Misclassification of workers: a costly issue

Misclassification of workers as independent contractors remains a top employment law problem area, frequently resulting in fines, orders for back wage payments, penalties and an array of headaches for unsuspecting employers. Proper classification of workers can be difficult for several reasons:

• There is no singular definition of employee or independent contractor under federal or state law.
• An agreement between an employer and a worker that the worker is an independent contractor may have little, and in some instances, no legal significance. Independent contractor is a legal status determined by factors that go beyond the employer’s and employee’s desire to contract for work on a certain basis. Written agreements can be quite helpful, but are not dispositive. 
• Both federal and state policy has been trending towards classifying workers as employees due to perceived governmental and individual worker benefits from employee payroll withholding, workers’ compensation and unemployment insurance. 
• The relationship between employer and worker frequently evolves over time, and even a well-intentioned employer can find that a worker once properly classified as an independent contractor has now become misclassified.

Overall, an independent contractor is generally someone who holds himself or herself out separately from the employer, and agrees to carry out responsibilities typically imposed on an employer. Other indicators of an independent contractor are maintaining a separate business checking account, invoicing for work completed, having more than one client, having his or her own tools, and setting his or her own hours. An employee, on the other hand, generally performs duties directed or controlled by the employer, receives training for work to be done, works for only one employer, and uses tools and equipment supplied by the employer.

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These factors, however, are not exhaustive, and for some tests, one factor may be enough to control the outcome. Although a written agreement between an employer and independent contractor is not dispositive, a carefully crafted document helps establish parameters and expectations of the relationship going forward. It can also provide useful evidence that required criteria have been met.

In short, proper classification of workers can be complicated, and employers should take steps to ensure that workers are properly classified. Where employers wish to engage a worker as an independent contractor, they should consult with legal counsel to structure the relationship and accompanying independent contractor agreement carefully.

Karyn Forbes is a partner at Shaheen & Gordon and a member of the firm’s employment law practice group. She serves as general outside counsel to companies, counseling business owners on employment matters, financing, succession planning, corporate governance and general business and litigation matters. Her practice also includes representing commercial clients who are seeking developing real estate, forming commercial enterprises, and re-structuring closely-held businesses. She can be contacted at 603-225-7262 or kforbes@shaheengordon.com.  

Jeanine Kilgallen is an associate attorney at Shaheen & Gordon and a member of the firm’s employment law practice group. Her employment practice includes assisting employers with drafting and implementing effective workplace policies, conducting audits and investigations, and advising employers on handling a variety of difficult workplace issues. She can be contacted at 603-617-3041 or jkilgallen@shaheengordon.com.