There has been recent focus on the whole questions of whether CONTRACTORS and/or TEMPORARIES are really EMPLOYEES and it is currently being audited by Department of Labor (DOL), U.S. Equal Employment Opportunity Commission as well as the Internal Revenue Service (IRS). The DOL, EEOC and the IRS today are very different than previous administrations and are aggressively reviewing the independent contractor/temporary relationships with employers.
The most famous case regarding the use of Contractors was a class-action lawsuit, Vizcaino v. Microsoft Corporation, where the court found that Microsoft had misclassified workers as independent contractors and “freelancers.” Although the workers were hired for specific projects, some had been kept on, working on successive projects for a number of years. The workers were considered part of Microsoft’s workforce, worked on site, and on work teams along with Microsoft’s regular employees. These workers also performed identical functions and worked the same core hours as full time regular employees. Microsoft provided them with card keys, office equipment, and supplies. However, as independent contractors, these workers were not eligible for the same employee benefits that Microsoft’s regular full time employees received.
The IRS performed an audit to determine whether Microsoft was in compliance with federal tax laws. The IRS ruled that these workers were not independent contractors, but rather were regular full time employees. Microsoft was required to pay overdue taxes and issue retroactive W-2 forms. It got worse for Microsoft after that because the newly-designated employees then filed a class-action suit demanding the same employee benefits as other full time employees at Microsoft had received. The Court found these workers were also eligible to participate in the same employee medical, pension and stock option plans as Microsoft’s regular employees.
Today, employers in many industries have benefited from the flexibility offered by staffing firms which specialize in a wide variety of job categories, such as accountants to construction workers. The typical temporary help arrangements, where the staffing firm generally recruits, screens, interviews, tests, evaluates and assigns its W-2 employees to specific clients. The staffing firm completes the I-9 verification process, pays the employee, withholds and remits payroll taxes and provides worker compensation insurance coverage. Sounds like the staffing firm is the employer, right? On the other hand, the staffing firm’s client generally directs and controls the temporary employee’s work, establishes the duration of the assignment, the hours of work and dress codes, monitors the temporary employee’s performance and decides when to end the temporary employee’s assignment. Sounds like the client company is the employer, right?
Well, what has happened here is that the traditional employer functions and rights with respect to the temporary employees have been divided up between the two entities. There is a term called “co-employment” whereby the Courts and EEOC have allocated liability and responsibility to both the temporary/staffing firm and the employer/client.
Most independent contractor (contingent worker, freelancer, or temporary worker) versus employee controversy arises when the worker goes to the Department of Labor (DOL) with a claim that he or she has not received minimum wage and/or overtime. These requirements apply only to employees, not independent contractors. Because these agencies share information regarding their investigations, generally EEOC and IRS also become involved. The DOL, EEOC and IRS use different tests to determine if a worker is an Contractor or Employee and are highlighted below.
EEOC’s Guidance on determining the employment relationship:
- who has the right to direct and control when, where and how the worker performs the job;
- who furnishes the tools, materials and equipment;
- whether the work is performed on the premises of the firm or the client;
- whether the firm or the client has the right to assign additional projects to the worker;
- who sets the hours of work and the duration of the job;
- who recruits, screens and hires the worker;
- who provides the worker with benefits;
- who has the right to discharge the worker; and
- who is the employer for tax purposes.
IRS Guidelines (11 Factors) for determining whether a worker is an EMPLOYEE or a CONTRACTOR:
Behavioral Control/Instructions –
- Telling how, when, or where to do work.
- Telling what tools or equipment to use.
- Telling what assistants to hire to help with the work.
- Evaluation systems of independent contractors.
- Telling where to purchase supplies and services.
Training –
- Requiring specific training and procedures and methods to be used on the jobs.
Financial Control –
- Significant investment on the part of the independent contractor.
- Not reimbursed for business expenses by employer.
- Independent contractor must prove profit or loss.
Relationship to the parties –
- Provide benefits insurance, pension or paid leave.
- Written contracts for contractors, permanency of the relationship, and services provided as key activity to the business.
DOL Guidelines “Common Law Control Test” for determining whether a worker is an EMPLOYEE or a CONTRACTOR:
- the greater the skill required to do the job, the more likely the individual is an independent contractor;
- the fact that the individual supplies his or her own tools and materials suggests independent contractor status;
- the longer the relationship, the more likely that there is an employer/employee relationship;
- the fact that the person who pays for the work has the right to assign additional projects to the worker without additional compensation and without altering the terms of a contract indicates employee status — an independent contractor relationship is generally contractual;
- the fact that the employer determines the work schedule suggests an employment relationship;
- an individual who is paid by the hour or other time period is more likely to be considered an employee, while payment by the job or project suggests independent contractor status;
- where the employer hires, fires and pays the worker’s assistants (rather than the worker himself or herself), the worker will more likely be deemed an employee;
- an individual who works in a field that is not the company’s ordinary line of business will be more likely to be found an independent contractor;
- the fact that a worker is in business for himself or herself and has all the appropriate licenses suggests independent contractor status;
- the fact that a worker receives employee benefits from the person who pays for the work suggests an employment relationship; and
- the fact that a worker is treated as an employee for tax purposes indicates an employment relationship.
BOTTOM LINE – Knowing and understanding all these entities are watching your business will help employers avoid liability!
References:
- www.dol.gov
- www.irs.gov
- Beware the Temporary Trap: Application of EEO Laws to Staffing Firm Employees (12/1/2006), SHRM
- Employee or contractor? Mistakes often costly. Thomas C. Greble, Esq. and Rachel L. Kirsh, Esq. Smith, Allen (1/5/2007)
- Employing Independent Contractors, SHRM Toolkit (4/1/2009)
