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Employment Law

The official Frantz, McConnell, and Seymour, LLP blog.

Misclassifying Employees As “Independent Contractors” Under Increasing Scrutiny

The United State Department of Labor (DOL) has partnered with almost 20 States to pursue employers that engage in misclassification of employees as independent contractors and collect unpaid overtime, payroll taxes, benefits and penalties that may be due. 

The financial incentive to treat persons who perform services as independent contractors is significant.  While employees are entitled to wage protections such as minimum wage and overtime pay, and in some cases leave protection such as FMLA, true independent contractors are not.  In addition, employers must pay State and federal payroll taxes, unemployment taxes and provide workers compensation coverage for employees, but not for independent contractors.  More recently, as the Affordable Care Act is implemented, certain employees classified as “full-time” under that statute are also to receive mandatory health care insurance coverage.

Since 2011, the DOL has signed formal agreements with other federal agencies (including the IRS) and a number of States in which the parties agree to work collaboratively and share information for the purpose of identifying private employers that engage in such misclassification and coordinating law enforcement efforts against them.  This effort seems to be gaining a great deal of momentum.  In the last three months, Alabama, Florida and Wisconsin have each signed a “Memorandum of Understanding” (MOU) with the DOL.  This is significant insofar as it signifies the effort is gaining support from those States that are considered more “business friendly” or “employer friendly.”  Even these States recognize that when employers fail to properly classify their employees, the State is deprived of needed payroll tax revenue, unemployment taxes and may be left with the responsibility of providing medical and subsistence benefits to persons who were injured while working, but who were not covered under an employer’s workers compensation insurance.

This new focus on misclassification of employees appears to be gaining traction in a number of States.  Very recently, the New Jersey Supreme Court was asked to articulate the appropriate test for determining whether a person is an employee or independent contractor in a wage and hour claim.  After considering a number of different tests, including the widely accepted “right to control” test, the New Jersey Supreme Court adopted a much more stringent test, the “ABC test.” This test imposes a presumption that an individual is an employee unless the employer can meet each of these three conditions: (1) the employer neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work; (2) the services provided by the individual were either outside the usual business of the employer or performed away from the usual places of business of the employer; and (3) the worker is in a profession or vocation that will clearly continue once the relationship with the employer terminates.

While the DOL has not of yet entered into a MOU with the State of Tennessee, it is very likely this national focus on misclassification will at least result in judicial challenges to purported misclassifications against Tennessee employers.  Such private lawsuits by workers would most likely come in the form of claims for non-payment of overtime or minimum wage, or failure to provide FMLA leave benefits.

If you are a Tennessee employer that utilizes independent contractors in your business, you should carefully examine that practice.  Not all misclassification is motivated by an intent to avoid legal required payment obligations.  In many instances, businesses with the best of intentions simply do not fully understand the differences between employees and independent contractors under Tennessee or federal law.  Legal counsel experienced in employment matters can assist businesses in that analysis before you have to undertake it in a courtroom or as part of a DOL audit.

If you are a someone who is called an independent contractor and receive no overtime pay or benefits, but you go to work every day for the same person or business, work the hours you are directed to work without having any personal say in when you perform those activities, or otherwise feel like you are no different than an employee, you may also need to consult legal counsel.  Individuals who should be treated as employees and who raise questions about possible misclassification are protected from employer retaliation under both federal and Tennessee law.

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