Independent Contractor Relationships
August 9, 2023
By: Frank Harty
As part of the client-exclusive Law & the Workplace webinar series, labor and employment attorney Frank Harty reviewed the importance of the distinction between independent contractors and employees.
Independent contractor or employee? The wrong classification can lead to litigation or regulatory penalties. Employers need to understand the risks of incorrectly designating an individual as an independent contractor rather than an employee.
THE INDEPENDENT CONTRACTOR LEGAL ANALYSIS
Laws have addressed the distinction between an employee and an independent contractor for more than 200 years. The legal analysis has changed little, but it is fine-tuned on a regular basis. Several factors have prompted proposed changes:
- The gig economy
- Hybrid and remote workplaces
- The plague effect
- Political, economic, and social forces
Some advocates assert that individuals participating in the gig economy are an underclass. They’re often classified as independent contractors. Those individuals can’t take advantage of employer health plans or other benefits.
Hybrid and remote options increase the possibility of misclassifying workers as independent contractors.
In Western civilization, an event like the Covid pandemic or the bubonic plague of the 1300s causes death and labor market changes. Because of increased scarcity, workers have more bargaining power than before the event. It’s generally known as the plague effect.
REGULATORY RISKS WITH INDEPENDENT CONTRACTORS
Misclassifying individuals as independent contractors carries significant legal risk for employers. Consider the reach of these regulatory agencies and laws:
- Internal Revenue Service: Incorrect independent contractor designation can create liability for an employer.
- The Department of Labor (DOL): The Fair Labor Standards Act applies to employees but not independent contractors.
- National Labor Relations Board (NLRB): Under the National Labor Relations Act (NLRA), employees are guaranteed the right to engage in concerted activity and to organize their workplace. The law does not apply to independent contractors.
- Employee Retirement Income Security Act (ERISA): Coverage in an ERISA-qualified plan is available only to employees.
- The Immigration Reform and Control Act: To avoid potential responsibility for employing someone who is not properly documented, employers have allegedly characterized workers as independent contractors when they should be employees.
- Iowa Civil Rights Act (ICRA): The ICRA protects employees but not independent contractors from unlawful discrimination based on their protected class status.
THE LEGAL STAKES FOR EMPLOYERS
Many laws depend upon an individual being an employee as opposed to an independent contractor. Typically, only an employee can bring an action in these situations:
- Employment discrimination claims
- Wage and hour claims
- Union organization campaigns
- Government and regulatory enforcement actions
- Income and payroll tax issues
- Workers compensation claims
DEVELOPMENTS RELATED TO INDEPENDENT CONTRACTORS
The National Labor Relations Act of 1935 provides Section 7 rights. Section 7 rights allow employees to organize. It allows them to engage in concerted activity. It offers the right to speak—usually through a union—with a concerted voice with regard to wages, hours, terms, and conditions of employment. The NLRA only covers employees.
In 2019, the NLRB issued the Super Shuttle standard. The board adopted a fairly simple analysis to determine whether individuals who wanted to organize a union were employees. If they were employees, they could take advantage of Section 7 rights. If they were independent contractors, they could not. The Super Shuttle test used factors of the traditional test but focused on entrepreneurial opportunity. It looked at the ability of the individuals to market their services to generate income outside the workplace in question.
On June 13, 2023, the National Labor Relations Board issued the Atlanta Opera decision. The board’s decision takes a different tack. The board looked to these elements:
- The extent of control the employer exercises over the details of the work
- Whether the work is done under the direction of the employer or without supervision
- Whether the worker is engaged in a distinct occupation or business
- How much skill is required in the particular occupation and in this workplace
- Whether the employer supplies the tools and the place of work
- The length of time for which the worker is employed
- The method of payment, whether by the hour or by the job
- Whether the work is a part of the regular business of the employer
The Atlanta Opera decision focuses on the reality that the individuals in question had only one choice. Makeup and wig artists at the Atlanta Opera wanted to organize. They argued they should be allowed to unionize because they were employees. They were paid by the hour. The opera controlled their hours. The opera supplied all supplies and materials.
The board deemed them to be employees. The NLRB focused on the fact that only one opera exists in Atlanta. These individuals were so specialized that they had no opportunity to engage in this activity outside the Atlanta Opera. They didn’t have the ability to work smarter to generate more profit.
This may be a limited decision. Often, a worker will have opportunities to generate work elsewhere. A different result might be obtained for a different job. And the case is likely to find its way into the appeals court.
Also, the Department of Labor, which oversees the Fair Labor Standards Act, issued a proposed wage and hour rule in October 2022. The DOL proposed rescinding the 2021 proposed rule that set forth a two-factor rule:
- Control of the work
- The opportunity for profit or loss
This proposed rule is moving toward a totality of circumstances test. After a lot of negative comments, the comment period expired, and no rule has been issued. The prior rule is still in effect.
INDEPENDENT CONTRACTOR BEST PRACTICES
For employers dealing with independent contractors, it’s best to be proactive. Consider these factors in the employer and independent contractor relationship.
Document the nature of the relationship. A signed agreement acknowledging the independent contractor relationship makes it difficult for an individual to say they thought they were an employee.
Weigh the risk. If an employee is mischaracterized as an independent contractor, an employer might have to pay unpaid overtime or minimum wage. Also, an employer can be subject to a discrimination claim.
Take inventory. Look for red flags in the use of independent contractors, such as:
- An independent contractor sitting next to an employee doing the same work
- Someone who used to be an employee now designated as an independent contractor
- Interchanging independent contractors and employees
Review employment liability coverage. Most insurance policies protect against discrimination claims. Most won’t protect against wage and hour claims. An employer might want to secure a rider to protect against an expensive wage and hour collective action.
For employers, the legal risk is almost always associated with improperly designating someone as an independent contractor as opposed to an employee. Your Nyemaster Labor & Employment attorney is your best resource for questions related to independent contractor relationships.