Tag Archives: Independent Contractor Agreements

11.21.22
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Don’t Be Like These Sheep: Check Your Contract Recitals to Avoid This Misclassification Mistake

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.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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10.24.22
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Silly Old Moo: Watch What You Say When Trying to Preserve Independent Contractor Status

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.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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06.06.22
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Get Aligned on Commissions: Ten Tips For Using Independent Sales Reps

Zippy incorrectly chooses portrait instead of landscape

Getting properly aligned is important. That’s true not only when using a dog bed, but also when using independent sales reps.

Sales reps generally receive commissions. When commissions systems are unclear, disputes arise. We don’t want disputes. You may think your commission system is clear, whether by tradition or otherwise. But it’s probably not as clear as you think. Unclear commission plans lead to lawsuits, especially after the relationship with a sales rep ends.

Here are ten tips for avoiding commission disputes. These tips are helpful whether your sales rep is an independent contractor or an employee.

1. Put the commission plan in writing, and get the rep to sign it. Many states require written, signed commission plans for employees. (California, I’m looking at you!) But even when not required by law, a clearly drafted and accepted plan is the best way to avoid disputes.

2. Define what constitutes a sale. Is a sale complete when the customer pays for the good? When the good is delivered? When it’s accepted? When some period for returns has expired? Whatever you decide, state it clearly.

3. Define when a commission is earned. Usually there are several things that have to happen before a commission is earned. List them all, and make clear that a commission is not earned until all of these things have occurred.

4. Specify the timing of when commission payments are due. For employee sales reps, you might have less flexibility than with contractors, since state laws often require that employees are paid at certain intervals. But you can also create some space for yourself in your definition of when a commission is considered “earned.”

5. Clarify whether the sales rep must still be employed (or still under contract) to earn a commission. This term will be viewed in tandem with your explanation of when a commission is considered “earned.” Some states (hey there, California!) require that the commission has been paid if the employee has basically done everything needed to earn the commission, even if employment has ended. Calling the rep a contractor won’t necessarily get around that, since as we know, California does not grant a lot of deference to classifying workers as contractors instead of employees.

6. Explain how the commission amount is calculated. The formula might be A times B times C. Whatever it is, write it out.

7. Clarify the relevant time period. If the commission plan is for 2022 only, say so. If the commission plan overrides all prior year plans, say that too.

8. What about charge backs? Are there circumstances when a commission might be paid but you’d have to recoup some of the payment through a charge back? Describe when chargebacks are permitted, if at all.

9. Don’t assume. Spell everything out. Just because there haven’t been commission disputes in the past doesn’t mean they won’t happen in the future. A recently departed sales rep is going to be more aggressive about a commission dispute than one who is still happily engaged, especially if the rep just closed a big deal was separated before the company received payment from the customer. Without a clearly drafted plan, that’s a lawsuit waiting to happen.

10. Write for the jury. A stranger reading your commission plan should be able to tell whether a commission is earned or not, how much the commission should be, and when the commission is due. It needs to be that clear. If there’s ambiguity, expect that the disputed term will be interpreted in favor of the sales rep. After all, you wrote the plan, not the rep.

Bonus 11th Tip: Don’t forget state law. State law may contain requirements for commission plans. Know where your salespeople are working and where they are selling. If multiple states are involved, consider adding a choice of law clause.

Getting aligned on commissions before there’s a dispute can go a long way toward preventing a dispute. Getting misaligned on a dog bed may lead to back pain or a funny picture, but getting misaligned on commissions can lead to expensive litigation.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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05.09.22
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Not Dead Yet: Arbitration Agreements May Sit Dormant, But They Can Still Save You From a Class/Collective Action

Not dead yet. @SCMPNews

This spring has been a bad time for injured civilians who prefer not to be buried alive.

In Peru last month, a funeral procession was interrupted when the 36-year old car accident victim was heard banging on the lid of her coffin, trying to get out. Days earlier the woman had been pronounced dead, in what turned out to be an unfortunate mispronunciation.

In Shanghai, a nursing home mourned the passing of an elderly resident, who was placed in a body bag and sent to the mortuary. As seen in this video taken by a bystander, the mortuary workers unzipped the bag and found the man still moving. He was transferred to a hospital, which seems to me like a more appropriate place for someone still alive.

People may go quiet, but that doesn’t mean they should be treated as dead. The same holds true for individual arbitration agreements. They may exist quietly in the background, but courts can’t just ignore them, as a recent Fifth Circuit Court of Appeals decision made clear.

A plaintiff alleged violations of the Fair Labor Standards Act (FLSA), claiming she was misclassified as an independent contractor and therefore was denied overtime pay. She asked the court to treat her lawsuit as a collective action, claiming that other contractors were also misclassified and were also denied overtime pay. In FLSA cases, plaintiffs have to opt in to join the class. The district court approved the distribution of opt-in notices to similarly situated contractors, letting them know about the lawsuit and their right to participate.

The defendant opposed the notices, pointing out that the contractors had all signed individual arbitration agreements that included class action waivers. They couldn’t opt in, the defendant argued, so they should not get the notice. When the court approved the notices anyway, the defendant filed a writ of mandamus with the Fifth Circuit Court of Appeals, asking the appeals court to intervene and stop the notices from going out.

The Fifth Circuit granted the writ and stopped the notices from going out. The Court of Appeals ruled that the arbitration agreements required all disputes to be resolved through individual arbitration, and therefore the contractors could not opt in to the lawsuit. Since they could not opt in, they could not be sent notices inviting them to opt in.

It’s unusual for a Court of Appeals to grant a writ of mandamus. But here, the Court of Appeals recognized that the arbitration agreements were very much alive, even if the contractors who signed them were silent in the background.

This case is a good reminder of the value of individual arbitration agreements with class action waivers. A well-drafted arbitration agreement will require all claims to be resolved on an individual basis and will include a waiver of the right to participate in any class or collective action. The agreement should also deprive the arbitrator of jurisdiction to preside over a class or collective action.

Businesses that rely on independent contractors should check their agreements and consider adding robust, carefully-drafted arbitration clauses.

Arbitration agreements can sit silently in the background for years, but that doesn’t mean they are dead.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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05.02.22
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Don’t Get in Over Your Head: Set Up a Gatekeeper

Last month in Washington State, at a trailhead on the Olympic Peninsula, a woman dropped her cell phone in a pit latrine. Yes, that’s a flushless outhouse. The woman tried to retrieve the phone using a dog leash, then tried to use the dog leash to support herself as she reached down into the stinky muck. Dog leashes, however, are not meant for such endeavors, and — yes, this really happened — the leash failed. The woman fell head first into the latrine.

Making the best of a shitty situation, the woman found her phone, which she then used to call for help. The fire department rescued her, and the dispatch operator will be telling the story of that intake call forever.

The lesson here is: Know when to get help.

That lesson also applies to your company’s independent contractor relationships. Today’s tip is to set up a Gatekeeper System.

If your company is like most businesses, it’s simpler to contract with outside labor than to hire new employees. Operations managers or a procurement team are the people most likely to approve contracts for services. Because there are no employees being engaged in these contracts, the contracts don’t go to Human Resources, and they probably don’t get reviewed by Legal.

But every contract for services carries a risk that the individuals providing the services may be misclassified. Even if treated as independent contractors, those workers might be your employees under federal or state law. Or, if they’re being treated as employees of the business you contract with, they might be your joint employees. Both scenarios – independent contractor misclassification and joint employment – present legal risks.

But your operations managers or procurement team have not been trained to recognize those risks. They likely have never considered that the people providing those services might be deemed your company’s employees.

To protect against these risks, set up a Gatekeeper System. That would be a policy that says, anytime we retain non-employees to provide a service, there must be a written contract and it must be reviewed by a specific individual, the gatekeeper.

The gatekeeper will be trained to issue-spot and to recognize circumstances that may present an elevated risk of misclassification or joint employment. The gatekeeper can raise concerns with the legal department. Or maybe the gatekeeper is part of the legal team.

Setting up a Gatekeeper System is easy. It’s just a policy requiring a specific layer of review whenever non-employees are retained to perform a service. Make sure everyone authorized to enter into contracts for the business knows of the policy. Then train your gatekeeper to issue spot and to escalate for further analysis when necessary.

The point is that someone needs to know to look out for these risks. You can only protect yourself against the risks you have identified. Once you get sued or hit with an audit, it’s too late.

Just like it was too late for our friend the Washington hiker, who should have asked for help a bit earlier — before getting in over her head.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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02.28.22
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Upside Down? U.S. Companies Can Learn from Australian High Court Ruling on Independent Contractors

Source: Hema Maps

There’s no reason our maps are oriented the way they are, with Australia at the bottom and Canada near the top. There’s no right side up in space, and we could just as easily think of the world with Australia on top, in the middle.

Same with our way of deciding Who Is My Employee? The process for determining whether someone is an employee or an independent contractor doesn’t have to be the way Americans conduct that analysis.

Two High Court decisions this month in Australia highlight a key difference between the American approach and what is now the new Australian approach.

In the U.S., courts look past the written contract and analyze a worker’s status based on the actual facts of the relationship.

The Australian High Court says the U.S. approach is upside down.

In two highly publicized decisions, the Australian court ruled that the contract establishes the rules of the relationship and therefore also determines the worker’s status. In one case, the agreement said the work would be controlled by the hiring party. By contractually reserving the right to control the work, the hiring party inadvertently made the worker an employee. The court still looked past the fact that the parties called the worker an independent contractor, but the court said the contractual requirements of the relationship — the terms and conditions — controlled the outcome.

The other High Court case involved two truck drivers. Their contracts exhaustively set forth terms preserving their flexibility to work for others and to control how their work was performed. Their contracts also called for the drivers to use their own equipment, which involved a significant investment by the drivers. The court overruled a lower court decision that deemed the workers to be employees. The lower court focused on actual control exerted by the hiring party. But the High Court said the contract controls and, in this case, the contract established requirements consistent with independent contractor status. It is up to the parties to follow the contract, but the contract establishes the independent contractor relationship.

There are lessons for American companies here too.

While under U.S. law, the actual facts of the relationship control whether the worker is an employee, the independent contractor agreement is an opportunity to memorialize the helpful facts. That’s why off-the-shelf templates in the U.S. are of no value. (Hot tip: Google & Bing is not a law firm.) See related posts here and here, including how to discomfit a bear.

An independent contractor agreement in the U.S. should be drafted with the particular facts of the relationship in mind. Does the worker get to decide when and where the work is done? If so, put that in the contract. The worker controls when and where the work is performed, and the hiring party has no right to control when and where.

If the worker’s status is challenged, you want the contract to be a helpful piece of evidence. You want to be able to say to a court: Not only does the worker get to decide when and where the work is done (or insert other factor), but the contract forbids us from controlling that.

In the U.S., contract terms like that will be persuasive evidence, but only if the actual facts align. In Australia, the contract sets the rules, and the parties are in breach if they fail to follow the rules established in the contract.

But no matter where you sit, and no matter which way your map is aligned, companies should view independent contractor agreements as an opportunity to build the case that an independent contractor is properly classified.

By planning ahead and drafting carefully, you can maximize your chances of coming out on top.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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01.18.22
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More Than One Iota: Supreme Court Agrees to Decide Scope of Arbitration Law; Outcome Will Affect Independent Contractor Agreements

Last week I read that Sirhan Sirhan had been denied parole again. No surprise there. But what captured my attention was his attorney’s comment that there was not “one iota” of evidence he would be a threat to society if released.

Not even one iota? Why are there never any iotas? And what is the plural of iota anyway? And how do you even respond to that? Well, actually, we had a few iotas. Let me check my notes here. Yes, three iotas.

“Iota” means an infinitesimal amount. Synonyms include bupkus and diddly-squat. But if you search for “iota” online, no one ever has any iotas. The word is always used in the negative.

Well here are a few iotas for you. The Supreme Court has agreed to hear two cases that will affect when arbitration agreements with independent contractors can be enforced. The Supreme Court generally gets involved when there are at least a few iotas of good arguments on both sides.

Both cases address the scope of the Federal Arbitration Act (FAA), which creates a presumption that arbitration agreements should be enforced, but includes a few iotas of carveouts.

In the first case, Viking River Cruises v. Moriana, the Supreme Court will determine whether cases brought under California’s Private Attorneys General Act (PAGA) are subject to arbitration. California courts have said they are not.

In the second case, Southwest Airlines Co. v. Saxon, the Court will address the scope of the Section 1 exemption, which makes the FAA inapplicable to certain types of transportation workers in interstate commerce. The Saxon decision is likely to clear up the mass confusion (and circuit split) over whether last mile delivery drivers and local rideshare fall within the exemption.

In the political arena, arbitration agreements have come under fire, and there is a movement among Democrats to abolish mandatory pre-dispute arbitration agreements. The Supreme Court, on the other hand, appears more likely to enforce the contracts as written, deferring to the contractual intent of the parties and interpreting any exemptions to the FAA narrowly.

There is more than one iota of evidence to support both sides of these disputes. But expect some 6-3s.

If I am pulling out my crystal ball, I expect the Supreme Court will uphold the arbitration agreements, at least in Saxon. Moriana is tougher to predict since PAGA is a state law creation in which the individual bringing the claim acts as a private attorney general, bringing the claim on behalf of the state. On one hand, the state never agreed to arbitrate. But on the other hand, the individual bringing the PAGA claim did agree to arbitrate any disputes, not to bring them in court under the guise of PAGA.

Whenever the Court rules, we’ll see arbitration agreements back in the news. More visibility on this issue will mean louder and more urgent calls from politicians to abolish pre-dispute arbitration agreements.

We can expect many iotas of news on arbitration agreements later in 2022.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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01.03.22
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New Year’s Resolutions: 5 Tips for Avoiding Trouble in 2022

Last spring in Poland, a menacing brown object appeared in a tree. Locals grew concerned about the mysterious beast and closed their windows. After a few days it was still there, and a call was placed to the local animal welfare society.

The authorities responded to the call and arrived on the scene to investigate. The citizens were relieved to learn it was not a bird of prey, a dangerous rabies-infested rodent, or a trapped pet. It was a croissant.

Somebody probably threw it into the tree while trying to feed birds.

The locals were likely embarrassed, but better safe than sorry. When in doubt, take steps to avoid problems. Be proactive.

Here are five tips to start off the new year the right way, with or without arboreal baked goods:

1. Review and revise your agreements with staffing agencies. Make sure you include The Monster with Three Eyes and these other clauses. Consider requiring all individual workers to sign arbitration agreements, and don’t forget the impact a choice of law clause may have.

3. Self-audit your use of independent contractors to determine whether these relationships are defensible. Here’s a tip for quickly identifying the riskiest relationships.

2. Review and revise your agreements with independent contractors. Add safe harbor clauses if you do business in WV or LA. Remember these rules, akin to discomfitting a bear.

4. Create a gatekeeper system so that managers and procurement team members cannot retain non-employee labor without first going through a designated individual. You can’t guard against the risks you don’t even know about.

5. Check your website for references to independent contractor relationships. Don’t refer to your contractors as “our whatevers” or “our team of whatevers.”

Remember, to those who say they haven’t been sued for misclassification, I say you haven’t been sued yet.

Wishing you all a happy and healthy 2022!

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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11.22.21
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You Don’t Have to Be An Official Wizard to Write a Solid Independent Contractor Agreement

Farewell, my bearded friend.
Photo by Shellie, Flickr CC BY-NC-ND 2.0

The Christchurch City Council has voted to discontinue paying its official wizard $16,000 a year to “provide acts of wizardry” for this New Zealand city. Ian Brackenbury Channell, known as The Wizard of New Zealand, lamented the decision, calling city council “a bunch of bureaucrats who have no imagination.”

As you can see from this sad state of affairs, acts of wizardry do not always get the appreciation they deserve. But fortunately it doesn’t take acts of wizardry to draft a solid independent contractor agreement.

A recent Illinois case shows the value of a solid agreement. In a decision earlier this month, a federal court ruled that a freight broker was not vicariously liable for catastrophic injuries caused in an accident involving a driver under contract to haul loads.

The driver had collided with a motorcycle, killing the motorcyclist. His widow sued the freight broker, alleging it was an employer and was therefore liable for the negligent driving of its employee. But the court reviewed the facts of the relationship and the terms of the contract, and it found that the driver was not an employee of the broker.

The broker did not provide equipment, select routes, or exhibit other elements of control. A Right to Control Test governed the analysis in this case. The broker did not retain the right to control the manner or means by which the work was performed. This lack of control was evident in both the facts of the relationship and the text of the contract.

When there’s a tragic loss, like here, it seems natural to point fingers at everybody, including the deepest pockets. But that doesn’t mean the deepest pockets are necessarily responsible for what went wrong. By drafting a careful and through independent contractor agreement, companies can avoid being held responsible for losses that are not their fault.

Although The Wizard of New Zealand undoubtedly has great powers of wizardry and although he is probably almost as much of a tourist attraction as the nearby penguins, he probably wouldn’t have the first clue how to draft a comprehensive independent contractor agreement.

Fortunately, it doesn’t take a wizard to draft a thorough agreement. But do make sure you do it right. Having a thorough agreement in place can make all the difference, especially in a catastrophic loss case when lots of parties — including those not really responsible — are going to be blamed.

You can read more about The Wizard here.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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08.09.21
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Now is the Time to Add These Safe Harbor Clauses to Your Independent Contractor Agreements

Image by Luca Falvo from Pixabay

I just finished reading The Longest Day, the 1959 book by Cornelius Ryan that tells the story of the D-Day landing from Allied, French, and German perspectives. The book covers June 6, 1944 and the days leading up to it, but it doesn’t get into what happened next. To facilitate supply lines into Europe right after D-Day, the British built two artificial harbors off the Normandy coast. Mulberry Harbours A and B allowed for the transport of up to 7,000 tons of vehicles and supplies to the mainland each day.

A harbor is a place where ships can seek shelter from the open ocean. Switching our focus to peacetime and the law, a “safe harbor” is the legal term for a provision that protects against liability if you meet certain conditions. No ships are required. Know the required conditions, and you can find shelter from a legal storm.

Two states recently passed laws that create safe harbors against claims of independent contractor misclassification.

Businesses using independent contractors in West Virginia and Louisiana should update their contracts immediately to take advantage of these new statutes.

Each state’s law provides a list of conditions that, if met, will make someone an independent contractor, providing a safe harbor against claims that these workers are misclassified and should be employees. The LA law creates a presumption of contractor status; the WV law is conclusive.

One of the conditions in WV, for example, is that the written contract “states…that the person understands” a list of five specific facts. The contract needs to “state” these five things. The WV law has other requirements too.

The LA law requires that 6 of a possible 11 conditions are met to fall within the safe harbor.

Other states are considering similar laws. Missouri and North Carolina are considering similar bills. Oklahoma was headed down the same road during the last legislative section but has not yet passed a bill.

Businesses using independent contractors in these states should amend their agreements to take advantage of these safe harbor opportunities.

At a time when the federal government is pledging to crack down further on independent contractor misclassification, it’s important to have contracts that are built to withstand classification challenges by any governmental body. Even under federal law, which doesn’t have these safe harbors, these recitations can be helpful when trying to meet the Right to Control and Economic Realities Tests used in federal law and in most states.

Your agreements with independent contractors provide an opportunity to build your defense against claims of misclassification. They should not be treated as a mere formality.

You want to be able to point to your agreements as Exhibit 1 in your defense against a misclassification claim. Play offense, not defense. Adding the WV and LA clauses — and even the proposed NC and MO clauses — can go a long way toward protecting your independent contractor relationships.

You might not be into reading books about World War II and that’s ok. But please read your contracts carefully. Now is a great time to amend and improve independent contractor agreements.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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