutes to address this issue of independent contractors during the time period 2004 2012. 3 Some of these states have adopted the “ABC test.” Under the most stringent version of this test, Ms. Smith would be an independent contractor ONLY if all of the following three factors are met: 4 A: she is free from your control and direction in connection with her performance of the work, both under the contract and in fact; B: she performs work outside your usual business; and C: she is customarily engaged in an independently established trade or business as the work that she is doing for you.

learned that there are no perfect answers to your employee-related questions (or perfect work environments). But there most definitely are people trying and wanting to do the right thing in the maze of employment regulations and business needs. My primary goal is and has been to assist in solving the problem, and I hope to use this forum to talk about some of the more common -- and potentially costly -- problems facing employers. Employee or Independent Contractor - It’s More than a Name. Does your company utilize independent contractors? Many, if not most, do. However, if challenged, sustaining that status will require more than just the label, or even a contract saying that Jane Smith is an independent contractor. Rather, it will be the company’s burden to proveMs. Smith really is an independent contractor (and not your employee). And your failure to do so can have costly consequences -- both in terms of tax and benefits issues, as well as wage and hour laws. In fact, even going through a court challenge (and winning) is expensive in litigation costs as well as your time and effort. Conversely, there is little (if any) financial hurdle for an individual to file a claim with the government or even initiate litigation -- on behalf of herself, or more likely, some larger group. And, even without litigation, in the “corporate deal” world, buyers and their insurers are looking a lot more closely at your classifications. So, even if you cannot imagine any of your contractors disputing this status or they tell you that they want to be contractors, your outcome (or lack of challenge) is not guaranteed. How do you know your independent contractor will be recognized as a non-employee? There is no one answer, but multiple tests. (I know, “it depends” is the answer you like least from a lawyer.) The IRS uses what is called the “common law” standard. This test gives

FIA MAGAZINE | August 2019 28