Companies are increasingly moving away from the traditional employee model and implementing independent contractor models for some aspects of their business to reduce their direct labor costs without sacrificing market share, productivity, or efficiency. However, implementing an independent contractor model is not without risk and, given the current economic and political climate, independent contractor relationships have been facing and continue to face increased scrutiny.
The risks of implementing an independent contractor model may include misclassification litigation and federal or state investigative initiatives. For example:
Legislative and Enforcement Initiatives
A Well-Crafted Agreement Shapes and Memorializes the Structure of the Independent Contractor Relationship
There is no single test used for determining independent contractor status. A court may use the common law test, the IRS test, the economic realities test, or a hybrid, depending on where the work is being performed and the laws that are being enforced (e.g., the FLSA, Title VII, the ADA, the National Labor Relations Act, the ADEA, income tax withholding, and state unemployment or workers’ compensation laws.)
As illustrated in a March 2012 decision in favor of Jeffry Knight, Inc., a cable installation and repair company, certain factors may weigh more heavily in favor of independent contractor status than employee status, or vice versa. The court will consider all of the circumstances to make the ultimate determination on independent contractor status.
Whatever factors are utilized for making the independent contractor determination, it is wise to have in place a carefully drafted independent contractor agreement and separate policies and procedures for independent contractors than for those governing employees. Avoid company “control” terminology and make the contractor responsible for “tools of the trade” and benefits. A well-trained management staff also helps to avoid misunderstandings about the nature of the relationship. It is important, for example, to use the correct terminology in communications with independent contractors:
Minimizing Risks of Liability
While it is impossible to determine with certainty how any court or agency may rule when assessing the enforceability or defensibility of any one independent contractor model, employers should work closely with legal counsel to build key factors and business considerations that will minimize the risks of misclassification liability into their independent contractor agreements.
William E. Grob is a shareholder in the Tampa office of Ogletree Deakins. Guilène F. Theodore is Of Counsel in the Tampa office of Ogletree Deakins.