The High Price of Misunderstanding Independent Contractor Classification | DCR Workforce Blog

The High Price of Misunderstanding Independent Contractor Classification

MSP/VMS to the Rescue in Independent Contractor MisclassificationsThe DCR blog has always advocated the need to be wary of potential violations when classifying workers as independent contractors. Oops! I almost said – classifying employees as independent contractors. After all, there does not seem to be much difference between the words – worker or employee; but FedEx, Uber and others are paying dearly for apparently not understanding the nuances between the two.

FedEx Corp. recently agreed to a $228 million settlement when accused of having misclassified as independent contractors 2,300 FedEx Ground and FedEx Home Delivery drivers working in California between 2000 and 2007. This is only one of many independent contractor lawsuits filed by workers against FedEx in nearly every state in the union. In 2010, in an effort to protect the company against misclassification claims, FedEx required all independent contractors to incorporate as a business, work for others who had incorporated as a business, or terminate their business relationship with FedEx. FedEx has come to discover that the business structure of the entities and individuals engaged to deliver these services is not sufficient to prevail in independent contractor misclassification cases.

FedEx is not alone. As the sharing economy, using mobile apps, has sprouted wings and taken off, work relationships are being redefined. Now, all companies which engage independent contractors to provide cab services, run errands, deliver food, provide maid service and shop for your groceries are running on borrowed time, more or less. The impact is expected to be seismic!

Why is it so difficult for companies to clearly delineate between employees and non-employees? Determination of independent contractor status has always been subject to confusion. The Federal Government and virtually every state have imposed their own criteria and evaluation methods. When litigation is filed, the appeals process constantly involves different standards for determining whether violations have occurred. But the problem is even more complex. While most states and the federal government have a defined list of criteria (for example, the IRS 20 Factors Test), an employer can be compliant with a majority of factors, but still be deemed non-compliant. Emphasis varies as well. The Federal Government tends to emphasize ‘economic realities’ in which the decision is largely based on whether the worker is primarily dependent on the company for income. Some states prefer to focus on ‘right to control’. In these cases, the major issue is whether the manner in which work is conducted is heavily supervised by the company. As a general rule, courts that focus on ‘right to control’ tend to more frequently side with the workers bringing the suit.

What does this mean for companies that depend on independent contractors for delivery of services? How do these companies maintain standards of service consistency and quality while remaining fully compliant with all statutes regarding independent contractor classification? Insights might be found in examining success stories, as in Saleem v. Corporate Transportation Group et al., filed by the chauffeurs of a “black car” service.

The State of New York enacted the Commercial Goods Transportation Industry Fair Play Act in January, 2014, which presumed that anyone working in the transportation services of commercial goods for a commercial goods transportation contractor will be classified as an employee and not an independent contractor unless some requirements are met which establish, that the driver is actually independent of any control. Based on this legislation, the chauffeurs claimed that they were employees entitled to overtime under both the Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL). Their claim was denied. The decision of the Southern District of New York proved that it is possible to have an independent contractor business model for taxi services. The judge found the classification to have been correctly handled as the company allowed the drivers to:

  • Set their own schedule of work and reject jobs at will,
  • Feel free to work for other car services and provide transportation to private customers; which most of them frequently did,
  • Be partners in making decisions which affected their overall profitability (such as whether to rent or buy a franchise, work for other car service companies, hire other drivers, and solicit private clients),
  • Terminate the franchise agreements at will.

The chauffeurs classify themselves as independent contractors on their tax returns, they receive no benefits from the company that retains their services, and do not receive a salary but do retain a percentage of the fares.

Mistakes can be costly! To minimize the risk of misclassification, DCR encourages companies to re-examine their policies to meet the strictest standards for defending the independent contractor classification. Consider economic realities and right to control. If the engagement requires an ongoing relationship, workers must be compliant with specific company procedures and instructions, and there is little likelihood that the worker would be able to simultaneously conduct similar work for multiple companies, then you should seriously consider filling this position with a direct employee.

Having the right policies won’t provide the protection you are looking for. Your internal staff must be trained to handle non-employees differently, and you must provide oversight to ensure that the worker truly remains independent.

Finally, consider the services of a workforce management firm. These experts will take responsibility for compliance screening, establishing statements of work for each engagement, and modifying relationships or reclassifying workers.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.