This mistake may seem obvious, but companies do it all the time. When an independent contractor is performing the same work as employees, the contractor is likely to be deemed an employee.
Remember, the determination of whether someone is an independent contractor or an employee is made based on the facts of the relationship, not what the parties call it. If the facts are that a contractor is doing the same work, in the same location, with the same instructions, and under the same supervision as an employee, then the contractor is likely an employee and should be paid as an employee.
I am not suggesting there is any problem using staffing agency workers or temp-to-hire. Those workers are being paid by the staffing agency as employees. That is, their paychecks show withholdings and deductions, and their pay is reported by the staffing agency on a W-2, not a 1099. These are employees of the staffing agency (and very possibly your joint employees, but that’s a separate issue).
The issue addressed in this post is the use of 1099 independent contractors to perform the same type of work as employees. If the work performed by an employee is employment, then it is very hard to maintain the position that the same work being performed by a contractor is not employment.
Summary: Avoid assigning contractors to perform the same work as employees. When individual contractors and employees work side-by-side doing the same thing, the likelihood of misclassification is high.
Do your independent contractors have access to confidential information? Does your independent contractor agreement provide you with sufficient protection?
Tip #1: Be sure your independent contractor agreement includes a Confidential Information section. It should prohibit the contractor from using or disclosing confidential information at any time, including after the retention is completed.
Be sure, however, to consider these carve-outs to allow disclosure under these limited circumstances:
- When a subpoena or court order requires, but consider requiring the contractor to provide advance notice so you have the opportunity to contest the potential disclosure.
- To a government agency, as part of a complaint or investigation. The SEC and DOL/OSHA have taken the position that it is a violation of federal whistleblower laws to have a Confidential Information clause that is so broad that it prohibits revealing confidential information to a government agency when whistleblowing. Under this whistleblowing scenario, you cannot require the individual to alert you to the disclosure first.
- Under circumstances described in the Defend Trade Secrets Act (DTSA), which took effect in 2016. Under DTSA, a company can recover additional damages and attorney fees if an individual improperly discloses the company’s trade secrets if the company provides advance notice to individuals of their DTSA rights.
Here is a sample DTSA disclosure:
You shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made (x) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (y) solely for the purpose of reporting or investigating a suspected violation of law. You shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Furthermore, in the event you file a lawsuit for retaliation by the Company for reporting a suspected violation of law, you may disclose the trade secret to your attorney and use the trade secret information in the court proceeding, if you file any document containing the trade secret under seal and do not disclose the trade secret, except pursuant to court order.
Tip #2: One other point to remember — and this is a common mistake: Make sure that when the agreement expires, the obligation not to disclose confidential information remains in effect. I have seen too many termination clauses where the agreement terminates, not just the relationship. If the entire agreement terminates, you may accidentally be terminating the contractor’s obligation to preserve confidential information after the engagement ends.
When you end an engagement, you probably want to terminate the engagement, not the entire agreement.
Have fun out there!
When an employee embezzles money, a company may look for insurance coverage under a crime policy, for employee theft. When an independent contractor steals money, a general commercial liability may cover the loss. But when an independent contractor acts like an employee, performs services typical of an employee, then steals money — neither coverage may apply.
That’s the harsh lesson recently learned by an Indiana company. Telamon Corporation retained an independent contractor to provide services through a series of consulting agreements. Eventually, the company made her a Vice President (please don’t name your independent contractors “Vice Presidents,” then claim they are not employees!) and put her in charge of recovering old telecommunications equipment to sell it to salvagers. She had other ideas, however. She recovered the equipment and sold it to salvagers, but she kept the money for herself. $5.2 million of it.
That eventually landed her in prison, where she won free use of an orange jumpsuit for five years. I know, she could have afforded a blinged-out $5 million jumpsuit, but she took the free one from the state.
Telamon, meanwhile, tapped its insurers to try to recover the cash.
Are you on the hit list?
The highest concentration of independent contractor misclassification lawsuits during the past 12 months seem to be in these areas:
- Agricultural workers
- Beauty consultants (sales)
- Cable installers
- Car services (passengers, ride-hailing services)
- Computer programmers
- Construction workers
- Consultants (various industries)
- Delivery drivers (food, goods, freight)
- Exotic dancers (strippers)
- Freelance writer/reporters/other journalism
- Information technology workers
- Installers (cabinets, appliances, windows, furniture)
- Insurance sales representatives
- Janitorial franchise owners (individuals)
- Maintainance workers
- Newspaper carriers
- Performers (actors, cheerleaders, wrestlers)
- Property inspection services
- Repair technicians
- Sales representatives
- Travel agents
- Truck drivers
- Yoga instructors
This list should not in any way suggest that the categories of workers in this list should be employees. That determination will depend on the facts in any given situation. All of these types of workers, however, have been plaintiffs in recent lawsuits alleging that they were misclassified as independent contractors and should have been deemed employees.
Companies who retain these types of workers as independent contractors should take proactive steps to evaluate the facts in these relationships, particularly under the variety of federal and state law tests that may apply. Companies should also remember that because different tests apply to different laws, workers may be properly classified as independent contractors under some laws and some tests, but may be deemed employees under other laws and other tests.
Fourth Circuit Adopts More Liberal Joint Employment Test Than NLRB’s Browning-Ferris Decision
(This article originally appeared in Corporate Counsel on March 1, 2017. Click here to view the original.)
Are 59 years of joint employment rulings all wrong? Yes, says a federal appeals court in a landmark Fair Labor Standards Act (FLSA) decision issued in late January.
Relying on a 1958 Department of Labor (DOL) regulation, the Fourth Circuit Court of Appeals has rewritten the test for joint employment, defining the concept so expansively that every outsourced and staffing agency relationship might be deemed joint employment under the FLSA. The decision in Salinas v. Commercial Interiors, issued unanimously by a three-judge panel (all Obama appointees), takes a more radical position on joint employment than even the NLRB took in its controversial 2015 Browning-Ferris decision.
The Court of Appeals concludes that everybody – including the DOL itself – has been misinterpreting the DOL’s joint employment regulation for 59 years.
Is that possible? Can the Court literally mean that? Or is this an example of the adage, “bad facts make bad law”? The facts in Salinas suggest there was probably a joint employment relationship under any test. It remains to be seen how this test will be applied and whether decades of court decisions and DOL guidance will truly be disregarded.
Meanwhile, employers in North Carolina, South Carolina, Maryland, Virginia, and West Virginia are immediately and directly impacted, since these are the states that the Fourth Circuit covers.
Act I, Scene 1
Location: Anywhere, USA
Boy: Can I have a red lollipop?
Mom: No, we’re eating dinner in half an hour.
Boy: (eats blue lollipop)
Mom: What are you doing? I said no!
Boy: I only asked about the red lollipop.
Too cute by half, right? Mom is no fool and easily sees through the simple trick. The boy is grounded.
Act I, Scene 2
Location: D.C. Court of Appeals
NLRB: These FedEx drivers in Massachusetts are employees, not independent contractors.
D.C. Circuit (2009): No, they’re independent contractors.
NLRB: Ok, Connecticut then. The FedEx drivers in Connecticut are employees, not independent contractors.
D.C. Circuit (2017): Are you kidding me? We already ruled they are independent contractors.
NLRB: Last time I only asked about the drivers in Massachusetts.
If your former contractor files for unemployment, pay attention!
When a former employee files for unemployment, it hardly matters to the business whether the individual gets unemployment coverage. Unless the individual had voluntarily quit, benefits are usually allowed. No big deal.
When an independent contractor files for unemployment, however, beware. Unemployment insurance coverage is available only to employees, not to independent contractors. For a contractor to obtain coverage, the state must first determine that the contractor was an employee.
This determination can have far-reaching economic consequences to the business, extending well beyond the individual contractor.
First, if your contractor was misclassified and is deemed an employee, you were not paying
into the state unemployment insurance pool for that contractor — or for all contractors who are similarly situated. The state wants your money and may issue back assessments (and penalties and interest) for having failed to pay into the system — not just for that individual but for all other individual contractors who performed the same type of work.
Back assessments can stretch back years and can add up quickly, particularly for businesses that retain a large number of individual contractors.
Second, the impact of a misclassification finding can quickly snowball beyond the land of unemployment insurance.