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Independent Contractor Conundrum

  Renewed Interest in Classification Issues
  House Panel Hears Testimony
  Intentional Versus Mistaken Qualification
  The Puzzling Maze of Qualifications
  Summary
  The 20-Point Test for Independent Contractors

Renewed Interest in Classification Issues

According to a Government Accountability Office report, almost a third of the entire U.S. workforce is comprised of "contingent workers" as of 2005. (42.6 million)

Government labor statistics do not specifically track independent contractors but instead group them with all contingent workers, including the staffing industry and temporary help.

With a new Democratic majority in power Congress has recently taken a renewed interest in the subject of independent contractors and their classification by employers.

The House Subcommittee on Workforce Protections called a hearing in March on the "Misclassification of Workers as Independent Contractors."

U.S. Rep. Lynn Woolsey, a California Democrat who chaired the hearing, described the misclassification of employees as contract workers "a national problem with implications for federal laws and our federal coffers; a problem we must solve."

House Panel Hears Testimony

The press release issued by the U.S. House Of Representatives after the March hearing had this for a title: "Subcommittee Examines Confusing Classification Rules for Independent Contractors"

The hearing primarily focused on workers in the construction industry, but a wide range of other industries that use contract workers was implicated as well, including trucking and delivery services, janitorial services, manufacturing, and high tech.

The press release noted the following:

"If an employer incorrectly classifies an employee as an independent contractor - classification that involves a patchwork of federal rules - the employer can be held liable for employment taxes for that worker, plus a penalty and the potential for legal action by workers and the government."

During the hearing Catherine Ruckelshaus, a lawyer with the National Employment Law Project in New York, urged better and more coordinated enforcement by the DOL's Wage and Hour Division and the IRS to crack down on employers that intentionally misclassify contract workers.

She also called for "more information sharing" between DOL and IRS to identify suspicious employers or industries.

Another participant in the hearings was Rich Shavell, who represented Associated Builders and Contractors. He remarked that the maze of federal and state regulations can confuse and complicate the situation even further for honest employers who actually want to comply with the law.

And in this vein, Rep. Joe Wilson, the Subcommittee's Ranking Republican added this observation:

"If a team of lawyers is necessary to determine whether a worker is an 'employee' or an 'independent contractor,' an employer working in good faith is saddled with the time, energy, and expense of trying to classify them correctly, often with no guarantee that down the road they won't be found to have gotten it wrong."

Wilson was also quoted in the press release as saying this:

"Indeed, as I've traveled around my district and spoken to business owners, particularly small business owners, that's a common thread I hear: that most businesses want to follow the law, and want to do what is expected of them. Sometimes, it seems, we as policymakers make it harder than it needs to be for that to happen."

Intentional Versus Mistaken Qualification

It should be noted that there is a difference between "intentional" and "mistaken" classification of independent contractors.

The presumption in all of these discussions seems to be that the vast majority of misclassifications are intentional.

For example, consider the following implications:

John J. Flynn, head of the Bricklayers and Allied Craftworkers, told the subcommittee that his union is working to fight "fraudulent misclassification."

In the Chicago area they discovered "a network of accountants and insurance brokers" whose "primary business" is to assist employers in misclassifying workers. This discovery has lead to an investigation by the Illinois state attorney general, according to Flynn.

When asked by Rep. Tom Price if Congress needs to define more clearly the independent contractor/employee distinction, Cliff Horn, president of A. Horn Inc stated:

"A lot of the rules are in place, they just need to be enforced," and that employers "are well aware when they are doing something wrong."

The Puzzling Maze of Qualifications

Rich Shavell, a Florida-based accountant and consultant who specializes in construction, said this in the press release issued from the House Panel on the hearing:

"While the construction industry provides significant opportunities for independent contractors, all parties must function under a confusing framework of rules that inadequately address the classification of workers as either employees or independent contractors."

In general there are several important items that companies need to consider when deciding to use independent contractors for ongoing tasks:

• The contractor must be allowed to work for other clients.
• The contractor must be allowed the option of turning down assignments.
• The contractor must be allowed the option of having another person do the actual work.
• The contractor must be able to determine how the work will be carried out.

For example, Albany is a global contingent workforce consultancy that offers a compliance service to help companies meet federal and state rules for using independent contractors. Albany says that on average, 62 percent of workers classified as independent contractors are actually employees.

Summary

In May Rep. Lynn Woolsey and Rep. Rob Andrews wrote a letter to Secretary of Labor Elaine Chao, calling on her to take immediate steps to prevent the misclassification of American workers.

The letter states: "We want to make sure that DOL is doing all it can to curtail the practice of wrongful misclassification and that it is targeting its enforcement activities in such a way as to address the problem effectively."

And finally, the following statement in this letter is revealing:

"In addition, Federal and state governments lose substantial revenues due to the improper misclassification of workers. The Internal Revenue Service estimated that in 2006 it would lose $2.72 billion in employment-related taxes. A recent analysis of workers compensation and unemployment compensation data in New York State found that noncompliance with payroll taxes means as many as 20 percent of workers compensation premiums - $500 million to $1 billion - go unpaid each year."

Woolsey added that if the subcommittee is dissatisfied with DOL's response, oversight hearings will follow.

Whatever the motivation for this renewed interest in the status of independent contract workers, it will likely remain for the foreseeable future.

The 20-Point Test for Independent Contractors

1. Continuing Relationship - Independent contractors do not have a continuous working relationship with a single employer.

2. Working for More than One Contractor - Independent contractors perform services for more than one entity at the same time.

3. Availability to the General Public - Independent contractors offer their services to the general public on a regular basis.

4. Instruction - Independent contractors do not receive instructions on how to perform and accomplish a job.

5. Training - Independent contractors do not receive training on how to complete a job.

6. Personally Rendered Services - Independent contractors have the right to hire employees or contract with other entities to perform actual jobs.

7. Payment - Independent contractors are paid by the job.

8. Business Expenses - Independent contractors are responsible for their own expenses.

9. Tools and Materials - Independent contractors provide their own tools, materials and equipment to perform the job.

10. Work Location - Independent contractors are free to choose where the work will be performed.

11. Controls Over Assistance - Independent contractors are free to decide to hire assistance to accomplish a job and to control their work activities.

12. Work Hours and Schedule - Independent contractors control their own hours and schedule for accomplishing results.

13. Full Time Work Requirement - Independent contractors are free to work when and for whom they choose.

14. Required Work Order or Sequence - Independent contractors determine the order in which they will perform the work.

15. Required Reports - A degree of control is suggested if a worker is required to submit regular oral or written reports.

16. Investments in Facilities - Independent contractors have a significant investment in facilities in the course of performing their job.

17. Profit or Loss - Independent contractors realize a profit or sustain a loss, based on the success in performing their work or service.

18. Business Succession or Continuation - operations or ability to be successful should not depend on the service of independent contractors.

19. Discharge Rights - Contracts with independent contractors cannot be terminated as long as they perform services in accordance with their contract.

20. No Compensation Liability - Independent contractors may be liable for a breach of contract if they leave without completing their work.

DOL Survey on FMLA 

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