Independent Contractor or Employee: The Stakes Are Getting Higher

October 18, 2010

The U.S. Department of Labor and the Internal Revenue Service are actively searching for and prosecuting companies which misclassify employees as independent contractors. The federal government claims that such misclassifications cost the government billions of dollars in revenue each year. In fact, Congress has recently re-introduced legislation seeking to increase the stakes for employers who continue with the practice. The Employee Misclassification Prevention Act seeks to deter employers from improperly classifying employees, including drivers, as independent contractors versus employees by:

  • Ensuring that employers keep records that reflect the accurate status of each worker as an employee or non-employee and clarifying that employers violate the Fair Labor Standards Act when they misclassify workers.
  • Increasing penalties on employers who misclassify their employees and are found to have violated employees’ overtime or minimum wage rights.
  • Requiring employers to notify workers of their classification as an employee or non-employee.
  • Creating an “employee rights web site” to inform workers about their federal and state wage and hour rights.
  • Providing protections to workers who are discriminated against because they have sought to be accurately classified.

In addition to legislative efforts to curb this practice, the courts have been coming down hard on companies who misclassify employees. Last July, the Ninth Circuit Court of Appeals, which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington ruled against EGL Inc. in a case in which EGL, a Texas corporation, classified its drivers as independent contractors. EGL even had written independent contractor agreements in which the drivers agreed that they were independent contractors and that any questions about the agreement were to be settled by Texas law. Some of the drivers claimed that they were actually employees who were entitled to overtime as well as benefits under the California Labor Code. If the language of their contracts ruled and Texas law were to be applied, they would not be able to recover. The Ninth Circuit ruled against EGL finding that the California Labor Code, not the contract, was at issue. The Court then found that under California’s multi-faceted test for determining employee/contractor status that the drivers had produced enough evidence of an employment relationship to justify a jury trial on their claims.

What This Means for Employers

Companies that employ “independent contractors” will want to closely examine the true nature of their relationship to determine if they have been properly classified. This may mean reviewing and possibly revising independent contractor agreements and staying away from “form” agreements. Also, reconsider any automatic renewal/termination provisions in those agreements as they may be interpreted to more closely resemble an “at-will” employment relationship. Finally, you should carefully evaluate any forms, training materials, or policies that you provide to independent contractors to ensure independent contractor status.