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Is Your Contractor Really an Employee?

The rules are murky—but the penalties for breaking them are severe.

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What, exactly, constitutes an independent contractor depends on who you ask. The Fair Labor Standards Act does not define the specific differences between full-time employment, part-time workers and independent contractors. What’s more, the Labor Department’s website notes that the National Labor Relations Board, the Civil Rights Act, the Fair Labor Standards Act and the Employee Retirement Income Security Act—each major labor and employment statute, in fact—“has its own way of drawing the line between employees and independent contractors.” Many of these definitions appear quite similar, but were created over a period of a half-century. Thus, their language is often “vague or circular,” the department concedes, “leaving them open to a broad range of interpretations.”

What is clear, however, is that companies are required to make that distinction and to offer employees statutorily required benefits and to pay the required employment taxes. Those who make a mistake in employment classification risk confronting significant liability under tax law and wage and hour regulations, as well as other employment laws like OSHA (Occupational Safety and Health Act) and FMLA (Family and Medical Leave Act). A wide range of penalties may be imposed and there’s even the possibility of benefit plan disqualification.

While various courts and government agencies such as the Internal Revenue Service offer lists of factors to help companies narrow the interpretation, even these differ slightly from court to court and agency to agency. Not surprisingly, according to a study by Deloitte, only 19% of executives believe their businesses fully understand the labor and employment laws that govern contingent workers.

“19% of executives believe their businesses fully understand the labor and employment laws that govern contingent workers.”

The most important aspect in determining if a worker is full-time, part-time or contingent for legal purposes is control. “Who controls the where, when and how of a particular task—the employer or the worker?” explains Nicholas Woodfield, principal and general counsel of The Employment Law Group, a law firm representing people with legal claims against employers, who cites restaurant and retail workers as an example. “If these people must keep strict hours in a particular location, and must dress and act in very specific ways, then no matter how you cut it, they will almost certainly be considered employees and not independent contractors.”

The upshot for employers is to proceed cautiously. “You can’t just decide to call someone an ‘independent contractor,’” warns Woodfield. “And it’s not enough to agree with a worker that he or she will be treated as an independent contractor. This isn’t something that either party can settle purely between themselves. An ‘independent contractor’ is a legal term that either applies to a situation or does not apply.”

To ensure the status of an independent contractor from a regulatory standpoint, employers must be ready and willing to relinquish control, insofar as how these people dress, what tools they use, how long they work and who else they might do work for. “The more rules you want to set, the less likely you’ll have an independent contractor,” Woodfield warns.

The bottom line? Employers looking to leverage the gig economy should play it safe. “If you’re not sure whether it’s okay to treat someone as an independent contractor, ask an attorney for advice,” says Woodfield. “If the attorney isn’t sure, just treat the worker as an employee. Any other decision is asking for trouble.”

This article was excerpted from a piece scheduled to run in the November/December 2016 issue of Chief Executive magazine.

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