New Year’s Resolution: 5 Tips to Limit Risks of an Independent Contractor Misclassification Claim

new years resolutions independent contractor misclassification 2018You know deep down you’re not really going to run a triathlon or learn Mandarin in 2018, so how about a New Year’s Resolution that’s more realistic? Here are 5 things businesses can do to limit their risks of an independent contractor misclassification finding:

  1. Review and edit contracts. Independent Contractor Agreements should be customized for the specific retention, highlighting actual facts that would be helpful in opposing a challenge to independent contractor status.
  2. Review and modify facts. Almost every independent contractor relationship can be strengthened by finding ways you can give up control or memorialize ways that you do not ever intent to exercise control. Does it really matter what times of the day your contractor works? If you set hours and don’t need to, change that fact. Then memorialize it in the contract.
  3. Use a Vendor Qualification Questionnaire. Qualify your contractors before retaining them. Make them represent to you that they are really in business for themselves, have other clients, are not economically dependent on getting work from you, etc. These representations can be useful if the contractor — or the government — ever challenges the contractor’s classification by claiming the relationship is really employment.
  4. Assign a gatekeeper. You may have contractors that you don’t even know about because managers in parts of the business have retained outside help rather than ask permission to hire new employees. Create a process that requires managers to obtain permission from a particular person before retaining any outside labor.
  5. Be proactive. Examine the facts and circumstances of your independent contractor relationships now. Know where you stand on the risk scale. Then assess how you can make changes to better protect your business against a claim of independent contractor misclassification. There are almost always steps that can be taken proactively to limit your risks. Be ready.

These are steps every business can take either internally, or with a little outside help. You’ve probably heard Ben Franklin’s axiom, “An ounce of prevention is worth a pound of cure.” Ol’ Ben was giving fire safety advice to his fellow Philadelphians in 1736, but the advice holds true as well when evaluating independent contractor relationships in 2018. Take steps now to reduce risks, and place your business in a better position to extinguish any claims of misclassification.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Can You Pay a Bonus to Your Independent Contractors?

“I want my money!” — Pearl, in The Landlord.

If you haven’t seen this Will Ferrell short video from 1997, take a look. Pretty funny.

Everyone wants their money. Method of payment is one of many factors used to evaluate whether an independent contractor is properly classified or instead is an employee.

Payment by the hour is permitted, but this method of payment more closely resembles employment. Payment by the project, regardless of time spent working, is most appropriate for an independent contractor relationship.

Other methods will do, though, and a fixed payment by the day, the week, or the month can be workable too. Method of payment is just one of many factors in the analysis of Independent Contractor vs. Employee.

Incentive pay for contractors is permitted too. Some examples of bonuses that may be appropriate include:

  • Incentive for early completion of a project;
  • Incentive for achieving certain project-based goals;
  • Incentive for accepting additional gigs.

The more closely the incentive can be tied to the project, the better. If properly classified, independent contractors are in business for themselves, and project-based retentions are most indicative of legitimate independent contractor relationships. Similarly, incentives should be project-based whenever possible.

One final tip: Terminology matters. “Bonus” sounds like something an employee would receive. Try offering “incentive payments” instead.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Don’t Wear Pajamas to Work: Be Careful Using “Statutory Minimum” Workers Comp Clauses in Subcontractor Agreements

Pajamas - Independent Contractor Agreements and Workers Compensation ClausesHave you ever had the dream where you show up at work or school in your pajamas or underwear? You’re exposed and embarrassed in the dream, and you can’t figure out why you forgot to put on regular clothes, right? (Please don’t tell me I’m the only one who’s had this dream. Please?)

You may be living this dream inadvertently in your vendor or subcontractor agreements. (And this is not what people mean when they say, “I’m living the dream!”)

Here’s the problem:

It’s commonplace in vendor and subcontractor agreements to include a section requiring insurance. You might require $1 million in commercial liability coverage, for example. Insurance clauses usually (and should) require the vendor or subcontractor to carry workers’ compensation coverage too. But sometimes these clauses are written in a way that may leave you exposed. Here’s an example:

“Subcontractor agrees to provide workers’ compensation coverage to its workers in the minimum amount required by law.”

You’re good, right? Depends on the state — and the circumstances.

The “minimum amount required by law” may be none.

First, if the worker retained by your vendor or subcontractor is its independent contractor (and not its employee), then there is probably no coverage required at all. State laws impose standards for determining Independent Contractor vs. Employee, but usually there is no requirement to provide any coverage to a true independent contractor.

Second, even if the worker is your vendor’s employee, the “minimum amount required by law” in the state might be none:

In Texas, for example, workers’ compensation coverage is generally optional. The minimum amount required by law is none.

Several states do not require employers to carry coverage unless they have a minimum number of employees. According to this chart from the National Federation of Independent Businesses (NFIB), an advocacy organization for small businesses, the following states require employers to provide workers’ compensation coverage only if they have at least this number of employees:

VA – required if 2 or more
GA, NC, WI – required if 3 or more
RI, SC – required if 4 or more
MS, MO – required if 5 or more

Some states have different requirements for construction and non-construction businesses:

NM – construction: required if 1 or more; non-construction: required if 3 or more
FL – construction: required if 1 or more; non-construction: required if 4 or more
TN – construction: required if 1 or more; non-construction: required if 5 or more

In some states, such as Ohio and New York, workers’ compensation might not be required for sole proprietors who have no employees other than themselves.

So what does all this mean for your agreements?

1. Depending on how your contract is written, you might be wearing pajamas to work. In other words, your agreement might leave you exposed, inadvertently, since the minimum amount of required workers’ compensation coverage for your vendor or subcontractor’s employees might be “none.”

2. Please don’t rely on the thresholds I have listed above. I have not examined the workers’ compensation laws state-by-state and I am merely listing state law summaries from the web. I have not checked these for accuracy. Check the laws in your state and check with legal counsel.

The point here is that the state-minimum required amount of coverage might be “none.” Things can go south for your business in a hurry if your vendor or subcontractor has insufficient coverage. If one of their workers is severely injured, the worker may bring a lawsuit against your business as an alleged joint employer. If the injury is severe enough and there is no workers’ compensation coverage, liability could be in the millions.

Keep this risk in mind when drafting the insurance sections of your vendor and subcontractor agreements. Draft carefully, and be sure you are fully covered.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Court Rules that New Jersey is a Goat (sort of): a Note on Forum Selection Clauses

goat independent contractor misclassification forum selection clause Mary Kay caseThe Monty Hall puzzle is a brain teaser based on the game show, Let’s Make a Deal. The contestant is presented with three doors and must choose one. Choose the correct door and win a car. Choose either of the wrong doors and win a goat. (Note to rural readers: The puzzle is a first-world conundrum and assumes you’d prefer the car.)

Once the contestant chooses, the host opens one of the doors with a goat and asks the contestant whether he wants to stay with his original choice or choose the other unopened door. As explained here, the contestant should always switch doors, since switching provides a 2/3 chance to win. The math here is not intuitive, but read about it and you’ll understand.

The gimmick relies on the fact that the host knows what’s behind each door and will only reveal a door that hides a goat. The host never reveals a car.

When drafting multi-state independent contractor agreements, be the host, not the contestant. You want to know what’s behind each door and choose knowingly — and that leads us to choice-of-law and forum selection clauses.

One of the lessons reiterated throughout this blog is that the tests for Who Is My Employee? (i.e., Independent Contractor vs. Employee) vary substantially among the states. Some state laws are much more favorable for businesses than others. Massachusetts and California, for example, are the goats.

Businesses that use independent contractor agreements across multiple states should consider the advantages of inserting a forum selection clause and choice of law provision. Know what’s behind each possible door and then select, in advance, which state’s law will apply and where any lawsuit between the parties must be brought. If these terms are in an Independent Contractor Agreement, courts will generally (but not always) defer to the parties’ contractual agreement, so long as the selected state has some reasonable connection to the parties’ relationship and is not contrary to the state’s public policy. (Sorry, you can’t pick Hawaii just because you like pineapples.)

A recent case out of New Jersey demonstrates the usefulness of these clauses.

A group of New Jersey independent contractor beauty consultants attempted to sue Mary Kay, alleging independent contractor misclassification and violations of New Jersey wage law. They filed the lawsuit in New Jersey, which the plaintiffs’ bar likens to a shiny new Escalade. Mary Kay, however, sees New Jersey as a goat and knew ahead of time that New Jersey was a goat. On the well-known Car vs. Goat Continuum (ed. note: not actually well known at all), New Jersey employment laws are relatively pro-employee. The company therefore included in its Independent Contractor Agreement the requirements that any litigation be brought in Texas, that Texas law applies, and that any complaint must be recited aloud in court using a voice imitating Ross Perot, circa 1992. (The last part might be unenforceable.)

In response to the lawsuit, Mary Kay pointed to the contract and asked the court to move the case to the Lone Star State. Despite the plaintiff’s protests, the court honored the contract and sent the case southward. The plaintiff appealed that decision but lost. The Court of Appeals ruled that it was proper, under the circumstances, to honor the choice of law and forum selection clauses and to move the case to Texas.

Businesses using independent contractors across multiple states should strongly consider inserting choice of law and forum selection clauses into their contracts. (Arbitration agreements can be an even better option, but that’s for another post.)

Avoid the goats. They’ll eat anything, including your cash.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Beware of Sinkholes When Running Background Checks on Independent Contractors

Sinkholes are terrifying. One minute you’re slowly and cautiously riding along a city street. Then the road buckles and disappears. I feel bad for this guy in the video!

A similar danger may lurk for businesses who perform background checks on independent contractors. You proceed cautiously, following the various legal requirements, then – BAM! – someone claims that by following those requirements, you’re treating the contractor like an employee. Whaaaaat?

Background check laws are full of technicalities and traps for the unwary. For pre-employment background checks, the federal Fair Credit Reporting Act (FCRA) requires:

  • a stand-alone disclosure form, disclosing that a background check may be run,
  • consent, and
  • pre- and post-adverse action notices (if adverse action may be taken).

Several states and localities impose additional requirements on pre-employment background checks.

Many of the more technical background check requirements, however, apply only to employees. For example, your stand-alone disclosure forms for pre-employment background checks almost certainly disclose that a background check may be performed “for employment purposes.” That language comes from the Act. Check your forms. It’s in there for pre-employment background checks (or it should be).

But what if you give that same form to an independent contractor?

The form says the background check is being performed “for employment purposes.” Is that phrase evidence that your business is treating the worker as an employee?

Not necessarily, but why open yourself up to that argument?

I say, “not necessarily” because the Federal Trade Commission (FTC) has issued guidance saying that the “for employment purposes” language can be applied to independent contractors. See here, page 32. It would probably be reasonable for a business to rely on the FTC guidance. Using the “for employment purposes” forms should not, therefore, be considered evidence that the contractor is being treated like an employee.

But why even open that door? If I’m defending against a claim of independent contractor misclassification, I’d prefer not to have to explain that away.

An alternative approach is to add language to the background check disclosure form being used for independent contractors, indicating that a background check may be run for employment purposes “or for purposes of retention as an independent contractor.” Or use a separate set of forms for independent contractors.

Following the pre-employment background check requirements seems prudent but, like a sinkhole, may cause unexpected troubles. Proceed with caution. And don’t fall off your scooter.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Why I Can’t Give You a Template Independent Contractor Agreement

Independent contractor vs employee template independent contractor agreement - generic independent contractor agreement - IMG_1112I am often asked for a sample Independent Contractor Agreement. I do a lot of work in this area, so I should have plenty, right? Well, sure, I have drafted dozens, but they won’t do you much good.

A generic Independent Contractor Agreement that includes a few boilerplate recitals is of little value. A generic agreement probably says something like, “We all agree that you’re an independent contractor and not an employee. We won’t pay employment taxes for you. We’re not paying into your Social Security account or providing you workers’ comp or unemployment coverage. We’re not giving you benefits. You’re lucky if we let you breathe the air in our building. No, you know what, bring your own oxygen tank. You can’t use our air. You agree to all of this and you’ll like it. And Thank you sir, may I have another?

As discussed here, applying the wisdom of a Dave Mason song, merely agreeing to be classified as an independent contractor doesn’t mean the worker is one. The determination of Independent Contractor vs. Employee is based on the facts, not what the parties agree. Remember: You can’t just agree to not to follow tax law, employment law, and employee benefit law. If the facts say the worker is an employee, then the worker is an employee — no matter what the agreement says.

So why even have an Independent Contractor Agreement?

Lots of reasons — if it’s customized to fit the facts of the relationship. Use the contract to highlight the facts that support independent contractor status. When drafting a meaningful Independent Contractor Agreement, consider the tests that might be applied to determine if the worker is really an employee or an independent contractor. These include Right to Control Tests, Economic Realities Tests, and ABC Tests, among others.

If the worker determines when and where to do the work, what days to do the work, whether to hire helpers, what equipment to use, etc., those are all facts that support independent contractor status. Put that in the agreement!

Or better yet, if you do not intend to exercise control over those decisions, don’t just write in the Agreement that the contractor gets to decide these things. Write that the business has no right to control these things. It’s a “Right to Control” Test you need to be concerned about. There is no “Exercise of Control” Test.

Independent Contractor Agreements can be helpful in memorializing a legitimate independent contractor relationship and can be valuable evidence in a hearing or trial if the worker’s status as an independent contractor is challenged. But they are helpful only if they are customized to fit the facts of the relationship.

Generic recitations of independent contractor status are of little value. They’re the Canadian pennies of the contract world. Make your Independent Contractor Agreement work for you.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Why You Should Limit Workplace Rules That Apply to Contractors (Twisted Sister Edition)

There are so many great songs about defying authority. What’s the best? Hard to say. The best video, though – that’s easy. We’re Not Gonna Take It by Twisted Sister. (Watch here, then thank me later. I could watch the first minute a hundred times. Say it with me: “What do you want to do with your life?”)

Rock may about breaking rules, but business is not. With your employees, there are lots of rules you want them to follow, and you probably list them in painful detail in handbooks, posters, flyers, brochures, catalogs, signposts, compendiums, directories, and mandatory worker inner eyelid tattoos.

What about independent contractors, though? To preserve independent contractor status, you already know you want to try to minimize your exercise of control. But some rules are needed, expecially for contractors who work on your site.

Here are some guidelines to consider:

Rules appropriate for employees, but not well-suited for contractors:

  • Employee Handbooks
  • Policy Manuals
  • FMLA Policy
  • Vacation and leave policies

Applying those employee-specific rules to independent contractors would tend to support an argument that contractors are being treated like employees.

Some rules, though, are more appropriate to ask on-site contractors to follow.

Examples of rules that are generally suitable to apply to contractors:

  • Safety rules, especially those related to ensuring safety at the facility (e.g., must wear hard hat, please do not flick matches at that industrial-size fuel tank, keep your fingers clear of the 4000 ton forging press)
  • Emergency evacuation or exit procedures
  • Anti-Discrimination Policy (if drafted broadly, to cover employees, contractors, visitors, interlopers, outerlopers, sidelopers, etc.)

These types of rules can be applied to contractors because they do not tell the contractor how to do the work. Instead, they are designed to ensure a safe and productive space where no one gets hurt.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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