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 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.
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.
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.
A couple in Uttarakhan, India, has sued their 35-year old son for $650,000 on the grounds that he failed to provide them a grandchild. The monetary claim reflects the amount they supposedly invested in him over the years, apparently viewing him as some sort of horse stud when they paid for his education and wedding.
Their petition explains, “We killed our dreams to raise him” and “despite all our efforts, my son and his wife have caused mental torture by not giving us a grandchild.”
In the business world it seems more reasonable to demand a return on your investment in someone. But that has limits too.
Last week in Virginia, a jury awarded $2 billion to a software company for misappropriation of trade secrets, finding that a rival had paid a disloyal employee of the victim company to steal trade secrets and pass them along. Investing in someone to steal trade secrets is not kosher. Unlike the “no grandbabies” case, that seems like solid ground for a lawsuit.
While the theft of trade secrets appeared intentional here, it’s possible to acquire a rival’s confidential information unintentionally too. The risk may be especially high when you’re retaining an independent contractor who has expertise in an industry and who has likely worked for various competitors in the same space.
When retaining independent contractors, businesses should take steps to ensure they are not going to be acquiring confidential or trade secret information from the contractor.
Here’s an easy tip to help protect your company from inadvertently acquiring confidential or trade secret information from a competitor: Include in your independent contractor agreement a clause that prohibits the contractor from using any confidential or trade secret information from any past client or employer. Prohibit the contractor from incorporating any such information into any work that the contractor creates for your business.
The same type of clause can be inserted into your employment agreements.
While intentionally stealing a rival’s trade secrets is obviously a no-no, an accidental taking or an accidental incorporation of such information into your software or other systems can also create liability. Taking a clear stand that you prohibit that sort of thing will help avoid a problem later. And, if something bad does occur (assuming you didn’t solicit the improper disclosure), you’ll be in a much better place to defend against a misappropriation claim.
As for the Uttarakhan man and his wife, I don’t know what the best defense is to that sort of claim. But I do know the next family get-together is likely to be a bit uncomfortable.
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.
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.
There’s an optical illusion known as a negative afterimage. If you stare at the red dot on this woman’s nose for about 15 seconds, then look at a blank wall, you’ll see the woman on your wall – but in full color and with dark hair. And yet, there is no woman on your wall.
You see what isn’t there because the illusion tricks the photoreceptors in your retina.
Monday’s ruling by a federal judge in Texas also has us seeing what isn’t there – or what was there and then wasn’t there – or something like that, but with respect to the test for independent contractor classification.
In early January 2021, the Trump DOL issued a new regulation that sought to provide clarity on how to determine whether someone is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Even though the FLSA is a federal law that is supposed to apply everywhere, different courts around the country used different versions of the FLSA’s Economic Realities Test to make that determination.
Under the new regulation, 29 CFR Part 795, there would be just one test. It was simple, and the same rule would apply all over the country. The regulation was scheduled to take effect March 8, 2021. But a few days before the effective date, the Biden Administration postponed implementation of the new rule. Then in May, they rescinded it. They replaced it with nothing. If you go to the Code of Federal Regulations, there is no 29 CFR Part 795. (Here, try it!)
But Monday’s ruling said to stare a little harder. It’s there.
The court ruled that the Biden Administration’s effort to delay and then withdraw Part 795 was unlawful and violated the Administrative Procedure Act. The delay provided too short a comment period, failing to offer the public a meaningful period to provide input. The withdrawal was improper because the DOL failed to consider alternatives and instead “left regulated parties without consistent guidance.”
Because the delay and withdrawal of the Trump era rule were deemed unlawful, the court ruled that Part 795 did, in fact, go into effect March 8, 2021, and “remains in effect.”
So now you probably want to know what the rule is, since you cannot find it online in the Code of Federal Regulations – at least as of Tuesday night.
The test in Part 795 identifies two “core factors” for determining the independent contractor vs. employee question under the FLSA. If both factors point in the same direction, the issue is generally decided. If the core factors point in different directions, three “other factors” are considered.
• The nature and degree of the individual’s control over the work; and
• The individual’s opportunity for profit or loss.
The control factor supports independent contractor status if the worker “exercises substantial control over key aspects of the work,” including setting schedules, selecting projects, and being allowed to work for others.
The profit or loss factor weighs in favor of independent contractor status if the worker has the opportunity to earn profits or incur losses based on the exercise of initiative, managerial skill, business acumen or judgment, or based on management of his or her own investments or capital expenditures. Examples of investments may include hiring helpers or buying equipment.
If the two core factors do not determine the issue, three other factors are to be considered:
• Amount of skill required for the work;
• Degree of permanence of the working relationship between the individual and the potential employer; and
• Whether the work is part of an integrated unit of production.
Amount of skill required. This factor weighs in favor of independent contractor status if the work requires specialized skill or training that the potential employer does not provide.
Degree of permanence. This factor weighs in favor of independent contractor status if the work is definite in duration or sporadic. This factor supports employee status if the work is indefinite. Work that is seasonal by nature does not weigh in favor of independent contractor status, even though it’s definite in duration.
Whether the work is part of an integrated unit of production. This factor is likely to receive the heaviest criticism from worker advocates. The “integrated unit of production” factor comes from a pair of 1947 U.S. Supreme Court cases. Over the years, this factor has morphed into the question of whether the work is “integral” to the potential employer’s business. Part 795 takes a firm stance here, saying that — based on the 1947 Supreme Court decisions — the relevant question is whether the work is “integrated,” not whether it is “integral.”
This factor weighs in favor of independent contractor status if the work is “segregable” from the potential employer’s processes for a good or service. For example, a production line is an integrated process for creating a good. A software development program may require an integrated process for creating a computer program. Work that is performed outside of an integrated unit of production is more likely performed by an independent contractor.
What Happens Now?
First, the DOL can appeal the decision to the Fifth Circuit. We expect that will happen. In the meantime, a stay might be issued or might not be issued.
Second, Part 795 is now in effect, unless a stay is issued.
Third, it’s a fair question how much this really matters anyway. The test was not intended to change the outcome in most instances. It was instead intended to articulate more clearly how these determinations were already being made. The two “core factors” were already determinative in almost all cases, even if courts were not explicitly identifying two factors as being most important. Also, the Circuit Courts of Appeal do not have to adopt the DOL’s interpretation of the test. They can go on using their five-part and six-part tests, or they can apply the Part 795 analysis.
The Part 795 should now be the applicable test. But we shall see.
If you stare hard enough at your handy copy of the Code of Federal Regulations, and then look at a blank wall, Part 795 just might appear.
In this post, we’ll set the bar low. Today’s theme is “Don’t say stupid [stuff].”
Those of you living outside Northeast Ohio may have missed this recent gem. During a city council meeting on whether to allow ice fishing at Hudson Springs Park, Hudson’s mayor opposed the proposal — on the grounds that ice fishing shanties might be used for prostitution.
“If you open this up to ice fishing, while on the surface it sounds good, then what happens next year? Does somebody come back and say, ‘I want an ice shanty in Hudson Springs Park for ‘X’ amount of time?’ And if you then allow ice fishing with shanties, then that leads to another problem. Prostitution.”
Don’t say stupid stuff. After being widely mocked, the mayor resigned a week later.
A similar rule of thumb applies when evaluating your independent contractor relationships.
It’s a great idea to look carefully at those relationships and to examine whether misclassification might exist. But be careful what you put in writing. Don’t write stupid stuff. Emails are a plaintiff’s lawyer’s best friend.
If you think your business might be misclassifying its contractors, you get a gold star for being proactive. (Congratulations! It will look great on your chart on the refrigerator.) But don’t express that opinion in an internal company email. Pick up the phone and call someone. Or better yet, get your legal counsel involved. Not only can you have privileged, non-discoverable email communications with counsel, you can also get helpful legal advice.
Email, IMs, DMs, texts, Slack, and Team chats are all discoverable in litigation. If your business gets sued for misclassifying contractors, you do not want a trove of emails from HR to the CFO saying, “I think we may be misclassifying our contractors” or “I saw Lebowitz’s blog, and I think our contractors are probably employees under the Right to Control test,” or “That California ABC test is a real killer. There’s no way we meet part B.”
Those are helpful thoughts — and you all know I always recommend being proactive about these things — but please, please, pick up the phone instead. Call your CFO. Call your company president. Call your lawyer. Don’t write it in a discoverable email or text or IM or chat. Don’t create evidence that will allow a plaintiff’s lawyer to say, “Not only was this business misclassifying its contractors, but they knew they were doing it. Just look at this email.”
Your good intentions in identifying a possible issue can be used against you. But be careful how you communicate that concern. Say it, don’t write it.
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.