Just Calling Someone an Independent Contractor Don’t Make It So, Pinocchio
By: Dan Cohen
I was delighted to learn the other day that one of my
clients received a clean bill of health from the IRS concerning its treatment
of certain individuals as independent contractors rather than employees. The
groundwork for this result was laid well in advance of the IRS audit and
involved a detailed review of the operation and duties of the individuals and
the adoption of an independent contractor agreement. This document was front
and center of the IRS audit, and I like to think that it was influential.
Don’t get me wrong though: merely calling an employee an
independent contractor in a contract will not protect your business from an
adverse determination by the IRS, the Department of Labor (“DOL”), state
agencies or class action attorneys. Yes, all are stakeholders in cases of
employee misclassification. Several years ago, the U.S. Government
Accountability Office estimated that employee misclassification costs the
federal government in excess of $2.72 Billion in lost tax revenues. This cost
may actually exceed $3 Billion today. State unemployment insurance tax losses are
in the hundreds of millions. Beyond that, misclassified workers often are not
paid minimum wages or overtime pay, and do not typically participate in
employer-based health and pension plans.
Under the Obama Administration, the IRS and DOL have signed
a Memorandum of Understanding enabling the two agencies to work together and
share information to reduce misclassification cases. The DOL has collected tens
of millions from employers in misclassification investigations since hiring 300
additional investigators to combat the problem. Michigan is one of nearly 20
states that have created inter-agency tasks forces to strengthen enforcement
mechanisms. Of course, class action litigation has resulted in several high
profile misclassification findings, like the exotic dancer case in 2012.
Workers are misclassified, often by mistake, but sometimes
by design. For some professions, the line between employee and independent
contractor is blurred and employers make the decision that an independent
contractor designation is proper. Clearly, there are huge cost savings for
employers who classify their employees as independent contractors. And, most of
the legislation designed to protect employees (e.g. Title VII, NLRA, the
Elliott-Larson Civil Rights Act) do not apply. It is for this reason that
misclassification cases are so widespread.
However, unless you can pass the IRS right to control test
and the economic realities test employed by the DOL and State of Michigan
(among other states), the reward may not be worth the risk. Even though the
temptation may still exist, make it a point to review the two tests which can
be found at “Independent Contractor (Self-Employed) or Employee?” Internal
Revenue Service, October 2, 2014. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee
as well as FACT SHEET 13: Am I an Employee?: Employment Relationship Under the
Fair Labor Standards Act (FLSA).” Department of Labor, Wage and Hour Division,
May 2014. http://www.dol.gov/whd/regs/compliance/whdfs13.htm,
as well as “Administrator’s Interpretation No. 2015-1”, Department of Labor,
Wage and Hour Division, July 15, 2015. http://gov/whd/workers/misclassification/ai-2015_1.htm.
If you still believe the worker(s) are truly independent contractors, you
should memorialize the terms and conditions of the relationship in an
independent contractor agreement, establishing the workers independence,
non-exclusivity, right to refuse assignments and the like.
Daniel G. Cohen is a member of the NFIB/Michigan Leadership
Council and a Labor Law Attorney with Pilchak & Cohen, P.C. located in
Auburn Hills, MI. Dan concentrates his practice representing employers
exclusively in the areas of labor law and employment litigation. You can
contact Dan directly at http://mi-worklaw.com/
