If you google “what to watch for 2023,” you’ll mostly get tips on soon-to-be-released movies and streaming video shows. You’ll get grammatically impossible generic hype like “movies we can’t wait to see” (except the whole point is that you have to wait to see them) and you’ll get grammatically impossible niche hype like “The most anticipated Korean dramas and movies we can’t wait to watch in 2023.”
We won’t peddle hype in this post, and you’ll literally have to wait for all of the things addressed below. But here are five important developments to watch for in 2023.
1. The test for Independent Contractor vs. Employee is likely to change, at least under the Fair Labor Standards Act (FLSA). The Department of Labor proposed a new multi-factor test, and the period for public comment ended December 13. The DOL is likely to roll out a new test in 2023. It will replace the current core factors test described here.
2. The test for Joint Employment is likely to change, at least under the National Labor Relations Act (NLRA). In September, the NLRB proposed a new test for determining when joint employment exists under the NLRA. You can read more here. The public comment period has closed, and we can expect a new test sometime in 2023.
3. The NLRB is likely to rule that independent contractor misclassification, by itself, is an unfair labor practice. The NLRB General Counsel has expressed an intent to reverse the Velox Express decision from 2019, in which the Board ruled that misclassification was not an automatic ULP. More information is here. Now that the Board majority has switched from Republican to Democrat, expect a decision in 2023 that creates an automatic ULP when there’s a finding of worker misclassification.
4. Expect state legislatures to keep changing the tests for Independent Contractor vs. Employee. Some states will try to make it harder to maintain independent contractor status by passing ABC Tests, in either a standard or strict version. A few conservative states may go the other way and adopt the latest version of the Uniform Worker Classification Act proposed by ALEC. The law would create a safe harbor for independent contractor classification if certain requirements are followed, including having a written contract. Versions of this law have been passed in West Virginia and Louisiana. You can read more here. Expect Oklahoma to be next.
5. Expect significant rulings on California independent contractor law. Several important cases are pending. These include Olson v. State of California, which challenges the constitutionality of AB 5. Oral argument was held in the Ninth Circuit in July 2022. In another case, the California Court of Appeal is considering the legality of Prop 22, the successful ballot measure that helped to protect independent contractor status for rideshare and delivery drivers using app services. Oral argument in that case, Castellanos v. State of California, was held in December 2022.
The law regarding contingent workforce is constantly changing, and 2023 looks to be another year of significant transformation. As always, it will be a good idea to watch these new developments carefully, as they will likely have a significant impact on companies using independent contractors and other contingent workforce arrangements.
Christian Encarnacion-Strand presents an unusual problem for the Cincinnati Reds. His name is too long to fit horizontally across the back of his uniform. The Reds are taking an upside-down-horseshoe approach to this problem, and if this minor league third baseman makes the big league club this year, his 18-character surname (with hyphen) would win the award (there’s no award) for most characters in a major league surname.
The current honor lies with Simeon Woods Richardson, a pitcher for the Twins, whose unhyphenated surname stretches 16 characters (including the space). The Twins applied more of a 3/4 circle strategy, which I think is less visually appealing than the Reds’ approach.
When it comes to horizontal challenges, placing letters on a uniform falls in the category of very low risk. The twitter community may have strong opinions, but there’s no real implication to either approach.
But when it comes to horizontal relationships among companies competing for talent, it’s much more important to get things right. No poaching agreements can lead to criminal charges — as we can see from a case making its way through the federal district court in Connecticut.
In the pending case, Company A outsourced engineering projects to companies B through F, all of whom compete for engineering talent. Companies B through F also compete with each other for projects from Company A.
Between 2011 and 2019, Companies A through F allegedly agreed to restrict the hiring and recruiting of engineers and other skilled-labor employees between them. All of the companies allegedly agreed to (1) not hire employees of Companies B through F and (2) not proactively contact, interview, and recruit applicants who were employed by another one of the companies. Company A allegedly policed and enforced the agreement.
This arrangement led to a criminal indictment, charging that these no-poaching agreements were a conspiracy in restrain of trade, in violation of the Sherman Act. The indictment alleges that the companies engaged in illegal market allocation, which suppressed competition for talent and wages.
The defendants filed a motion to dismiss the indictment. Because this issue potentially affects staffing and franchise relationships, the American Staffing Association, the Society for Human Resource Management, and others filed amicus briefs in support of the motion to dismiss.
On December 2, 2022, the district court denied the motion to dismiss. The opinion evaluates the arguments on both sides and considers how this arrangement compares to others where no-poach agreements have been held to be permitted. For example, the court considered whether the agreed-upon restraint was “ancillary to a legitimate business collaboration.” If yes, that could support an exception to the legal prohibition on restraints of trade. But the court ruled that the relationship here was competitive, not collaborative, because Companies B through F were competing for outsourcing work from Company A.
From a procedural standpoint, this decision does not make any findings about whether the arrangement actually did violate the law. This ruling is just the denial of a motion to dismiss, which means the case can move forward.
But the opinion should provide a wake up call to the staffing industry, the franchise industry, and other organizations where a small identifiable number of companies are competing for talent and for engagements.
The federal government has made it a priority to minimize restraints of trade and has shown a willingness to issue criminal indictments against companies (and individuals) who enter into unlawful agreements that restrict labor mobility.
That is not to say that all no-poach agreements are unlawful. In many situations they are appropriate. But companies in horizontal competition with each other need to tread very carefully, and any no-poach agreement among horizontal competitors may create significant legal problems, including potential criminal liability.
For baseball uniforms, horizontal challenges can be addressed with the upside-down horseshoe or 3/4 circle strategy (preferably the former!). But these simple solutions are not available in the business world, where companies compete for talent and engagements. As of now, there is no upside-down horseshoe exception to the Sherman Act.
In Inner Mongolia, these sheep have been walking in a circle for about two weeks, with a few sheep occasionally standing in the middle. Here’s video.
Various theories have been circulating to try to explain the odd behavior, including that it may be some sort of bacteria-induced delirium.
But I think I know the real reason. (And a hearty Mazel Tov! to the wooly couple!)
When drafting independent contractor agreements, it’s never a good idea to be unsure of why you’re doing something. Too often, businesses use generic agreements and don’t understand the impact or purpose of what they’ve written.
One common place I see mistakes is in the very beginning of contracts – the contractual recitals.
Recitals are often used to provide context for the reader. Recitals are also used for six-year old piano players to play chopsticks for grandma, but that’s for another day. For example, an off-the-shelf independent contractor agreement might start with something like this: We’re in the business of doing X, and we are retaining Contractor to do this part of X. Therefore, the parties agree to the following terms.
The problem with that innocent sounding recital is that it may be evidence the contractor is misclassified.
Under a Strict ABC Test, if the work being performed by the contractor is within the hiring party’s usual course of business, the contractor is automatically considered an employee. That fact fails prong B of a strict ABC Test.
Under an Economic Realities Test or a Right to Control Test, one of the factors often considered is often whether the work being performed is “an integral part” of the business, or some variation on that theme. Unlike ABC Tests, these tests are balancing tests and so one factor will not necessarily determine a worker’s classification, but there’s no reason to give the factor away, especially in a contract recital.
In a misclassification challenge, every fact and contract term will be subject to scrutiny.
If you’re unsure whether the term is needed, then question whether to include it. Recitals generally aren’t needed at all, and I often omit them from my independent contractor agreements. Don’t include off-the-shelf terms if you don’t understand their effect.
Unexplainable behavior makes for good blog posts and tweets, but not good contracts.
Which is why I never ask unfamiliar sheep to help me draft contracts.
The world’s dirtiest man died last month at the (ripe) age of 94, having reportedly going 60 years without bathing. Covered in soot and living in a cinder-block shack, the Iranian hermit was known for eating roadkill, smoking a pipe filled with animal excrement, and believing that cleanliness would make him ill.
The newest dirtiest man alive may be this guy in India, who as of 2009 hadn’t bathed in a mere 35 years. Instead of water, this man of the people opts for a “fire bath,” in which he lights a bonfire, smokes marijuna and stands on a leg praying to Lord Shiva. The man told a reporter from the Hindustan Times, “Fire bath helps kill all the germs and infections in the body.” Of course it does.
Sometimes when we settle lawsuits, we also feel dirty. Maybe not that dirty, but at least icky. It feels wrong to pay money to a plaintiff when we feel the other party doesn’t deserve it. But settlements are often driven by factors other than the merits of a claim, such as business conditions or considerations other than purely financial.
In independent contractor misclassification cases, a settlement is sometimes the only way to ensure that a lawsuit does not result in forced reclassification of workers. In a settlement, the parties can agree upon terms, including financial payments, without conceding that anyone was misclassified and without requiring a reclassification going forward.
That is what happened in a recent case involving A Place for Rover, which is an app-based gig economy company that connects dog walkers with dog owners.
In May 2021, the app company won summary judgment in a misclassification dispute. The company argued that dog walkers were independent contractors, not employees, even under California law. The company argued that it could satisfy each prong of the ABC Test and that, regardless, it was a referral service under California law, which would exempt it from the ABC Test usually used in California to determine whether a worker is an employee. The company urged the court instead to analyze the classification dispute using the S.G. Borello balancing test, not an ABC Test.
The district court did not reach a conclusion on whether the company was a referral service and instead determined that the ABC Test was satisfied. The court ruled that dog walkers controlled their own work, routes, and prices, making them legitimate independent contractors.
But the plaintiff appealed, and the company may have feared that the Ninth Circuit Court of Appeals would revive the case and send it to trial. Instead of taking a chance on a bad outcome, the company settled.
By settling, the company pays money to avoid the risk of a judgment that the dog walkers were employees, an outcome that would likely render the company’s business model no longer viable. The company’s decision makers probably felt a little dirty, paying any money at all after having won at the district court level. That is not a surprising outcome, even if they felt strongly about their case. Because the stakes are so high in misclassification litigation, that’s often how these cases conclude. Icky but sometimes necessary.
But at least in litigation, afterwards you can take a bath.
There’s an ongoing debate in my family over whether tennis balls are green or yellow. I sit firmly in the green camp and can’t see the yellow. My family thinks I am an idiot.
Turns out we’re both right. (Read into that as you wish.)
Tennis balls are officially Optic Yellow, but on the color wheel, that’s the same color as Electric Lime. There’s been some serious investigative journalism devoted to this topic, and the debate rages on. See here and here.
While Optic Yellow and Electric Lime may be the same, co-employment and joint employment are definitely not the same. Here’s today’s explainer.
In both co-employment and joint employment, there are two employers. For our purposes, the secondary employer is the one that benefits from the workers’ services. The primary employer is the one that pays them.
Co-employment is a voluntary arrangement in which one entity (often a Professional Employer Organization, or PEO) agrees to perform administrative/HR tasks for another entity, usually including providing benefits, HR services, and taking on the obligations of an employer in each jurisdiction where the workers will be.
The company that will benefit from the workers’ services selects them, determines their pay, determines their schedules, terminates them, and generally decides on all terms and conditions of employment. The company then sends them to the co-employer (PEO) to be hired and onboarded for the sole purpose of providing services to the secondary employer.
Unlike an employee leasing or staffing agency relationship, when a co-employment relations ends, the employees stay with the secondary employer. They don’t go back into a pool.
In co-employment, the employees and all parties acknowledge up front that this is a co-employment relationship, with the terms and conditions of employment dictated by the secondary employer. The offer letter and employee handbook will generally explain to the new hire the nature of the co-employment relationship.
No one worries about being deemed in a co-employment relationship because co-employment is an intentional choice. It’s not something that a court declares.
Joint employment, on the other hand, is a legal conclusion, often not a relationship that is acknowledged by the parties. The most common scenario for joint employment is when a staffing agency provides workers for staff augmentation, with the workers fully integrated into the secondary employer’s workforce and supervised by the secondary employer’s managers.
Joint employment can arise when labor services are provided by a staffing agency, a subcontractor, or a consulting firm. In a joint employment situation, there are two distinct employers. The staffing agency, subcontractor, or consulting firm is the primary employer and, if there’s not joint employment, then it’s the sole employer.
The primary employer determines wages and benefits and often selects the workers to be hired. Those workers often provide services for multiple companies, either sequentially or simultaneously.
If a secondary employer terminates a worker’s assignment, the worker stays with the primary employer. The primary employer can reassign the worker to another job site or make its own determination whether to keep the worker employed. You’ll want your staffing agency agreement to make clear that you can end a worker’s assignment but that you have no right to control the worker’s employment status with the agency.
There is a contractual relationship between the two companies that one will provide services for the other. But joint employment is not a foregone conclusion. Joint employment can exist, for example, if the secondary company makes decisions about the workers’ wages, working conditions, schedules, training, etc. To oversimplify a bit, joint employment is somewhat likely in a staffing services situation; less likely when retaining professional outside consultants.
Unlike with co-employment, joint employment does not involve a trilateral understanding among the worker and the two companies that the worker is employed by both.
Generally, the secondary company will argue that it does not control wages and working conditions, is therefore not a joint employer, and is therefore is not liable for any employment-related errors by the primary employer. The determination of whether joint employment exists is a legal determination, not based on an agreement among the parties and the worker.
What you’re worried about, therefore, is a finding of joint employment. Joint employment is not unlawful, but it creates unplanned risks and liabilities for the secondary employer. For example, if a staffing agency fails to pay its employees as required by law, the secondary employer is fully liable for the underpayment and the other legal consequences, even though it had no control over the primary employer’s payroll practices.
For more fun facts about joint employment, choose the Joint Employment category of posts in the blog. But be mindful of the date of the post. In the world of joint employment and determine when joint employment exists, the rules are always changing. So that’s fun, right?
The parliament of New Zealand maintains a list of words and phrases that are considered unbecoming to say about another member and are therefore banned from use during parliamentary debates. These include:
His brains could revolve inside a peanut shell for a thousand years without touching the sides.
Energy of a tired snail returning home from a funeral.
Could go down the Mount Eden sewer and come up cleaner than he went in.
Silly old moo.
Words matter when trying to preserve a worker’s independent contractor classification too. Avoid possessives when referring to independent contractors, who are not “your” anything. The terminology you use should be consistent with the concept that the contractors are in business for themselves.
Check your company’s website and public facing materials and try to avoid phrases like this:
Our technicians [or representatives or whatever]
Our team of [whatevers]
We install/repair/other verb
Other words and phrases can also suggest employment and should be avoided when referring to contractors:
Hire (instead, retain)
Wages (instead, compensation)
Assignment (instead, project or engagement)
Duties (instead, services)
Using terminology that does not sound like employment will help when trying to show a court of agency that the relationship is not employment.
And never, ever tell anyone that your independent contractor’s brains could revolve inside a peanut shell for a thousand years without touching the sides. That’s just unbecoming.
The Fremont Troll, photo by Sue (CC BY 2.0) modified
Back in the 1990s, Seattle was known for Nirvana and Pearl Jam, Ken Griffey Jr., Microsoft, Frasier (which I could never get into), the emergence of Amazon, and a lot fewer homeless people. The fewer homeless people may have been in part to the Fremont Troll, an 18-foot sculpture erected in 1990 under the Aurora Bridge, where it holds a crushed VW Beetle and would be scary as hell to sleep next to.
The troll’s still there, but Griffey and Frasier are gone and we all know what happened to Nirvana.
Having left the 90s behind, Seattle in 2022 apparently wants to be known instead as a city where it is pretty burdensome to retain independent contractors.
The Seattle City Council passed a law that requires immediate action from all companies that have solo independent contractors working in the city. The Independent Contractor Protections Ordinance, codified at SMC 14.34, took effect Sept. 1.
The rest of this article was originally published as a BakerHostetler Alert, here. Immediate action is needed for companies with solo contractors in Seattle, so read on. All the same helpful info is just below.
The law applies to solo independent contractors who perform any part of their work in Seattle for a commercial hiring entity if the contractor receives or is expected to receive at least $600 in total compensation from the hiring entity during a calendar year. If the hiring party knows or has reason to know that the work is being performed in Seattle, then the law applies, even if the hiring party has no preference as to where the work is performed.
Independent contractors are defined to include individuals and entities consisting of only one person. The law does not apply to workers being treated as employees by a staffing agency or consulting firm.
Commercial hiring entities are defined to include for-profit and nonprofit organizations. Modified rules apply to drivers for transportation network companies, such as ride-share services. There are also exceptions for lawyers and for contractors whose sole relationship to the hiring party is a property rental agreement.
Commercial hiring entities with independent contractors covered under the new law must:
Provide a written precontract disclosure to the contractor that includes at least 12 specified categories of information about the engagement. This disclosure must be in a single document in the contractor’s primary language. A model notice is available.
Provide written updates before making changes to any of the required information.
Provide timely payment consistent with the precontract disclosure terms or a later written contract. If no deadline for payment is specified, then the contractor must be paid no later than 30 days after the work is completed.
Provide an itemized, written payment disclosure accompanying each payment. The disclosure must be in a single document, such as a pay stub or invoice, and it must contain information in at least 12 specified categories.
Provide a written notice of the contractor’s rights under the new law. The notice must be in English and, if applicable, the contractor’s primary language. A model notice is available.
Maintain for three years records that demonstrate compliance with these requirements.
Refrain from retaliating against any contractor who asserts rights protected under the new law. Prohibited retaliation includes threatening to report that the contractor is an illegal immigrant. If any adverse action is taken within 90 days of a contractor’s exercise of rights, the law creates a rebuttable presumption that the action was retaliatory.
The precontract disclosure and disclosure of rights must be provided before work begins or, for contractors already providing services, by Sept. 30, 2022.
Penalties for violating this law may include payment of unpaid compensation, liquidated damages, civil penalties, other penalties payable to an aggrieved contractor, fines and interest. These penalties are in addition to any other relief available under any other law.
BakerHostetler’s Contingent Workforce team continues to monitor state and local developments affecting companies that retain independent contractors. Please reach out to your BakerHostetler contact or any member of the Contingent Workforce team for compliance assistance.
Worker protection laws are a bit different in China.
According to this report, a Chinese company forces its employees to eat raw eggs as punishment if their work does not meet expectations. When one intern complained, the HR Manager allegedly responded, “What law is preventing you from eating a raw egg?”
Even if the company’s motivational techniques could be challenged under Chinese labor law, Chinese legal experts caution that the intern is probably not the right person to complain. His unpaid internship apparently doesn’t make him an employee under Chinese law. And there it is: The age old questionof Who Is My Employee? is a thing in China too.
Back in the U.S., we know that the employee vs. independent contractor question makes all the difference in whether several types of employment, tax, and benefits laws apply. But what about military leave law?
Under the Uniformed Services Employment and Reemployment Rights Act (USERRA), employees are guaranteed reinstatement and other job protection rights after taking military leave. And employers must grant military leave when requested.
Do the same protections apply to independent contractors?
According to federal regulations, the answer is no — so long as the contractor is properly classified as a contractor.
Under USERRA, independent contractor status is evaluated using a Right to Control Test. The regulations say these six factors should be considered:
1. The extent of the employer’s right to control the manner in which the individual’s work is to be performed;
2. The opportunity for profit or loss that depends upon the individual’s managerial skill;
3. Any investment in equipment or materials required for the individual’s tasks, or his or her employment of helpers;
4. Whether the service the individual performs requires a special skill;
5. The permanence of the individual’s working relationship; and,
6. Whether the service the individual performs is an integral part of the employer’s business.
No single factor is controlling, but all are relevant for determining whether an individual is an employee or an independent contractor.
As with so many other laws, it’s not enough just to assume USERRA doesn’t apply because a worker is classified as an independent contractor. The workers has to be properly classified as an independent contractor, according to the test that applies to that particular law.
Getting it wrong means failure to comply with military leave law. That sounds unpatriotic and unfair. And it could leave you with egg on your face.
[Note to self for future blog post idea: Can you require independent contractors to eat raw eggs in the U.S.?]
Zippy practices for the 13th Annual Lying Down Championships
Lying down in the face of a challenge is rarely a good strategy. I did, however, find one exception.
A man from Montenegro recently won the 12th Annual Lying Down Championships, beating out nine other competitors by remaining horizontal under a tree for 60 hours. As a reward for his (lack of) effort, he received 350 euros, lunch for two at a restaurant, a weekend stay at a local village, and a rafting trip.
Then things got weird. Local media reported that shortly after the competition, the winner was taken into police custody for (allegedly) physically attacking journalists and damaging the headquarters of a newspaper that called him “the biggest swindler in all of Montenegro.”
I suppose there’s a lesson in here somewhere: Offer a man an award and he’ll lie still for 60 hours, but call him a swindler and he won’t take that lying down.
But I digress. In this post, I want to share some tips gleaned from a recent New Jersey Supreme Court case involving prong C of the ABC Test. The case also serves as a reminder never to take a misclassification audit lying down.
The dispute involved East Bay, a drywall installation company that used independent contractor drywall installers for residential jobs. Until 2013, the company treated its installers as employees. It then switched to an independent contractor model. Risky move. This sparked an audit.
The New Jersey Department of Labor and Workforce Development wanted to know why this company, which was still active, suddenly lacked employees. The audit looked at the individuals who continued to install drywall and examined whether, under New Jersey’s ABC Test, they were independent contractors or employees.
You can guess what happened next. The Department found that 16 installers were misclassified, and it issued a hefty back assessment against the company for failing to pay into the state unemployment fund. The company appealed and lost.
The New Jersey Supreme Court’s opinion focused largely on what it takes to prove prong C of the ABC Test — that the individual “is customarily engaged in an independently established trade, occupation, profession, or business.” (You can read more about New Jersey’s ABC Test here, but otherwise I am going to assume that readers are familiar with the basic concept of the ABC Test.)
The drywall company put forth evidence that the independent contractors had registered business entities and certificates of insurance. The New Jersey Supreme Court held that wasn’t enough to satisfy prong C. This evidence wasn’t enough to prove that the individuals truly operated independently. Evidence in support of prong C should demonstrate that the independent contractor would not become unemployed if the work from this company went away.
The Court gave some examples of evidence that would have been more persuasive in satisfying prong C, including:
That the IC’s business will continue when this engagement ends;
That the IC’s business is stable and lasting, or other evidence of longevity;
That the IC has other customers;
That the IC has other sources of revenue, and the company being audited is not the primary source of income for the IC;
That the IC provides the tools, equipment, vehicles, and other resources needed to perform the work;
That the IC has telephone listings or business stationery;
That the IC advertises;
That the IC has its own employees;
That the IC maintains inventory;
That the IC bears the risk of loss;
That the IC benefits from the goodwill generated from a job well done;
That the IC is required to maintain educational and licensure requirements;
That the IC is permitted to obtain work from other businesses; and
That the IC in fact performs work for other businesses.
The court cited these as examples of the types of evidence that would have been helpful to prove prong C. This is not a mandatory list. The point here was just that business registrations and certificates of insurance were not enough. Strategically, there is other evidence that would be helpful too, and there are steps that can be taken when retaining ICs to help build a defense. I maintain a longer list but, hey, I can’t give away all the secrets here.
Other observations from the New Jersey Supreme Court decision:
1. How to invite an audit. Switching from an employee model to an independent contractor model is, by itself, enough to prompt an audit.
2. An ominous footnote about prong B. There was also a dispute in this case over the meaning of prong B. Remember, New Jersey has a standard ABC Test, which allows prong B to be satisfied by showing either the work is outside the hiring party’s usual course of business or the work is performed outside of the places of business of the hiring party. (This is different than the California version of the ABC Test.) All drywall installation work was performed at customers’ residences. After the audit, the Commissioner of Labor found (inexplicably) that prong B was not satisfied. It is unclear from the opinion whether that was based on a conclusion that the customers’ residences were East Bay’s places of business or was based on some other fact, such as some kind of work being done at East Bay’s place of business. If the Commissioner believed customer’s residences to be East Bay’s places of business, then it is hard to see how the latter part of prong B could ever be satisfied. But the NJ Supreme Court did not consider prong B in its decision. The Court ruled that prong C was not satisfied, and so it chose not to wade into the morass of prong B.
But there is an ominous footnote. When the Court declined to consider prong B, it noted that in its prior decisions, the place of business meant locations where the hiring party had a “physical plant or conducts an integral part of its business.” That’s consistent with common sense and would exclude a customer’s residence. The Court then, however, invited the Department of Labor to issue regulations explaining how the Department thinks prong B should be interpreted. Yikes!
3. You need to fight unemployment claims by ICs at the initial audit level; you can’t expect a court to save you on appeal. Courts will defer to the findings of an agency if its factual findings have any support in the record, no matter how flimsy. In other words, the agency can be wrong in its overall weighing of the factors, but a court is supposed to affirm the agency’s decision if there’s evidence to support it. Not “a preponderance of evidence” or “ample evidence” or even “sufficient evidence.” Just “evidence.” Folks, the reason we have trials is because there’s almost always at least some evidence on both sides, even if the preponderance of the evidence leans the other way. You shouldn’t have to pitch a shutout to win the game.
I have seen the same deference standard applied to unemployment decisions in New York and Ohio. The courts defer to the agencies. It is unfair. The result can be that the agency’s decision gets affirmed, even if it made the objectively wrong decision.
This unfair standard highlights how important it is to win at the earliest stages in an unemployment claim, if independent contractor status is being challenged. The initial investigation is your best chance to defend independent contractor status. If you wait, it’s too late. Provide the auditor your best evidence on every factor, and don’t hold back.
Remember the consequences too. If one contractor is misclassified, the agency will likely deem all other similarly situated contractors to be misclassified, and you’ll be on the hook for unpaid assessments for all of them. The stakes are high. Companies using independent contractors should spend the time and money to mount a full defense of their contractor’s status at the audit stage. It’s worth the investment, especially because the state courts will generally defer to the agency’s findings, even if the agency is wrong.
Here’s the ultimate takeaway: If you’ve entered a Lying Down Competition, it’s ok to lie down for as long as you want. But if you’re faced with a worker classification audit, or a 1099 audit, or an unemployment claim by a former independent contractor, do not take that lying down.
You need to fight hard in the audit, producing evidence to support independent contractor status. You’ll have the right to appeal if you lose, but don’t expect a fair chance to prove your case. You’ve got to do your best to win any classification dispute at the initial audit. That’s the time to retain counsel and invest time and resources. If you lose the audit and bring an appeal, you’re fighting a steep uphill climb.
The natives of Papua New Guinea call the hooded pitohui a “garbage bird,” and they don’t eat it or touch it. As Westerners learned more recently, there’s a good reason for the islanders’ hostility.
The hooded pitohui is the first bird confirmed to be poisonous. The bird‘s feathers emit batrachotoxins, which causes numbness and burning in low concentrations. A heavier does can cause paralysis, cardiac arrest and death. In other words, there’s good reason for keeping the hooded pitohui off the menu.
Numbness and burning may also describe the impact of a recent DOL enforcement action on two contractors in Louisiana. They were dealt a double hit—the DOL found independent contractor misclassification and joint employment.
After an investigation, the DOL’s Wage and Hour Division found that hundreds of painters and drywall workers had been misclassified as independent contractors. The company that retained the workers, PL Construction, failed to pay overtime and failed to maintain accurate time records, both violations of the Fair Labor Standards Act (FLSA).
Adding to the pain, the DOL found that a higher tier contractor, Lanehart, was the workers’ joint employer. That meant Lanehart was jointly liable for the violations—even though it had no control over PL Construction’s pay practices.
The DOL recovered more than $240,000 in overtime back wages for 306 workers.
There are several lessons here, both for companies that retain independent contractors directly and for higher tier contractors that engage subcontractors that use ICs.
1. The DOL considers independent contractor misclassification an enforcement priority. The agency is actively looking for violations.
2. The DOL publishes its wins. That means you can expect a press release naming and shaming your company if the DOL finds that there’s a practice of misclassifying workers. Have you heard the old adage that there’s no such thing as bad publicity? It’s not true.
3. Higher tier contractors are taking a risk if they put their head in the sand and disregard misclassification by their lower tier subs—especially if they plan to direct the work of the lower tier sub’s workers.
Here, the DOL found that Lanehart, the higher tier contractor, supervised PL’s workers and maintained records of who worked when. Lanehart’s supervision and direction made it a joint employer of PL’s workers. Under the FLSA, a joint employer is fully liable for wage and hour violations, even where it had no control over how the lower tier sub paid its workers.
4. A lawsuit is not the only way misclassification claims arise. Federal and state agencies can initiate investigations too. And while arbitration agreements with class action waivers can prevent class action litigation, they can’t stop a federal agency from pursuing claims on its own.
The DOL made its position pretty clear in its press release: “Our investigation shows the costly consequences employers face when they or their subcontractors fail to comply with the law. When we determine a joint employment relationship exists, the Wage and Hour Division will hold all responsible employers accountable for the violations.”
Misclassification hurts. Joint employment doubles the pain. The DOL can inflict an uncomfortable burning sensation, even without sending a a hooded pitohui your way.
Who Is My Employee? 