By: Lisa M. Casa, Esq., Associate with the Labor and Employment Practice Group.
An administrative law judge with the New York State Unemployment Board recently found that drivers for Uber were improperly classified as independent contractors, when they were in fact employees, and found that the three drivers seeking unemployment benefits, and all similarly situated drivers, are entitled to unemployment benefits going back to January 1, 2014. Although Uber intends to appeal the administrative law judge’s ruling, if they are unsuccessful the ride sharing company could be subject to a large and unexpected liability. This recent decision highlights a question that frequently plagues employers, whether a person is an employee or an independent contractor.
Employers have reason to be confused because the employer simply stating that they are hiring an independent contractor is not enough. When confronted with this issue, courts and administrative agencies will make their own inquiry to determine whether a person is properly classified as an independent contractor. This inquiry is fact specific, and there are slight variations in the test depending on the statute or administrative agency that is making the determination. Accordingly, it is recommended that when confronted with a classification question you consult with an attorney to review the specific facts. This article provides a brief discussion of the multi-factor “economic realities test” utilized by courts when confronted with this question, and to provide a few best practices and general guidelines that employers should consider when hiring independent contractors.
When determining whether a person is an independent contractor, courts and administrative agencies utilize what is known as the “economic realities test.” Unlike a bright line test, the “economic realities test” is not a test or checklist, but rather a set of factors that tribunals consider when determining whether a person is properly classified as an independent contractor. No one factor is determinative and the ultimate determination will depend on the totality of the circumstances. Factors that have been considered by courts are:
whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.
Additional factors that are considered by the courts are:
(1) the degree of control exercised by the employer over the workers, (2) the workers’ opportunity for profit or loss and their investment in the business, (3) the degree of skill and independent initiative required to perform the work, (4) the permanence or duration of the working relationship, and (5) the extent to which the work is an integral part of the employer’s business.
A main focus of these factors is the degree of control that the employer exerts over the independent contractor. The more control that an employer has over the means and methods of the independent contractor’s work and work product, the more likely it is that the independent contractor will be found to be an employee. Often courts will consider whether the independent contractor operates like a separate business entity, who has separate accounts, and has the flexibility to be entrepreneurial and build on his/her own skills, expertise, brand and business, separate and apart from the employers who contract for his/her services.
Some practices that may facilitate an independent contractor finding, is having separate written agreement with the independent contractor, which clearly spells out the terms of the relationship, including the duration, expectations for each assignment, and payment terms. Also, independent contractors should be paid by 1099, with no taxes or deductions taken out. Additionally, independent contractors should obtain their own benefits, including health insurance and workers’ compensation. While an employer may want to provide these benefits as part of the compensation package, doing so can be used as evidence that the independent contractor was in fact an employee. The more steps that employer takes to distinguish an independent contractor from a business’s regular employees, the stronger argument that the employer will have to support that the independent contractor was properly classified.
If a court or administrative agency determines that an independent contractor is in fact an employee, the court or administrative agency, as illustrated by the recent Uber decision, will treat the independent contractor as an employee and award the independent contractor the same rights and benefits provided to employees, regardless of the label given by the employer. These rights include, but are not limited to: (a) minimum wage and overtime pay as required by the New York Labor Law and Fair Labor Standards Act; (b) workers’ compensation; (c) leave rights under the Family Medical Leave Act and New York City Earned Sick Leave Act; and (d) unemployment benefits. Accordingly, the cost of misclassifying an employee as an independent contractor can be very high, as many of these statutes allow misclassified employees to seek unpaid wages and benefits going back between two and six years, depending on the statute.
If employers have questions regarding classification of independent contractors or drafting independent contractor agreements, the attorneys in the Labor and Employment Practice Group are available to take your questions.