Rock history is filled with questions. There’s “Questions 67 and 68,” a 1969 release by the band then known as Chicago Transit Authority, about a girl that singer Robert Lamm was seeing in 1967 and ‘68. There’s “Question” by the Moody Blues, reflecting on the war in Vietnam. There’s even ? and the Mysterians, a typographically monikered pre-punk band that gave us “96 Tears.” (Fun fact: The band members were the children of migrant workers who had settled in Michigan.)

I can’t sing at all, but I can field questions. One question I get a lot is, “Should I make this person an independent contractor?”

Note the phrasing of this question. It’s not “Can I?” — that’s a legal question — but “Should I?” That’s partly a legal question and partly a business question. The answer largely depends on your tolerance for risk.

When trying to decide “Should I?” ask yourself three questions:

1. What is the likelihood the IC relationship will be challenged?

If no one ever questions the relationship, it never becomes an issue. But it’s not enough to consider whether you think the contractor will ever challenge the relationship. You need to worry about federal and state agencies, auditors, and other similarly situated contractors who might not be as content with their classification. Consider also that a contractor who is happily working might be less happy if your company terminates the relationship. A contractor who wants to be a contractor now might have other ideas later if the relationship ends badly and the contractor seeks legal advice.

Here are a few situations where there’s a high likelihood of a classification challenge:

• Volume: The company works with a lot of independent contractors.
• Industry: The contractors are performing services in an industry that is under heightened scrutiny, such as rideshare, installers, delivery drivers.
• High Dollars: The independent contractors are paid a substantial amount of money, either individually or collectively.
• General Audit Risk: The company considers an audit to be likely for any reason, even if unrelated to worker classification.
• Similar Employees: The company has employees who do the same or similar work as the independent contractor.

Here are a few situations where there’s a low likelihood of a classification challenge:

• One-off. It’s a one-off retention, meaning there’s just one independent contractor; there are no other independent contractors who are similarly situated.
• Shared Expectations: The independent contractor wants to be an independent contractor (although that can change if the relationship ends badly).
• Low Dollars: Low dollar value of the contract.
• No Similar Employees: There are no employees doing what the contractor has been retained to do.

2. If there’s a challenge, what is the likelihood of success?

This is the purely legal question. Is the independent contractor classification correct under all of the applicable laws (federal, state, and local)?

That’s the question we usually explore in this blog (see all other blog posts, haha), but the legal analysis is only part of the equation you should be considering when asking the “Should I?” question. The answer to the legal question will depend on the facts, the contract, the applicable law, and the jurisdiction. This is the part where you want to reach out to a lawyer.

3. If misclassification is found, what are the likely damages or adverse consequences?

Often it’s a close call whether a worker is misclassified. Do you want to take that risk? Sometimes the stakes are so low that a company might be more willing to take the risk. If there are only a few independent contractors and they are not paid much money, you might be more willing to take the risk if there are facts that could support IC status (even if there are also facts that go the other way).

In making this assessment, there are generally several factors to consider:

A) What laws might be violated if the contractor is misclassified?

Sometimes an IC classification seems questionable on the facts, but the impact of misclassification would be very low. Suppose the IC works 15 hours a week, never more than 8 hours in a day, is paid at a rate of $20/hour or more, performs non-manual labor, and has other clients. Even if this worker is misclassified:

• There’s no federal minimum wage or overtime violation (hourly rate exceeds minimum wage, no overtime hours).
• There’s no state or local minimum wage or overtime violation (same).
• There’s no failure to provide employee benefits (probably not eligible because part-time).
• The risk of a workplace injury and resulting workers’ compensation claim is minimal (based on the nature of the work).
• An unemployment claim is unlikely because the IC would continue to have other work (has other clients).

There could be local wage statement violations, meal or rest break violations, or disclosure violations. There could be a failure to reimburse business expenses. There could be tax penalties for failure to withhold. There could be an unfair labor practice charge under the National Labor Relations Act (see point #3 in this post). There could be penalties for failing to comply with local freelancer laws. There could be assessments for failing to pay into the unemployment and workers compensation systems. But none of these adverse findings are likely to create significant economic exposure under this fact pattern.

On the other hand, suppose the IC works varying hours per week, perhaps up to 60 hours, is paid on a fixed per project basis that would result in an hourly wage below the minimum if the IC worked a high number of hours, has no other clients, and performs manual labor. Suppose there are several ICs doing the same kind of work with the same IC classification. Now the risks are much higher in each category. You’re looking at possible violations of many laws, with potentially significant economic consequences.

B) What does the statute say about damages?

What damages are available? Are there penalties? Liquidated or punitive damages? Attorneys’ fees?

C) Is the potential misclassification systemic?

If the potential misclassification is of one person, the damages are going to be limited. If there are many ICs doing the same thing, the potential damages are multiplied. And, if there are many similarly situated ICs, a plaintiff’s lawyer might find the case attractive as a potential class action. If there are violations of law, your company may be liable for the plaintiff’s attorneys’ fees.

D) Is the use of contractors vital to the business?

For some companies, a finding of widespread misclassification could put the entire business model at risk. For other companies, a few adjustments can be made and life goes on.

E) Are there individual arbitration agreements in place?

Individual arbitration agreements can prevent class action litigation, but they don’t solve every problem. Is there a risk of mass arbitrations? Is your business still subject to California PAGA claims? Is the arbitration agreement enforceable as written?

F) Are there other practical or business considerations?

If there’s a finding of misclassification, what else might happen? Can you justify your decisions if questioned by your CEO or the board? Will there be adverse publicity? Would the business suffer reputational damage? Would the company’s value or stock price suffer? What would it cost to defend a claim, even if you win? If the company gets sued based on the decision to retain workers as contractors not employees, would your job be at risk?

That’s a lot of questions.

I know.

And we haven’t covered it all either. There are other factors to consider too, but hopefully this is enough to get you to start thinking about how to conceptualize the “Should I?” question.

The main point to remember is that “Should I?” is not purely a legal question. It requires business judgment and risk calculation too.

If you’ve had enough of the questions for today, I will leave you with this, courtesy of the best band to come out of Jacksonville, Florida.

 

© 2023 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.