Author: Ronald Esq.

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Seven Costly Myths About Managing Contract Workers

Businesses across the country are continuing to cut costs by replacingemployees with independent contractors. Some savings are certain–employers don’tpay employment taxes to the IRS or employee benefits to their workers. However,many hidden costs can reduce these savings or even erase them entirely.

    This article focuses on seven legal myths, myths that can lead businesses tobelieve they are saving money by blinding them to the costly legal risks ofhiring workers as independent contractors instead of employees. These mythsresult from being uninformed about the legal differences between employees andindependent contractors. Shattering these myths is the best way to learn howthese distinctions affect your business’s legal compliance and why companiesshould include these risks in any cost-cutting calculations.


    Myth #1: Employers should use the IRS’s 20 Common-Law Factors Test todetermine worker status as employee or independent contractor.


    Reality: The IRS no longer applies its long-standing, much-publicized, andfrequently used 20 Common-Law Factors Test to determine a worker’s status asemployee or independent contractor. The IRS has replaced this test with a newapproach that focuses on three categories to determine if a worker is anemployee or independent contractor: Behavioral Control, Financial Control, andType of Relationship. Companies relying on the 20 Common-Law Factors Test todayrisk costly fines and penalties for worker misclassification by IRS auditors.


    The IRS is specifically targeting companies that have laid off employees tosave costs and then hired independent contractors to perform the same work.Their incentive is the same as that of businesses being audited–the hugeamounts of money not being paid in employment taxes. In short, employers’savings become Uncle Sam’s losses, and Uncle Sam wants his money back! Theanswer lies in recognizing this risk and making sure that you are classifyingyour workforce properly, complying with the agency’s new tests.


    Myth #2: Employers can avoid costly worker misclassification risks bycomplying with the IRS worker-status test.


    Reality: The overwhelming focus on the IRS’s worker-status test by businessand legal advisers has led many employers to believe they can avoid legal risksof worker misclassification entirely by pleasing Uncle Sam. However, the IRS’sworker-status test applies only when businesses need to determine worker statusfor employment-tax purposes. Precious little information is provided about themany other federal (and state) laws governing the workforce, yet each has itsown test to determine worker status, and all differ from the new IRS approach.Four examples are:


    Employee benefits: A 12-factor test determines whether a worker is anemployee or independent contractor under ERISA, the federal law governingemployee benefits.


    Immigration: The Immigration Reform and Control Act (IRCA) applies aseven-factor test to determine worker status.


    Employment discrimination: The Equal Employment Opportunity Commission (EEOC)applies a test based on the “right to control the means and manner of aworker’s performance” in federal employment discrimination cases.


    Wage and hour laws: The Fair Labor Standards Act (FLSA) applies an “economicrealities” test, including six factors to determine whether the worker iseconomically dependent on the business to which the services are provided.


    While it is important to learn the worker-status rules under the various lawsand regulations governing the workplace, just knowing that all worker-statustests are not the same is an important first step in reducing legal risks.


    Myth #3: You can avoid costly worker-misclassification liability by complyingwith federal statutes and regulations governing the workforce.


    Reality: Even if your company complies with lengthy lists of laws andregulations governing the workforce, you still risk liability by misclassifyingas independent contractors any workers who are considered to be “common-lawemployees” by our courts and the IRS.


    Many high-profile worker-misclassification lawsuits, whose staggering coststo employers made national headlines, were based on courts’ findings thatplaintiffs were common-law employees.


    The IRS defines a common-law employee as “any individual who, under commonlaw, would have the status of an employee . . . a person who performs servicesfor an employer who has the right to control and direct the results of the workand the way in which it is done. For example, the employer provides theemployee’s tools, materials, and workplace, and can fire the employee.” Unlikeindependent contractors, “common-law employees are not self-employed andcannot set up retirement plans for income from their work.”


    Courts and the IRS will find that workers are employees if they meet thecommon-law-employee criteria, whether they are hired as independent contractors,freelancers, or temporary or other “contingent” workers.


    Myth #4: An employment contract expressly stating that a worker is anindependent contractor means that the worker is an independent contractor.


    Reality: In a series of recent cases, several appeals courts across thecountry have ignored or rejected employment contracts that expressly designatedworkers as independent contractors. These and other courts have consideredwritten contracts less important than the actual working relationships, controlof worker performance, and other factors when worker status is at issue.


    In the landmark case Vizcaino v. Microsoft, the Ninth U.S.Circuit Court of Appeals held that Microsoft’s “permatemp” workers werecommon-law employees despite the fact that they had signed written agreementsacknowledging that they were independent contractors.


    Myth #5: Hiring CEOs, CFOs, and officers as independent contractors ratherthan employees is an acceptable, routine, legal business practice.


    Reality: While hiring corporate chief executives as independent contractorsmay be a common, routine, and legal business practice, it carries its own legalrisks for creditors, employees, and shareholders. The currentcorporate-accountability crisis is exposing these risks every day. Consider theEnron case. When Enron hired Stephen Cooper as its new CEO, his contractdesignated him an independent contractor, not a full-time employee. SECinvestigators knew that the independent-contractor status would limit the newCEO’s fiduciary responsibility to the company and its creditors. This wouldhave freed Cooper from fiduciary responsibility to the company and itscreditors. They characterized the designation as “inappropriate” and (joinedby the Florida State Board of Administration, an Enron creditor and shareholder)scolded the company for its independent-contractor designation. The SEC forcedEnron to change Cooper’s contract status to “full-time employee” topromote corporate responsibility.


    Myth #6: All contractors are the same when it comes to legal compliance.


    Reality: All contractors are not the same. The IRS considersindependent contractors to be self-employed. Each is a business owner with theright to choose from various forms of business entity, including a corporation.An independent contractor’s business entity can affect the potential liabilityof any company that hires or manages that person when legal disputes arise.Recognizing that all contractors are not the same can help reduce the cost offuture potential legal disputes in contractor-workforce management.


    Myth #7: Workers’ compensation policies protect employers from liabilityfor work-related injuries suffered by employees, but not independentcontractors.


    Reality: This is true, and therefore the risks of potentially costly legalconsequences also must be considered. Because independent contractors aren’tcovered by an employer’s workers’ compensation plan, hiring independentcontractors (or converting employees to independent-contractor status) can openthe door to personal-injury lawsuits when contractors suffer work-relatedinjuries.


    Because they are not employees, independent contractors who are injured onthe job can bring a personal-injury lawsuit alleging negligence, defectivemachinery or equipment, or other grounds for liability, just like any businesscustomer or client. Employers must recognize the real costs of losing theprotective shield that workers’ compensation provides against such lawsuits.


   The information contained in this article is intended to provide usefulinformation on the topic covered, but should not be construed as legal advice ora legal option. Also remember that state laws may differ from federal laws.

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Common Contractor Myths

Some savings are certain when companies replace employees with independent contractors. Employers don’t pay employment taxes to the IRS or employee benefits to their workers. But employers that buy into some common myths about independent contractors are overlooking the costly legal risks involved.



    Myth No. 1: Hiring CEOs, CFOs and officers as independent contractors rather than as employees is an acceptable, routine, legal business practice.
    Reality: While hiring corporate chief executives as independent contractors may be a common, routine and legal business practice, it carries its own legal risks for creditors, employees and shareholders. Consider the Enron case. When Enron hired Stephen Cooper as its post-meltdown CEO, his contract designated him as an independent contractor, not a full-time employee. SEC investigators knew that the independent-contractor status would limit the CEO’s fiduciary responsibility to the company and its creditors. This would have freed Cooper from fiduciary responsibility to the company and its creditors. The SEC forced Enron to change Cooper’s contract status to “full-time employee” to promote corporate responsibility.


    Myth No. 2: All independent contractors can be treated as “business associates” under the new HIPAA privacy requirements.
    Reality: Independent contractors can fall into either of two worker classifications under the new HIPAA personal health information privacy rules: business associate or workforce member. Treating all contractors as business associates without determining their proper classification can result in costly penalties for HIPAA noncompliance, ranging from $100 up to $250,000.


    Myth No. 3: Employers can avoid costly worker-misclassification risks by complying with the IRS worker-status test.
    Reality: The IRS’s worker-status test applies only when businesses have to determine worker status for employment-tax purposes. Many other federal (and state) laws govern the workforce, and each has its own test to determine worker status. For example: a 12-factor test determines whether a worker is an employee or independent contractor under ERISA; the Immigration Reform and Control Act applies a seven-factor test to determine worker status and the Fair Labor Standards Act applies an “economic realities” test, including six factors to determine whether the worker is economically dependent on the business to which the services are provided.


    Myth No. 4: An employment contract expressly stating that a worker is an independent contractor means that the worker is an independent contractor.
    Reality: In a series of recent cases, appeals courts have ignored or rejected employment contracts that expressly designated workers as independent contractors. These and other courts have considered written contracts less important than the actual working relationships, control of worker performance and other factors when worker status is at issue.


    In the landmark case Vizcaino v. Microsoft, the 9th U.S. Circuit Court of Appeals held that Microsoft’s “permatemp” workers were common-law employees despite the fact that they had signed written agreements acknowledging that they were independent contractors.

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Employment Discrimination and the Contingent Workforce

discrimination
Bias is a potential workplace issue even with a contingent workforce.

Traditionally, classification of workers as employees or independent contractors were based on tax and payroll issues, relying on the Internal Revenue Service’s “20 Common-Law Factors” test. Employment-discrimination law compliance has usually focused on regular employees, paying little attention to temporary and other contingent workers. Yet all that is changing.

The explosive growth of temporary and other contingent workers has raised new legal questions and quandaries for business owners and managers. A temporary worker’s status as employee or independent contractor depends on the statute involved and regulatory agency administering it. An employer’s liability also depends on the legal scheme, how many employees it has and whether it has correctly classified all its employees. For both employers and their contingent employees, the changing contingent employment landscape has replaced many of the traditional rules with a maze of new, often vague and confusing legal requirements.

A good example is guidance recently issued by the Equal Employment Opportunity Commission (EEOC), the agency charged with administering and enforcing our federal anti-discrimination laws, including the Americans with Disabilities Act (ADA). The EEOC’s “Enforcement Guidance on the Application of EEO Laws to Contingent Workers Placed by Temporary Employment Agencies and Other Staffing Firms” illustrates how non-discrimination statutes should be applied to temporary, contract and other contingent workers.

The EEOC’s Guidance explores four issues that arise when temporary and other contingent employees bring employment discrimination claims:

  1. worker status: employee vs. independent contractor
  2. who is potentially liable if the temporary worker is an employee
  3. who is potentially liable if the temporary worker is not an employee
  4. whether an employer is covered by the laws, regardless of the temporary worker’s status.

1.  Worker Status/Classification.
The EEOC provides its own list of 15 factors to determine worker status [see list below]. They’re vague.Even worse, the EEOC states that “all aspects of the employment relationship are considered.” Generally, all factors are based on questions of control, and a worker is generally considered an employee if the right to control the worker or working conditions lies with the staffing firm and/or its business

2.  Who’s Liable if the Worker Is an Employee?
If a worker is an employee, the question of “who is the employer” often arises when the worker brings an employment discrimination claim. For employment discrimination claims, temporary staffing agencies are generally considered to be employers of the workers they hire and place with clients on temporary assignments.

The agency usually hires the worker, determines when and where the worker should report to work, pays the wages, is itself in business, withholds taxes and social security, provides workers’ compensation coverage, and has the right to discharge the worker.

Significantly, this classification can come despite agency contracts that specifically identify their workers as independent contractors. The actual overall relationship is more important than the employment contract. Temporary staffing agencies are generally presumed to be employers, and their staff to be employees. This often comes as a surprise, with many staffing firms assuming they aren’t legally accountable for discrimination or harassment of their workers at their clients’ work sites.

Businesses that use temporary workers are also often deemed “employers” of temporary workers if they have significant supervisory control over the worker and his or her environment, applying the same vague standards.

3.  Who’s Liable If the Worker Isn’t an Employee?
Anti-discrimination statutes not only prohibit an employer from discriminating against its own employees, but also prohibit an employer from interfering with an individual’s employment opportunities with another employer.

The EEOC’s policy is that a company with enough employees to qualify as an employer under a particular employment statute can be liable for discriminating against an individual who isn’t one of its employees. For example, a temporary-staffing firm that discriminates against its client’s employee can be held liable for unlawfully interfering in the individual’s employment opportunities, even if the worker is not the firm’s employee.

Conversely, a business charged with discrimination by a temporary worker can be liable even if the worker is not the company’s employee.

4.  Whether a Business Is Covered or Not
Many federal anti-discrimination employment laws exempt small businesses by limiting coverage of the law to employers with a minimum number of employees. For example, the ADA and Title VII apply to any employer with 15 or more employees for a period of 20 weeks or more. The Age Discrimination in Employment Act (ADEA) has a 20-employee minimum requirement for 20 or more weeks. An exception is the EPA (Equal Pay Act), which doesn’t provide minimum-employee exceptions.

This minimum employee-coverage requirement has produced its own controversies, particularly when companies involved in litigation argue that the law doesn’t cover them because they don’t have enough employees. In some instances, firms may have fewer than 15 full-time permanent employees, with large staffs of contingent workers.

While employers may point to the number of employees on their payroll, the EEOC’s position is that an employer must count every worker with whom it has an employment relationship. For example, a worker assigned by a staffing agency to a business client may be listed on the business client’s payroll. However, both the business client and the staffing agency must count the worker as an employee if the other employee-classification criteria have been met.

The array of employment discrimination requirements, growing use of contingent workers and increased outsourcing of business functions have raised new, complicated and controversial legal issues when temporary workers bring employment liability claims.

As workforce managers learn more about the laws affecting contingent employment, they are recognizing their need to practice more proactive management. As temporary workers learn their legal rights, they are turning to lawyers and the courts to enforce those rights. For now, the only certainty is change.

EEOC Employee vs. Independent Contractor Criteria:
The following are the 15 factors provided in the EEOC’s Guidance to determine worker status under federal employment discrimination laws. (For more information, see the IRS’s explanation.)

  • The firm or client has the right to control when, where and how the worker performs the job.
  • The work does not require a high level of skill or expertise.
  • The firm or client—rather than worker—furnishes the tools, materials and equipment.
  • The work is performed on the premises of the firm or client.
  • There ‘s a continuing relationship between the worker and the firm or client.
  • The firm or client sets the hours of work and duration of the job.
  • The worker is paid by the hour, week or month, rather than for the agreed cost of performing a particular job.
  • The worker has no role in hiring and paying assistants.
  • The work performed by the worker is part of the regular business of the firm or client.
  • The firm or the client is itself in business.
  • The worker is not engaged in his or her own distinct occupation or business.
  • The firm or client provides the worker with benefits such as insurance, leave or workers’ compensation.
  • The worker is considered an employee of the firm or the client for tax purposes (i.e. the entity withholds federal, state and Social Security taxes).
  • The firm or client can discharge the worker.
  • The worker and the firm or client believe that they are creating an employer-employee relationship.