Category: Independent Contractors
The U.S. Department of Labor’s Wage and Hour Division announced a final rule extending the Fair Labor Standards Act’s minimum wage and overtime protections to most of the nation’s direct care workers who provide essential home care assistance to elderly people and people with illnesses, injuries, or disabilities. This change, effective January 1, 2015, ensures that nearly two million workers – such as home health aides, personal care aides, and certified nursing assistants will be treated as W-2 employees, not independent contractors. To learn more about the change in this law, click here. According to the FAQ, the Department’s Final Rule makes two significant changes: (1) the tasks that comprise exempt “companionship services” are more narrowly defined; and (2) the exemptions for companionship services and live-in domestic service employees may only be claimed by the individual, family, or household using the services rather than third party employers such as home health care agencies. The Final Rule also revises the recordkeeping requirements for employers of live-in domestic service employees.
In the case of Beaumont-Jacques v. Farmers Group (CA2/3 B239855, filed 6/12/13, pub. ord. 7/11/13) an independent contractor brought sexual harassment and other employee based claims. The court agreed with the trial court that the plaintiff was an independent contractor so it dismissed the sex harassment and related claims.
Louisiana joins a growing list of states that are teaming up with the DOL to go after 1099 misclassification. States that have joined with the DOL now include California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington. Typically what these arrangements do is
- Conduct joint investigations periodically,
- Coordinate enforcement activities and provide mutual assistance,
- Refer potential violations of statutes enforced by the other,
- Develop “methodologies” for exchanging investigative leads and complaints, and
- Otherwise share information “as appropriate”.
We will continue to warn employers to make sure a duck is a duck. Remember the agenda is to call everyone ducks. Look at the Independent Contractor tools on HR That Works.
The 9th Circuit has concluded that drivers in California that were classified as independent contractors by their Georgia employer are governed by California, not Georgia independent contractor law. In other words they may be turned into employees and the company will have to pay out big overtime bucks. Georgia laws supports a presumption of IC status:
“Under Georgia law, if a contract designates the relationship between the parties to be one of principal and independent contractor, this designation is presumed to be true ‘unless other evidence is introduced to show that the employer exercised control as to the time, manner and method of performing the work sufficient to establish an employer-employee relationship.’”
California law does just the opposite!
“On the other hand, ‘under California law, once a plaintiff comes forward with evidence that he provided services or an employer, the employee has established a prima facie case that the relationship was one of employer/employee….Once the employee establishes a prima facie case, the burden shifts to the employer, which may prove, if it can, that the presumed employee was an independent contractor.’”
Thus, the starting point from which the drivers begin their lawsuit is vastly different depending on whether California or Georgia law applies. In essence, the drivers are at a disadvantage under Georgia law because they must overcome the presumption that they are independent contractors. By contrast, under California law, the presumption is that the drivers are employees and the burden is upon Affinity to demonstrate that the drivers are independent contractors. As such, Georgia law directly conflicts with California law.
To read the case, click here.
US Labor Department, California sign agreement to reduce misclassification of employees as independent contractors
As further evidence of the attack on 1099 labor, the DOL issued the following press releaseon Feb. 9th:
WASHINGTON — Nancy J. Leppink, deputy administrator of the U.S. Department of Labor’s Wage and Hour Division, and California Secretary of Labor Marty Morgenstern have entered into a memorandum of understanding regarding the improper classification of employees as independent contractors. Leppink and California Labor Commissioner Julie A. Su hosted a press teleconference Feb. 9 during which they discussed how the U.S. Department of Labor and the state of California will embark on new efforts, guided by this memorandum, to protect the rights of employees and level the playing field for responsible employers by reducing the practice conducted by some businesses of misclassifying employees. This partnership is the 12th of its kind for the U.S. Department of Labor.
“This memorandum of understanding helps us send a message: We are standing together with the state of California to end the practice of misclassifying employees,” said Leppink. “This is an important step toward making sure that the American dream is still available for workers and responsible employers alike.”
“California is proud to enter into this partnership with the U.S. Department of Labor to work together to attack the problems of the underground economy,” said Su. “Gov. Brown just signed an important law that went into effect on Jan. 1, increasing penalties for willful misclassification. With the Labor Department, we are poised to use all the tools in our arsenal to lift the floor for hardworking employers and employees throughout the state.”
Employee misclassification is a growing problem. In 2011, the Wage and Hour Division collected more than $5 million in back wages for minimum wage and overtime violations under the Fair Labor Standards Act that resulted from employees being misclassified as independent contractors or otherwise not treated as employees.
Business models that attempt to change, obscure or eliminate the employment relationship are not inherently illegal, unless they are used to evade compliance with the law. The misclassification of employees as something else, such as independent contractors, presents a serious problem, as these employees often are denied access to critical benefits and protections — such as family and medical leave, overtime compensation, minimum wage pay and Unemployment Insurance — to which they are entitled. In addition, misclassification can create economic pressure for law-abiding business owners, who often struggle to compete with those who are skirting the law. Employee misclassification also generates substantial losses for state Unemployment Insurance and workers’ compensation funds.
Memorandums of understanding with state government agencies arose as part of the U.S. Department of Labor’s Misclassification Initiative, which was launched under the auspices of Vice President Biden’s Middle Class Task Force with the goal of preventing, detecting and remedying employee misclassification. Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington have signed similar agreements. More information is available on the U.S. Department of Labor’s misclassification Web page at http://www.dol.gov/misclassification/.
A California appellate court ruled that a 6’7” Dish TV installer, who was contracted for through a 3rd party, could not sue a homeowner for negligence when he fell through the roof. The important reminder of the law, which is pretty much the same in all states is as follows:
Limitations on the liability of the hirer of an independent contractor
Plaintiff Gravelin was an independent contractor or the employee of one. “Generally, when the employees of independent contractors are injured in the workplace, they cannot sue the party that hired the contractor to do the work.” (SeaBright Ins. Co. v. US Airways, Inc. (2011) 52 Cal.4th 590, 594, citing Privette v. Superior Court (1993) 5 Cal.4th 689 (Privette).) The same rule applies when the independent contractor, rather than his or her employee, is injured. (Tverberg v. Fillner Construction, Inc. (2010) 49 Cal.4th 518, 522.) It therefore does not matter, for purposes of this appeal, whether plaintiff Gravelin was an independent contractor as he asserts, or an employee of one as defendants assert.
The California Supreme Court has explained why the hirer of an independent contractor is usually not held liable for injuries to the contractor or its employees. The independent contractor “has authority to determine the manner in which inherently dangerous . . . work is to be performed, and thus assumes legal responsibility for carrying out the contracted work, including the taking of workplace safety precautions” to protect himself and his employees. (Tverberg, supra, 49 Cal.4th at p. 522 [contractor’s duty to protect himself]; Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 671 (Kinsman) [contractor’s duty to protect its employees].) Thus, the hirer will not be held vicariously liable for injuries resulting from the contractor’s negligence in failing to perform its task safely. (Privette, supra, 5 Cal.4th at p. 695.) The remedy for the contractor’s injured employee is workers’ compensation, which is a cost ultimately borne by the contractor’s hirer. (Id. at p. 692.)
The general rule that a contractor and its employees may not recover tort damages from the contractor’s hirer has few exceptions.
To read the case in its entirety go to http://www.courtinfo.ca.gov/opinions/documents/A131333.PDF
DOL and IRS Announce Initiatives Focused on the Misclassification of Employees as Independent Contractors
The U.S. Department of Labor (“DOL”) and Internal Revenue Service (“IRS”) both recently announced efforts aimed at curbing employer misclassification of workers as independent contractors.
• DOL Announces Memorandum of Understanding with the IRS. On September 19, 2011, the DOL announced that it had signed a Memorandum of Understanding with the IRS to coordinate efforts to address the misclassification of workers as independent contractors. Seven state agencies have already signed onto the Memorandum: Maryland, Connecticut, Massachusetts, Minnesota, Missouri, Utah, and Washington.
The initiative between the agencies is meant to “improve departmental efforts to end the business practice of misclassifying employees in order to avoid providing employment protections.” The Memorandum will enable “the DOL to share information and coordinate law enforcement with the IRS and participating states in order to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.”
• IRS Announces Voluntary Settlement Program for Employers who have Misclassified Workers as Independent Contractors. Two days after the DOL announced its joint initiative with the IRS to coordinate enforcement to end the practice of misclassifying workers, the IRS on September 21, 2011, launched the Voluntary Classification Settlement Program (“VCSP”), a new program that will allow employers to resolve prior misclassification issues by voluntarily reclassifying workers as employees for future tax periods and paying a reduced amount in employment taxes.
To be eligible to participate in the VCSP, the employer must: 1) consistently have classified the workers as independent contractors or non-employees; 2) have filed all required Form 1099s for the prior three years; and 3) not currently be under an audit by the DOL, IRS, or a state agency concerning the classification of the workers at issue.
In exchange for agreeing to re-classify its workers, the employer will: 1) pay a reduced amount that effectively equals just over 1% of the wages paid to the workers for the most recent tax year (instead of the typical 10% tax due on wages); 2) not be liable for any interest and/or penalties on that amount; and 3) not be subject to an audit by the IRS as to the previous misclassification for the workers being reclassified under the VCSP. Employers are not required to reclassify all workers and may choose which to reclassify under the program.
Employers who wish to participate in the program must submit a VCSP application at least 60 days before it reclassifies the workers. The IRS will then review the application and determine whether to accept the employer into the VCSP.
Employers should exercise caution before participating in the program. First, participation in the VCSP does not shield the employer from potential liability under the Fair Labor Standards Act (“FLSA”). If an employer voluntarily reclassifies an independent contractor, it is opening itself up to potential unpaid overtime claims from those workers whom it reclassified. In addition, employers who participate will, for the first three years in the VCSP, also be subject to a special six-year statute of limitations (instead of the three-year limitations period that normally applies to assessment of employment taxes). It appears that the three-year extension of the statute of limitations period applies not just to the misclassification of workers, but to all payroll taxes. Finally, the VCSP application provides the IRS with information regarding an employer’s misclassification, and it is unclear whether the IRS can use this information in a later audit if it rejects the employer’s application to participate in the VCSP.
Article courtesty of Worklaw® Network firm Shawe Rosenthal (www.shawe.com)
California just passed legislation today which makes anyone other than a lawyer who “advises” employers to hire someone as an Independent Contractor jointly and severably liable for any mis-classification. And there’s more. Here’s the bill itself: http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_459_bill_20110912_enrolled.pdf
- Essentially, SB 495 makes it unlawful to willfully misclassify an individual as an independent contractor. If found guilty a company would have civil penalties of no less than $5,000 and no more than $10,000 per occurrence. If found guilty of repeated violations the result could be as much as $25,000 for each violation – willful is defined as with voluntary intent *( a very broad standard).
- The company must maintain records by completing a document developed by the EDD for each independent contractor retained.
- A notice indicating the individual will be engaged as an independent contractor
- What EDD factors were included to determine the individual is an employee or an independent contractor
- A statement explaining the impact the independent contractor status has on tax obligations and eligibility for labor and employment protections
- Notice to the individual that they can seek advice from EDD or the Labor Commissioner regarding whether they were properly classified
- Provides that any person who knowingly advises an employer to treat an individual as an independent contractor, to avoid employee status, shall be jointly and severably liable if the individual is found not to be an Independent Contractor. Of course, except for the lawyers.
No surprise, many entrepreneurs are livid about bills like this. As one entrepreneur stated:
“As a small business owner, if this passes I don’t see myself hiring any more contract programmers in state. It would be too risky. $25,000 fine and a required ‘Scarlet Letter’ on my web site? No thank you. It’s bills like this that force jobs to go overseas”
In contrast to the employer viewpoint another commentator on the bill said:
“I know an ‘employee’ working as an Independent Contractor, who stepped in a hole at San Quentin State Prison, where she worked as a registry nurse. By the time it was over, she lost half her leg, and ended up with no Worker’s Compensation Insurance, no Disability Insurance, no Unemployment Insurance, no nothing. Employers are totally bastardizing the definition of an Independent Contractor, and paying people who work only for them, 40 hours a week, under their supervision, as Independent Contractors. Great way for an employer to lure an “employee” to work for them, right up until either they’re injured on the job, are laid off, or of course when they get their 1099 at the end of the year, and find out they owe $38,000 of that $90,000 they earned in State and Federal Income Taxes. Great bill. About time. Pass it and enforce it!”
Bottom line is it is now the law. Here is the current info on it which will be updated in light of the new law. http://www.edd.ca.gov/payroll_taxes/independent_contractor_reporting.htm
In a continued effort to crack down on 1099 misclassification schemes, the PA legislature has passed a bill that defines the issue. You can see the bills history at http://www.legis.state.pa.us/cfdocs/billinfo/billinfo.cfm?syear=2009&sind=0&body=H&type=B&bn=0400 below is the most important language in that bill. MY highlights in bold.
(a) General rule.–For purposes of workers’ compensation, unemployment compensation and improper classification of employees provided herein, an individual who performs services in the construction industry for remuneration is an independent contractor only if:
(1) The individual has a written contract to perform such services.
(2) The individual is free from control or direction over performance of such services both under the contract of service and in fact.
(3) As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business.
(b) Criteria.–An individual is customarily engaged in an independently established trade, occupation, profession or business with respect to services the individual performs in the commercial or residential building construction industry only if:
(1) The individual possesses the essential tools, equipment and other assets necessary to perform the services independent of the person for whom the services are performed.
(2) The individual’s arrangement with the person for whom the services are performed is such that the individual shall realize a profit or suffer a loss as a result of performing the services.
(3) The individual performs the services through a business in which the individual has a proprietary interest.
(4) The individual maintains a business location that is separate from the location of the person for whom the services are being performed.
(5) The individual:
(i) previously performed the same or similar services for another person in accordance with paragraphs
(1), (2), (3) and (4) and while free from direction or control over performance of the services, both under the contract of service and in fact; or
(ii) holds himself out to other persons as available and able, and in fact is available and able, to perform the same or similar services in accordance with paragraphs (1), (2), (3) and (4) while free from direction or control over performance of the services.
(6) The individual maintains liability insurance during the term of this contract of at least $50,000.
(c) Factors not to be considered.–The failure to withhold Federal or State income taxes or pay unemployment compensation contributions or workers’ compensation premiums with respect to an individual’s remuneration shall not be considered in determining whether the individual is an independent contractor for purposes of the Workers’ Compensation Act or the Unemployment Compensation Law.
(d) Workers’ compensation.–
(1) An individual who is an independent contractor as determined under section 3 is not an employee for purposes of the Workers’ Compensation Act. For purposes of this section, each employment relationship shall be considered separately.
Merchandising Concept Group v. California Unemployment Ins. Appeals Bd. (2010) , Cal.App.4th
Merchandising Concept Group contracted with clothing manufacturers to provide attractive product displays to promote sales of goods in retail stores. The people who made the displays were called detailers, and Merchandising Concept Group classified them as independent contractors.
The Employment Development Department audited Merchandising Concept Group and determined the detailers were not independent contractors but employees subject to employment tax-related deductions. The Employment Development Department issued an assessment totaling approximately $110,000 plus a penalty on Merchandising Concept Group based on the reclassification of 148 of its workers. This assessment included unpaid unemployment insurance contributions, employment training taxes, disability insurance contributions, and personal income tax.
Lesson: Get your 1099 act together! HR That Works Members are encouraged to watch the Independent Contractor Webinar and review the Independent Contractor Training Module which includes a video, report, analysis checklist, sample agreement and more.