The relationship between employer and worker is not always straightforward. Even the IRS has made it clear that it’s not easy to classify independent contractors and employees. Every case they evaluate is different based on a wide variety of factors.
In the case of Acosta v. Jani-King of Oklahoma, Inc., the Tenth Circuit Court of Appeals overturned the lower court’s ruling, instructing the district court to consider “economic reality factors,” including:
Continue reading for an article by CHUBB that provides important information on the risks of misclassifying workers.
The Costly Mistake Of Wrongly Classifying Employees As Independent Contractors
Written exclusively for ChubbWorks
January 1, 2019
The Tenth Circuit Court of Appeals recently overturned the lower court's ruling in Acosta v. Jani-King of Oklahoma, Inc. The appellate court ruled that Jani-King's workers were employees, even though the organization required them to form corporate entities and sign franchise agreements, as if they were independent contractors.
The Department of Labor (DOL) brought the lawsuit against the janitorial services provider. The DOL alleged that the individuals who performed cleaning services were misclassified as independent contractors, and that the employer failed to keep required time records.
The district court had dismissed the case based on the fact that the individuals worked as corporate entities and therefore were not subject to the Fair Labor Standards Act (FLSA). However, the Tenth Circuit ruled that, even though the individuals formed franchisee corporations in order to work for Jani-King, they were still employees.
The appellate court's ruling is in line with the precedent of determining classification based not on labels and structures, but on the actual conditions of the working relationship. The corporate-franchisee structure was not in and of itself sufficient to classify workers as independent contractors, according to the Tenth Circuit. Philip Bruce "Employers must still use caution when using independent contractors" employerlinc.com (Oct. 31, 2018).
In the above case, the Tenth Circuit instructed the district court to consider “economic reality factors, including 1. the degree of control exerted over the worker, 2. the worker’s opportunity for profit or loss, 3. the worker’s investment in the business, 4. the permanence of the working relationship, 5. the degree of skill required to perform the work, and 6. the extent to which the work is an integral part of the alleged employer’s business.” Examination of each of these factors can help determine whether a relationship is truly one of employer-employee.
Classification must be keyed to work actually performed, and the consideration of the above factors. Job titles, job descriptions, and contract language are not determinative. Having a worker sign an independent contractor agreement will not protect your organization from a lawsuit if the worker meets the requirements of an employee.
Misclassifying a worker as an independent contractor, rather than as an employee, violates the Fair Labor Standards Act and IRS regulations.
Suppose a worker thinks he or she has been misclassified as an independent contractor? The worker may file a complaint with the U.S. Department of Labor (DOL) or the state's equivalent agency. The DOL tends to accept cases in which many other workers have been misclassified, but states handle individual worker complaints.
If the DOL investigates a complaint against an employer, even by just one individual, it will look at every employee and every independent contractor the employer has worked with for the past three years.
If misclassification was unintentional, the employer faces all of the following based on all of the payments to misclassified independent contractors now being considered employee wages:
In addition to the numerous penalty categories above, there is additional liability for intentional misclassification:
The DOL suggests that employers ask themselves the following questions to determine classification:
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