Earlier this year, a federal district court in Indiana consolidated twenty-three lawsuits against a nationwide package courier. Although the lawsuits were originally filed in twenty-five different states and alleged violations of a variety of federal and state laws, each lawsuit turned on the common question of whether the package courier misclassified its drivers as independent contractors.
The misclassification of employees as independent contractors can present myriad problems for employers. For example, an employer may find itself liable to such workers for unpaid wages (including overtime) and benefits. Last year, a California court awarded $5.3 million in pay and benefits to a group of drivers misclassified as independent contractors, and ordered the employer to pay the plaintiffs an additional $12.3 million in attorney's fees.
An employer's potential liability may run to various taxing authorities, as well. Employers generally are responsible for the payment (or withholding) of various taxes on employees, including income, Social Security, Medicare, unemployment and, sometimes, worker's compensation. When a misclassification affects large numbers of workers mistakenly classified as independent contractors, the unpaid taxes – plus interest and penalties – can constitute an especially significant amount.
Generally, an employer has the right to control or direct the work done by an independent contractor, but not the means and methods of accomplishing the result. Historically, the Internal Revenue Service has used a 20-factor test in determining whether a worker is an employee or an individual contractor. While the agency still considers all of these factors, it currently focuses its inquiry on three broad categories: (1) behavioral control (i.e., the employer's control of what will be done and how); (2) financial control (i.e., whether the worker assumes any financial risk related to his/her activities); and (3) other characteristics of the relationship (e.g., whether the relationship is for a limited time only or continues indefinitely). Nevertheless, the IRS will consider all information regarding the employer's degree of control and the worker's independence.
Moreover, even if a worker is an independent contractor under a common law analysis, he or she still may still be a statutory employee for certain employment tax purposes such as Social Security or Medicare. Couple that with sometimes conflicting state (or even local) laws, and the task of ascertaining a worker's appropriate status can present a formidable challenge for employers.
The financial risk to employers who improperly classify employees as independent contractors is potentially devastating. Some experts estimate that if the above-mentioned package courier is found to have misclassified the employees at issue, it could face damages and penalties as high as $1.4 billion. If you have any questions regarding the correct classification of your workers, please contact the author(s) at deveney@elarbeethompson.com, mingus@elarbeethompson.com or the Elarbee Thompson attorney with whom you usually work.
