Playing By the Rules
7 Keys to Avoid Employee Misclassification
There's a tendency in the green industry to hire people as laborers and state that they're subcontractors or independent contractors. I don't know when this trend started, but business owners often use these designations inappropriately.
For the purposes of this article, I use the words subcontractor and independent contractor interchangeably. Using one term instead of the other has no real bearing on whether a worker is properly classified.
Many people seem to believe that as long as a worker is given a subcontractor agreement and IRS Form 1099 at the end of each year, the worker can be classified as a subcontractor. This is a misconception, and when the U.S. Department of Labor visits a business to conduct an audit, it will determine whether workers are subcontractors or employees. The DOL can assess fines, back wages and overtime pay in the event workers have been misclassified.
How can a business make sure that workers are properly classified? The Fair Labor Standards Act (FLSA) is one of the major laws that govern worker classification.
The U.S. Supreme Court has addressed FLSA worker classification on multiple occasions and has ruled that there's not a single rule or test that, on its own, can be used to determine worker status. Instead, the Court has found that taking the total situation into account is what controls status determination.
Here are seven factors the Court has found influential in making this determination:
More Info on Workers Classification
Each state may have its own standards for worker classification as well, making things further complicated. Check with your state to see what else may apply to your business. As a general rule, the federal law will be the one to follow, unless special circumstances apply or the state is more favorable to the worker.
To find a listing of the state labor agencies go to www.dol.gov/whd/contacts/state_of.htm.
For more information about the FLSA and worker classification, check out www.dol.gov/compliance/laws/comp-flsa.htm.
1 The extent to which services rendered is an integral part of the principal's business.
This means that if the subcontracted work is a central part of the contractor's business, then the worker is probably correctly classified as an employee instead of a subcontractor. For example, lawn mowing is an integral part of a lawn care company's business. If the company hires someone to perform lawn mowing, then this worker should most likely be classified as an employee because of the type and nature of the work they are doing.
Alternatively, if the lawn care company subcontracts irrigation work to an individual, then this may be a legitimate subcontractor because the irrigation work is not central to the lawn care company's business.
2 The permanency of the relationship.
If a worker has a long-term relationship with a company and does not work for other companies, there is a sense of permanency to the working relationship. The more permanency there is, the more likely that worker should be classified as an employee instead of a subcontractor.
3 The amount of the alleged worker's investment in facilities and equipment.
If the worker uses all of the business' tools, equipment and materials, then they tend to look more as if they should be classified as an employee. On the other hand, if the worker has his or her own shop, tools, trucks, etc., then the worker appears to be a genuine subcontractor.
4 The nature and degree of control by the principal.
The more control a business has over a worker, the more likely they are to be an employee. For example, if the worker is required to show up at a certain time each day and take specific breaks each day, then there's a lot of control. Additionally, if the worker's hour-to-hour or day-to-day projects are directed by the business, then the worker should probably be classified as an employee.
Alternatively, if the business doesn't control the worker and broadly directs how a project is to be done, with timeframes to be controlled by the worker, then the worker may be properly classified as a subcontractor.
5 The worker's opportunities for profit and loss.
True subcontractors have the ability to make more (or less) money on a project depending on how they manage the project. This may mean finding a better price on the materials for their part of the project, or working more efficiently on the project.
When a worker is paid an hourly wage, regardless of the time it takes to complete a project, they appear to be an employee. When a worker provides a bid for each individual project, the work appears more like a subcontractor.
6 The amount of initiative, judgment or foresight in open market competition with others is required for the success of the worker.
Does the worker hold themselves out to the public, or others as a business, or as being for hire? When this happens, the worker appears more like a subcontractor. The same is true when multiple subcontractors bid for the same work.
If a worker is simply given a task to complete and there is no competition for the task, then the worker appears more like an employee.
7 The degree of independent business organization and operation.
True subcontractors often have a business entity of their own, such as an LLC or incorporation, for which they perform work.
Workers without any independent business entity or separate bookkeeping for their own services appear more like employees.
The information above is not conclusive on its own. For example, if a worker appears to be a subcontractor for four or five of the standards, doesn't mean they are properly classified as a subcontractor. At the same time, a worker doesn't have to meet all seven standards in order to be properly classified.
There is no black and white answer for how to classify workers. Instead, the DOL takes the above factors into account when looking at the entire working relationship between a worker and a business.
As I tell people so often when I am presenting seminars and giving speeches: I am only the messenger. I do not write the laws and rules. I only tell you what they are. So, if you do not like the way that the law is affecting your business, do something about it. Become involved in commenting on proposed regulations and contact your congressperson about pending legislation. Finally, get the word out to others in our industry because there's power in numbers.
This article provides general information on legal matters and should not be relied upon as legal advice. A qualified attorney must analyze all relevant facts and apply the applicable law to any matter before legal advice can be given. If you would like more information regarding employment law or other legal matters, please contact Patrick McGuiness at email@example.com.
Patrick McGuiness is one of the founding partners of Zlimen & McGuiness, PLLC. His law practice focuses on assisting contractors and other small business owners. He is also part-owner of One Call Landscaping a Minneapolis landscaping company.