The U.S. Department of Labor, the IRS and state work agencies have been cracking down on businesses they believe are misclassifying their employees as independent contractors. The Labor Department has entered a Memorandum of Understanding with 21 state workforce agencies to detect and deter misclassification. The IRS has entered a Memorandum of Understanding with the Labor Department and 37 state agencies to help identify “employment tax schemes and illegal tax practices.” There are also dozens of states that have multi-agency misclassification task forces aimed at the coordinated enforcement of state wage, hour and unemployment tax laws.
Although companies in every industry that use independent contractors are at risk if they have not structured, documented and implemented their independent contractor relationships in a compliant manner, the Labor Department, the IRS and state workforce agencies have targeted certain industries where misclassification is thought to be most prevalent. But, the only ones that matter to you are transportation and trucking. The Labor Department has already successfully prosecuted hundreds of businesses that it concluded were misclassifying employees as independent contractors and failing to pay them overtime or minimum wage. These include both small and large enforcement actions.
Although many states have informal lists of priority industries, at least one state, New York, recently published its “hit list” of industries found to have the highest incidence of misclassification which includes: the transportation industry; food services; construction; publishing; ambulatory health care; performing arts, spectator sports; educational services; and motion picture and sound recording.
How prevalent is misclassification? Recent figures from the New York Labor Department show that in 2014 it completed more than 12,000 audits and investigations, which led to assessments of more than $40 million in unpaid unemployment contributions. Similarly, Massachusetts reportedly audited more than 18,000 businesses in its last reported year and recovered $15.6 million from companies found to have misclassified workers. Last year, the California Labor Commissioner ordered a large logistics company to pay $2.2 million in back pay, attorneys’ fees and interest for having allegedly misclassified seven short-haul drivers. The Labor Commissioner also issued citations of more than $1.5 million to two janitorial companies for misclassifying 52 workers.
But enforcement actions by the government regulators are not nearly as worrisome to the companies using independent contractors as class action lawsuits by workers alleging that they have been misclassified. Thousands of these legal challenges have been filed by individuals being paid on a Form 1099 basis who seek unpaid overtime, minimum wage, employee benefits and work expenses. Misclassification class actions have been brought against companies in various business sectors, but some industries have been the focus of plaintiffs’ class action lawyers. These industries include: technology; transportation (courier services and logistics); cleaning/janitorial services; staffing; car rental; communications; financial services; insurance; car service; media; publishing; security; fashion; pharmaceutical; cable installation; cosmetics; delivery of home products and commercial goods; and more.
In just the last year alone, the following well-recognized companies have been involved in independent contractor misclassification cases: FedEx; Macy’s; the NFL; Lowe’s; DirecTV; BMW and SuperShuttle, just to name a few. This last Friday, FedEx announced that it had settled with drivers in California for $228 million! Some of the other notable recoveries in these types of cases include: 1) a newspaper publisher that was ordered to pay its carriers $11 million; 2) a home improvement store that settled with its installers for $6.5 million; 3) a courier service that was ordered to pay $20 million in unreimbursed work expenses and legal fees; 4) a large janitorial firm that agreed to pay $5.5 million to its franchised custodians who claimed they were employees; and 5) an airport shuttle company that settled with their drivers for $11.9 million.
Some companies have been found to have used independent contractors in compliance with the law. In 2014, the U.S. Department of Labor was ordered by a Texas federal court to pay almost $600,000 in attorneys’ fees and expenses to Gate Guard Services, a limited partnership that provides services to oil field operators by contracting with gate attendants to log in vehicles entering and exiting their operation sites. The court found that the Labor Department’s threatened prosecution of the company for allegedly misclassifying its gate attendants as independent contractors was not justified. Similarly, “black car” drivers providing services in New York City were found last year by a federal court to be independent contractors.
Although the misuse of worker classification has been a priority of the U.S. Labor Department, U.S. Wage and Hour Administrator, Dr. David Weil, stated earlier this year that “the use of independent contractors is not inherently illegal,” and that “legitimate independent contractors are a very important part of our economy.” Likewise, the Secretary of Labor, Thomas Perez, recently said, “There’s an important place for independent contractors, but I also believe that there’s ample evidence that that’s been abused.”
What does this mean for companies in one of the targeted industries which use independent contractors? You must comply. How is this done? For some companies, the quickest way to comply is to reclassify their independent contractors as employees or redistribute them through the use of staffing companies. But there are other ways to comply, including ways for those companies that wish to retain their independent contractors. Those businesses can request a risk assessment of their company through a reputable organization that understands their business, such as the NTA (NorthAmerican Transportation Association).
So, what are the laws? At the federal level, the Department of Labor has published a detailed six-part “economic realities” test for determining if a worker is an employee or independent contractor. This is available to all NTA members. Similarly, the IRS has publicized the “20 factor” test it uses to determine independent contractor status. While there is considerable overlap between the tests, both agencies state that any and all information that provides evidence of the degree of control and independence will be considered.
While almost all states allow companies to use independent contractors, the independent contractor laws differ considerably from one state to another. While some state laws borrow the Labor Department’s “economic realities” test and others use a form of the common law test used by the IRS, state independent contractor laws often vary considerably from state to state.
For this reason, one-size-fits-all and other universal solutions are usually ill-fitting. That does not mean, however, that enhancing compliance is either impractical or unattainable. Companies can create practical, sustainable independent contractor business models where they are willing to genuinely reexamine these relationships. Such businesses can substantially increase their level of compliance and/or eliminate their exposure to a misclassification case – even those that are on the industry “hit list” and being targeted.
