Many businesses prefer to hire independent contractors because often there is less overhead and fewer expenses (i.e. taxes). As the number of independent contractors increase, so have court challenges from workers who say they are improperly classified as contractors. Case in point: Federal Express (FedEx) settled a long-running class action lawsuit with over 2,000 of its drivers. The U.S. Department of Labor (“DOL”) found that FedEx misclassified employees as independent contractors. The result? FedEx had to create a $228 million fund to cover the claims. There have been a string of other similar settlements, though none as large as FedEx. These verdicts illustrate how improper classification of an employee as an independent contractor can yield serious consequences.
Who has “control” of the worker is paramount in classification. This question is not always easy to answer. According to the U.S. Internal Revenue Service (IRS), evidence of the degree of control and independence of a worker falls into three distinct categories:
- Behavioral: Does the company control or have the right to control what the worker does and how he or she performs the job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? These include how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.
- Type of Relationship: Are there written contracts or employee-type benefits such as a pension plan, insurance, sick pay, and vacation pay? Will the relationship continue indefinitely? Is the work performed a key aspect of the business?
If the DOL finds that a worker has been misclassified and denied access to benefits and protections to which they are entitled (such as the minimum wage, overtime compensation, family and medical leave, and unemployment insurance) it can enforce employers to pay, not only going forward, but retroactively as well.
In August 2016, the Arizona legislature implemented a law to aid in worker relationship clarification. A.R.S. § 23-1601, known as the Declaration of Independent Business Status law (DIBS), allows companies to prove the existence of an independent contractor relationship by: (a) obtaining a declaration of independent business status from the independent contractor that complies with DIBS; and (b) acting in a manner substantially consistent with the declaration. The declaration is not mandatory, but if made, there is a rebuttable presumption that an independent contractor relationship exists.
Discuss employee classification issues with our experienced business attorneys who can guide you in determining which classifications are correct for your situation.
-By Andrea Claus, Esq.