A national home-improvement store recently agreed to pay thousands of California workers as much as $6.5 million for improperly labeling them independent contractors (IC) instead of employees.
Over 4,000 installation contractors in the class-action lawsuit allege that — despite classifying them as ICs — the company retained and exercised sufficient control over their work to qualify them as employees. The plaintiffs claim this misclassification deprived them of a variety of employee benefits, such as workers’ compensation and insurance coverage. According to the complaint, the store required the installers to identify themselves as working for the company, wear company hats and shirts and attend store training. The workers were also told which projects to take on and were paid directly by the customers. As such, the plaintiffs argue the store "directed" their work in the way an employer would oversee an employee. Following mediation, the store agreed to pay up to $6.5 million — depending on how many installers file claims and what damages they can prove — plus an additional 25% for attorneys’ fees.
The line between an IC and an employee is often unclear. This case highlights the importance of proper worker classification and the harsh penalties companies face for violating state wage-and-hour laws and the federal Fair Labor Standards Act (FLSA).
Misclassification means that employees — and the government — are often denied certain protections, wages and monies. Accordingly, the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS), as well as state governments, continue to make worker misclassification a top priority. Since 2011, the Wage and Hour Division of the DOL has collected over $18.2 million in back wages for more than 19,000 misclassified workers.
While the DOL’s focus is on violations of the FLSA’s minimum-wage and overtime protections, the IRS is cracking down on employers who evade FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes by misclassifying workers as ICs. For state authorities, the priority is identifying employers who are misclassifying workers and not contributing to state programs, such as unemployment insurance and workers’ compensation funds.
Companies also face wage-and-hour lawsuits from contractors claiming overtime, insurance benefits, workers’ compensation and more. Under federal law, overtime liability alone can result in double damages — going back two to three years — plus attorneys' fees. State law can increase these amounts substantially.
Employers can avoid hefty fines by using DOL guidelines to correctly classify an individual as an employee or IC from the outset. As the installers argued, many of these guidelines deal with the company’s control over the person’s work, such as:
Does the company control what the worker does or how the worker goes about completing a task? An IC typically controls when, where and how they work. Therefore, an employee-employer relationship is more likely to be implicated where a company controls when and where the work is done, what tools or equipment is used or in what order tasks must be completed.
Does the company provide training to the worker? ICs generally use their own methods to complete a project. Thus, if a company requires that a worker be trained to perform the work in a particular manner, this may indicate an employer-employee relationship.
Does the worker provide services to other clients? An employer-employee relationship likely exists if a person works exclusively for the company and, in particular, must sign a non-compete agreement.
Does the worker control his/her opportunity for profit and loss? ICs typically control their own costs by investing in their own supplies, tools and equipment and maximizing their profits by working in the manner that best suit them, i.e., working on a per-project basis.
Does the worker provide a service that is part of the company’s core business? Where workers perform the same tasks as the company’s employees, it is more likely the company will have the right to direct and control their activities.
In determining the nature of the relationship between a worker and a company, courts and government agencies consider the relationship as a whole, rather than one particular aspect. Companies should ensure they take measures to correctly structure their relationships with ICs, document their agreements by contract, and properly use ICs in order to stay in compliance with the law.