Contractor Issues – Not Just a California Issue

13 January 2020 Labor & Employment Law Perspectives Blog
Authors: Carrie Hoffman

Misclassification of workers as independent contractors, when they really should be classified as employees, can lead to significant liability. The United States Department of Labor (DOL) continues to push this misclassification issue on the federal level.

Compliance is important because the DOL will seek to ensure that workers are receiving minimum wage for all hours worked, plus overtime. Despite the fact that on a federal level the law has remained relatively unchanged for many years, employers continue to believe that classifying a worker as a 1099 contractor is the only determinative factor. Obviously, a worker who is an independent contractor is also generally not entitled to benefits, including FMLA, medical insurance, etc. Employers therefore have financial incentive to consider workers contractors. Further, many workers prefer the classification, as it enables them to earn a higher wage and can provide tax benefits.

Instead, under the Fair Labor Standards Act, to be considered an independent contractor, courts consider a variety of factors, including:

  1. The extent to which the services rendered are an integral part of the principal's business
  2. The permanency of the relationship
  3. The amount of the alleged contractor's investment in facilities and equipment
  4. The nature and degree of control by the principal
  5. The alleged contractor's opportunities for profit and loss
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
  7. The degree of independent business organization and operation

Employers must weigh all of the above factors when determining whether a worker is an employee or an independent contractor and that there is no set number of factors that makes the worker an employee or an independent contractor. No single factor alone makes this determination, but a good rule of thumb is that a worker who is not a “free agent” to work for other businesses, and who cannot pick and choose when to be at work, is likely an employee.

Employers should also remember that the IRS recently revamped its 20 factor test into a Three-Factor Test: behavioral control, financial control, and relationship control. Regardless of the test used (DOL or IRS), the key is to look at the entire relationship and make a decision supported by the facts of the relationship versus the desires of the parties involved.

This issue can be especially risky for employers who have workers performing the same jobs but classify some as employees and some as contractors. Employers should also consider that there are distinctions between a temporary employee and a contractor. A temporary employee is still a W-2 employee on a short term assignment but works at the direction and control of the employer. While it can be tempting to classify an individual as a contractor, employers must continue to analyze each situation in light of the factors listed above to avoid potential liability for unpaid minimum wage, overtime, benefits (insurance, stock options), etc.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services