Independent Contractor Misclassification

Photo by: Bethany Legg

Photo by: Bethany Legg

A few days ago, Uber agreed to pay up to $100 million to settle class-action lawsuits in California and Massachusetts claiming that its drivers are employees not independent contractors. Paying out $100 million is by no means the end of this story. The settlement does not affect other drivers’ ability to sue on the same grounds nor does it preclude the Labor Commissioner from determining that individual drivers are in fact employees (which it has done in at least one case).

The U.S. Department of Labor also recently issued a formal interpretation of the federal Fair Labor Standards Act as it pertains to the classification of independent contractors. This advisory opinion signaled the intention of federal regulators to scrutinize independent contractor classifications and treat most workers as employees.

Most companies do not have enough independent contractors to be subject to class action lawsuits worth $100 million, but how will a $1 million lawsuit or even a $100,000 lawsuit affect your business?

If your company uses independent contractors, here are some steps you could take to minimize your exposure:

  • Closely examine the independent contractor relationship against the factors used by California courts, the U.S. Department of Labor, and the Internal Revenue Service.

Courts and regulators each have their separate tests to determine whether someone is an employee or independent contractor. So the person working for you may be an independent contractor under the IRS’s rules but an employee under California law. Despite the differing tests, the determining factor is the company’s right to control the manner and method by which services are provided. However, the lack of control does not necessarily mean that you are home free. California courts will look at other factors such as: whether the person performing services is engaged in a distinct occupation or business; whether this kind of work is usually done under the direction of the principal or by a specialist without supervision; the skills required; who supplies the tools and place of work for the person performing the services; the length of time services are performed; whether the person is paid by the hour or by project; whether the work is part of your regular work or business; and whether the parties believe they are creating the relationship of employer-employee.

  • Prepare an independent contractor agreement that clearly defines the relationship.

The independent contractor agreement should outline the terms of the relationship, the parties’ expectations and responsibilities, and how to resolve disputes. Your agreement should reiterate that you are not prescribing the manner by which the contractor will perform his/her services. The agreement should not require contractors to comply with your company’s policies. Most importantly, the independent contractor agreement should state that the independent contractor is exclusively responsible for self-management and supervision and is free to choose when and how to work, when to take meal and rest periods, and to decide the manner and method of delivery of the agreed upon goods or services.

Although independent contractor agreements are important, they do not define the relationship and a court or regulatory body will still take a close look at the parties’ conduct.

  • “Let it go” and do not supervise.

Do not treat independent contractors the way you treat your employees. Independent contractors should not receive the same forms, handbooks, guidelines, training, memos, etc. as your employees.

All materials and communications with contractors concerning the work for which they are hired should state that they are merely suggestions, and the contractor will ultimately decide the manner and method of performing the service.

Company management should not manage, supervise, train or direct the contractors or assign work beyond a general description of duties.

PRACTICAL TIP:

Periodically review each independent contractor relationship and analyze it critically. Reclassification may be necessary and although less than ideal, properly classifying workers could save you from a debilitating lawsuit in the future. If you have a difficult time auditing the relationship from a neutral perspective, seek assistance from counsel. If you use independent contractors and do not have an independent contractor agreement, prepare one, or if you have one that is unsatisfactory, have it reviewed and revised by counsel.

Schedule a call if you need guidance on your independent contractor relationship. 

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In: California Civil Litigation, Contracts, Employment Law

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