Flexible contract work has reportedly increased by about 56 percent over the past ten years, with more than 16 percent of American workers performing flexible contract work as their primary source of income.
Going into 2019, the workers’ flexibility in this “gig economy” is only expected to increase.
How should you, as business leader, prepare yourself for the continued rise of an independent workforce in the “gig economy”? To leverage a flexible workforce without falling into a trap for the unwary, businesses are best advised to understand the distinction between “employees” and “independent contractors.”
Why is the distinction between “employees” and “independent contractors” important?
The traditional employee/employer relationship is constrained by an ever expanding body of employment laws, many of which employees and employers cannot contract around. For example, employees cannot agree to waive their right to certain pay thresholds and methods provided under the Fair Labor Standards Act and corresponding state law. On the other hand, the independent contract relationship allows, for the most part, more freedom for the parties to contract for specific terms of the workers’ service to businesses, without having to toe the line of most employment laws.
There is a trap for the unwary…
Many businesses have misclassified workers who are legally “employees” as “independent contractors.” While misclassifications may yield some immediate savings, in the long run, the legal fallout can be costly. The organization must still pay the misclassified worker what he/she was entitled to as an employee, plus, in many cases, other damages and fees.
Here are three common mistakes in classifying workers:
Mistake #1: If my workers are paid, for tax purposes, as a 1099 independent contractor, not as a W-2 employee, they are independent contractors.
Without the support of economic reality, tax treatment alone is not legally sufficient to form an independent contractor relationship. Earlier this month, the Eastern District Court of Pennsylvania allowed a delivery driver to move forward with his suit against Gerhard’s Inc., where Gerhard’s Inc. paid the driver a flat rate for deliveries, as opposed to following the wage and hour requirements provided by law. Gerhard’s defended its classification by pointing to the tax treatment of the worker.
The court, however, allowed the driver’s claim to move forward based on the driver’s allegations of employment control by Gerhard’s, including Gerhard’s management and direction of the driver’s daily work activities, among other factors related to control and management.
Mistake #2: If I put a greater burden on workers by having workers purchase their own supplies and setup up a corporate form, such as an LLC, they are independent contractors.
Economic independence is only one factor an agency or court will look at in determining whether there is an independent contractor relationship. Simply placing the burden on the employee to be economically independent, without loosening management controls, is not enough to sustain flexibility.
All aspects of the working relationship will be considered by a court or an agency. In evaluating the tenability of Gerhard’s relationship with its driver, the Eastern District Court looked at the driver’s allegations concerning Gerhard’s control over the manner in which the driver worked and the means by which he performed his work, including Gerhard’s control in setting up the driver’s delivery route, training him in how to perform assigned duties, and requiring him to wear a shirt with a company logo. Even still, these are not the only factors that would be considered.
Mistake #3: If the contract states the person is an independent contractor, then the person must be an independent contractor.
Notwithstanding contract language, in all known cases in recent history, agencies and courts will still consider the nature of the actual working relationship between the business and its worker.
Here is a common example: A cleaning business hires a worker to provide cleaning services to its clients. This worker is employed under a contract that states that he is an independent contractor and even requires him to pay self-employment taxes and provide his own transportation and supplies.
The contract, in this instance, is reviewed by the worker and his legal counsel, and signed and agreed to by the worker. When the worker begins his job, the business sends him out on scheduled assignments, tells him how to perform the cleaning services, and supervises his performance. Under these facts, the worker would probably be viewed as an “employee” by most agencies and courts, even though his contract stated otherwise.
What can businesses do to take advantage of greater workplace flexibility in the gig economy?
- Have a clear contract that matches the economic realities of the relationship.
- To maintain an appropriate level of control, the best example to think of is when homeowner hires a carpenter or plumber for a renovation or repair project. Homeowners will often discuss the dates and times that work will be done, but if the plumber or carpenter is late or cancels, there is not much the homeowner can do. If your business needs require more control than the homeowner – plumber relationship, for long term success, you may want to consider classifying the worker as an employee.
Have a question about independent contractors? Please consult your legal counsel or contact one of the employment attorneys at KingSpry.
The Eastern Pennsylvania Employment Log (EPELog) is a publication of the KingSpry Employment Law Practice Group. Jeffrey T. Tucker, Esquire, is our editor-in-chief. EPELog is meant to be informational and does not constitute legal advice.
