The modern worker comes in a variety of forms, including independent contractors, consultant workers leased through staffing agencies, and on-call workers.
Determining who is and who is not an “employee” is critical. Workers who are not statutory employees are not covered by most state and federal labor laws; for example, the Fair Labor Standards Act (FLSA), Title VII, the National Labor Relations Act (NLRA), the Affordable Care Act (ACA), and state unemployment laws. The IRS’s Final Regulations implementing the ACA’s Pay-or-Play rules clarify that while employers are not required to offer coverage to independent contractors, contingent worker misclassification could, nonetheless, result in penalty exposure to the employer by triggering either the “no-coverage offered” or “insufficient coverage” penalty. Whether contingent workers are “employees” of the company for whom their service is provided, the employment or staffing agency, or are truly independent contractors depends on the workers’ duties and work conditions, not IRS form filings. Courts and regulators have developed several different tests to determine employment status.
The three basic control tests include: (1) the “Common Law” test, which depends upon whether the employer can hire or fire the individual, set the rules and regulations of the individual’s work and to what extent the employer supervises the individual’s work; (2) the “Economic Realities” test (applicable under the FLSA); and (3) a hybrid approach.
The Economic Realities test evaluates whether:
The Hybrid test considers:
No one factor is decisive, and all factors must be taken into account. The IRS also promulgated its own test for “employee,” in which the IRS will find an employment relationship where the employer has the right to control the individual’s performance of services. Leased employees, sole proprietors, partners in a partnership, 2 percent S Corporation shareholders and certain direct sellers and real estate agents are excepted from this IRS’s definition of “employees.”
There are significant tax consequences to employers who misclassify employees as independent contractors. For instance, payroll and withholding liabilities may accrue, and double if violations are found to be willful. Misclassified workers who are ultimately considered employees will be covered by pension and profit sharing plans, labor and employment laws, including all wage and hour, discrimination and the NLRA, and the employer mandates and tax penalties embodied in the ACA can accrue, all at significant cost.
When using leased employees, companies should consider that the contractor often will be deemed a “joint” employer, jointly responsible for compliance with wage and hour, workers’ compensation and related laws. Using leased employees may create a joint employer relationship with a staffing agency or other provider where the contracting entity can “share or co-determine matters governing essential terms and conditions of employment.” “Essential terms and conditions of employment” include hiring, firing, discipline, supervision and direction. Where the staffing agency is deemed a joint employer with the client/employer, both will be subject to, among other laws, the NLRA, the various state laws against discrimination, state workers’ compensation laws, as well as the ACA.
Employment status or a joint employer relationship is generally determined based upon one of the same control theories discussed above. Under the FLSA, an entity may be found to be a joint employer where the employers are not entirely unrelated with respect to employment of a particular employee and may be considered to share control of the employee by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer. Employers using or considering the use of contingent workers should carefully review their procedures and policies to ensure that they do not inadvertently misclassify workers, thereby subjecting themselves to penalties and lawsuits.
Written by Cynthia J. Borrelli and Jed L. Marcus, Bressler, Amery & Ross, P.C.
Cynthia J. Borrelli is a member of Bressler, Amery & Ross, P.C. and practices in New Jersey and New York. She directs the firm’s Insurance Practice, representing insurance companies, HMOs, managed care and other regulated entities, and participates in the firm’s Executive Compensation & Employee Benefits and Labor and Employment Practices, focusing on employee benefits and restrictive covenants in the insurance profession. Ms. Borrelli is a member and former Chair of the Public Regulation of Insurance Law Committee of the Tort and Insurance Practice Section of the ABA, a member of the Federation of Regulatory Counsel, the ABA’s Life Insurance Law Committee and is active in NAIC activities. She also chairs her firm’s Diversity Committee. Ms. Borrelli is a graduate of Lehigh University (B.A. 1982) and Seton Hall University School of Law (J.D. 1985). Contact:: firstname.lastname@example.org or www.bressler.com.
Jed L. Marcus Co-chairs the firm’s Labor and Employment Law practice group, and is a member of the firm’s Executive Committee. He represents employers in all types of employment and labor relations matters, both in court and before various state and federal human rights departments and the National Labor Relations Board. These matters involve employment discrimination, non-competition and trade secret protection, wage and hour, National Labor Relations Act (“NLRA”), Taft Hartley and ERISA, class and collective actions, executive compensation, including Section 409A, and the Immigration Reform and Control Act (“IRCA”). Mr. Marcus has authored numerous articles on employment and labor law. He is also a frequent speaker and panelist at seminars and workshops. Mr. Marcus is an Executive Committee member of the Labor and Employment Section of the New Jersey Bar Association and a founder and officer of the Academy of New Jersey Management Attorneys. Contact: email@example.com or www.bressler.com.