A prominent Washington State video game company, Valve Corporation, creator of Half-Life, Counter-Strike, and Left 4 Dead, has been sued by a former employee it converted into an independent contractor as an accommodation to allow her to relocate to California to undergo transgender transition surgery. This case highlights the legal difficulties that may befall companies that convert W-2 employees into 1099 contractors – a not uncommon practice that raises a red flag but, as noted in the Takeaways below, can in many instances be done in a manner consistent with independent contractor and employment laws.
The employee, who chose to use the initials A.M. in the lawsuit, alleges in her complaint that “her position was primarily translating content into Spanish” for Valve as one of its employees in Washington. A.M. alleges that she needed to move out of state where “her doctors were located and she could also recover from the surgical procedures while still working.” She acknowledged that Valve “accommodated her request to relocate and allowed her to work from home due to the gender transition issues” but as a condition, Valve officials “required that Plaintiff be classified as an ‘independent contractor’ although she was still performing the same duties as when she was classified as an ‘employee.’”
In her lawsuit, A.M. claims that she was willfully misclassified and thereby denied rights to overtime and employee benefits. She also alleges that after she complained about her supervisor’s allegedly improper use of unpaid minors who were video game players to perform translation services, her supervisor began calling her “it” and thereafter caused Valve to terminate its relationship with A.M., both in retaliation for her complaints and because of her transgender status. A.M. v. Valve Corporation, No. 16-cv-03595 (C.D. Cal. May 24, 2016).
Many companies view independent contractor status as a means to augment existing services provided by employees to meet the needs of the business or its customers. Often, there is no budget for the hiring of additional employees or the reduced costs of using ICs are just too alluring to ignore. Some companies also view the use of 1099 status as a means to quickly retain valuable services of workers in the face of layoffs or corporate practices that they view as presenting hurdles to productivity or efficiency. Indeed, it is not uncommon for the human resource department of a company to be sidestepped altogether by business managers eager to retain the services of laid off employees by retaining them as 1099ers doing the same work they did as employees. In these situations, though, the use of ICs performing similar work as employees under similar direction and control by the business is an invitation to a costly IC misclassification lawsuit or regulatory audit.
For example, as we have reported in an earlier blog post, a cable company’s use of both W-2 employees and 1099 contractors interchangeably as installers led to a lawsuit by the U.S. Department of Labor alleging that the cable company failed to pay overtime to several dozen installers classified as independent contractors. The lawsuit led to the entry of a consent judgment against the business for $1.075 million and a permanent injunction against the company and its principal executives from further violating the federal wage and hour laws.
We noted that while there is nothing under any federal or state law that prohibits a business from using both employees and ICs to perform the same end-result, many companies that do so fail to take steps to structure, document, and implement properly their IC relationships to demonstrate the important differences between ICs and their employees. While these steps are essential for all companies using ICs, they are absolutely critical for any company that uses both employees and ICs to perform an end-result that is the same or appears to be the same. Absent such steps, a business is advertising that it may be misclassifying a portion of its workforce.
Takeaways and Best Practices
The type of translation services provided by A.M. may well be the type that can be lawfully provided by independent contractors, even though Valve also uses employees in its Washington State headquarters to do so. Like cable installers, the services performed by an interpreter is an example of a function that can be legitimately structured and documented as an IC, consistent with federal and most state law tests for IC status. It is similar to the jobs of workers in many other industries that lawfully can exist either within a legitimate IC or an employment relationship, depending on how that relationship with the retaining party is structured, documented, and implemented. Examples of some of the many workers that can lawfully be either ICs or employees under federal and most state laws include:
as well as many others.
Some states have statutes specifically excluding certain types of workers from being considered employees, or specifically mandating that they be regarded only as employees. Further, many states have laws with different tests for determining if an individual is an employee or independent contractor. Only a few states have laws that are inhospitable to almost all types of ICs.
The A.M. v. Valve case illustrates the value of using, in advance of a legal challenge, a methodology such as IC Diagnostics™ to (a) evaluate whether an existing position can be legitimately structured as an independent contractor relationship, and (b) if so, whether it needs to be restructured, re-documented, and re-implemented to maximize the likelihood that those workers will be held to be ICs and not employees.
Existing lawsuits or regulatory audits should not hamstring companies from enhancing their IC compliance. Nor should a settlement, consent judgment, or adverse IC determination automatically be regarded as an obligation on the part of the business to treat a class of workers in question as employees on a going-forward basis. With a state-of-the-art understanding of applicable IC laws and the right legal diagnostic tools, many businesses can structure and document an IC relationship in a manner that is likely to survive future scrutiny under federal and most state laws.