Category Archives: Independent Contractors

Independent Contractor Misclassifications in Minnesota

One area of employment law that often trips up Minnesota companies is whether a worker should be considered an “employee” or an “independent contractor.” In general, independent contractors are considered to “be their own bosses.” In other words, because employers have less control over them, independent contractors are not subject to employment laws relating to wages, workplace health and safety, and withholding taxes. But the line between an independent contractor and an employee can be hard to draw, and federal and state agencies have been stepping up enforcement of the laws prohibiting misclassification of workers as independent contractors.

One mistake we frequently see is that when an agency, such as the U.S. Department of Labor or the Minnesota Department of Revenue, initiates an inquiry or enforcement action based on potential misclassification of a worker as an independent contractor, the company tries to respond informally, without involving their employment attorney. This can lead to unnecessary difficulties. For example, as the company tries to explain to the investigator why the worker is an independent contractor, the company may inadvertently provide information that the investigator can use against the company. Or, the company may not understand the impact of the investigation—misclassification can result in significant taxes, fines, or other liabilities. And, the company may not know the best practices for how to resolve the dispute. The last thing the company needs is for the result of one agency’s investigation to spur other agencies into undertaking their own investigation. Briggs and Morgan, P.A. has experience working with the Minnesota Department of Revenue and other relevant agencies to conclusively resolve misclassification inquiries.

Usually, the agency looks at a variety of factors to determine whether it believes the classification is correct. A company’s honest belief or good faith intent regarding classification of its workers as independent contractors is generally irrelevant, which is why so many companies may face liability for misclassifications. Instead, the agency will look at certain factors regarding the relationship between the worker and company. Another factor often working against the company is that the agency has an interest in finding an employee-employer relationship, so the scales may often tip in that direction when there is uncertainty.

Takeaway: When an employer receives notice of an investigation relating to misclassification of a worker as an independent contractor, it should not try to respond on its own—that can often make the situation worse. Instead, the employer should contact its employment law counsel right away so that a response strategy can be developed.

Authored by: Andrew Carlson and Kristin Emmons

OMB Stays Use of New EEO-1 Form

In 2016, the Equal Employment Opportunity Commission (EEOC) proposed and then approved a new EEO-1 Form for the collection of certain workforce data. In particular, the new form would require all employers with 100 or more employees, and federal contractors with 50 or more employees, to now annually report certain pay and hours worked data, in addition to data regarding workforce ethnicity, race, and gender. This new form was set to become effective with a March 31, 2018, filing date deadline.

The required submission of compensation data was received by employers with expected controversy. In addition to the increased administrative burden, employers recognized that the compensation data could be used by the EEOC to charge and investigate allegations of discriminatory practices.

Well, those employer concerns are now tabled. On August 29, 2017, the Office of Management and Budget (OMB), issued a Memorandum to the EEOC Acting Chair, Victoria Lipnic, stating that OMB is “initiating a review and immediate stay of the effectiveness of those aspects of the EEO-1 form that were revised on September 29, 2016.” In doing so, OMB noted that the EEOC had released data file specifications for employers to use in submitting the new data, but these specifications were not part of the prior public comment process and were not accounted for in previous burden estimates.  Further, the OMB Memorandum stated:

OMB has also decided to stay immediately the effectiveness of the revised aspects of   the EEO-1 form for good cause, as we believe that continued collection of this information is contrary to the standards of the PRA (Paperwork Reduction Act).  Among other things, OMB is concerned that some aspects of the revised collection of information lack practical utility, are unnecessarily burdensome, and do not adequately address privacy and confidentiality issues.

So for now employers should continue to use the prior EEO-1 form, rather than the new form. The March 31, 2018, filing deadline remains the same.

Takeaway: OMB has stayed indefinitely the EEOC’s use of its new EEO-1 form. Employers should instead continue to submit data under the prior form.

DOL Withdraws Independent Contractor and Joint Employer Guidance

The United States Department of Labor (DOL) issued a press release on June 7, 2017, announcing the withdrawal of two significant guidance statements issued during the Obama Administration.

In July 2015, the DOL released Administrator’s Interpretation No. 2015-1 regarding the potential misclassification of employees as independent contractors. This guidance emphasized the applicability of the economic realities test to determine proper classification under the Fair Labor Standards Act (FLSA) and noted that most workers are employees under the FLSA’s broad definitions.

In January 2016, the DOL released Administrator’s Interpretation No. 2016-1 emphasizing the potential applicability of joint employer status. This guidance analyzed both horizontal and vertical joint employment. Horizontal joint employment generally involves the relationship between related corporate entities, such as a parent company and a subsidiary. Vertical joint employment generally involves the relationship between unrelated companies upon both of which the employee may be economically dependent. The DOL emphasized that joint employment should be defined expansively under the FLSA.

Despite withdrawing both of these guidance statements (they are no longer posted on the DOL website), the press release stated that the DOL will continue to fully and fairly enforce all laws within its jurisdiction.

Takeaway: By withdrawing its previously issued guidance on independent contractors and joint employment, the DOL may be signaling more relaxed enforcement in these areas. Nonetheless, employers should continue to follow applicable law in assigning independent contractor status and assessing joint employer responsibility.

DOL Issues New Guidance Regarding Independent Contractors

On July 15, 2015, the U.S. Department of Labor released new guidance regarding the classification of workers as either independent contractors or employees under the Fair Labor Standards Act (FLSA). Here’s what employers need to know about the new guidance:

The DOL’s new guidance explains that whether an individual is an employee or an independent contractor under the FLSA is based on a multi-factor “economic realities” test. The DOL emphasizes that this standard is different from the common law “control” test utilized by most states.

The guidance explains that the “economic realities” test must be applied in view of the FLSA’s broad “suffer or permit” standard for determining compensable work. Under this standard, an individual is considered to be employed and subject to the FLSA if the employer “suffers or permits” him or her to work. The DOL argues that because this standard is broad, “most workers are employees under the FLSA.”

The guidance identifies six factors that are relevant to determining whether an individual is an employee under the economic realities test. These factors include the following:

  1. Is the work an integral part of the employer’s business?
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  3. How does the worker’s relative investment compare to the employer’s investment?
  4. Does the work perform require special skill and initiative?
  5. Is the relationship between the worker and the employer permanent or indefinite?
  6. What is the nature and degree of the employer’s control?

According to the DOL, these six factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be overemphasized.

Takeaway: Misclassification of employees as independent contractors carries potential risks and liabilities, including minimum wage, overtime, taxes, unemployment benefits, and workers’ compensation. Companies that utilize independent contractors should monitor ongoing legal developments in this area and ensure that they are in compliance.

California Labor Commissioner Holds That Uber Drivers Are Employees, Not Independent Contractors

A recent decision by the California Labor Commissioner’s Office has held that drivers for Uber, the popular online ride-hailing service, are employees of the company rather than independent contractors.

In Berwick  v. Uber Technologies, LLC, the office ordered Uber to pay Barbara Ann Berwick $4,152.20 in expenses and other costs for the roughly eight weeks she worked as an Uber driver in 2014. Case No. 11-46739 (Cal. Lab. Comm. June 3, 2015). Ms. Berwick filed a complaint with the Labor Commissioner alleging that Uber did not sufficiently pay her for her time. Determining whether she was an employee or independent contractor was critical to the hearing officer’s holding that the company had to pay her for certain expenses.

In California, as in Minnesota, courts use a multi-part analysis to determine whether someone is an employee or an independent contractor, considering factors such as whether the person performing services is engaged in an occupation or business distinct from that of the principal, whether the work is a part of the regular business of the principal or alleged employer, and the alleged employee’s investment in the equipment or materials required.

Uber argued that is drivers are independent contractors because they use their own vehicles, set their own working hours, and are never required to accept any particular assignment. Uber said it was “nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation.”

The hearing officer did not find that convincing. “The reality . . . is that Defendants are involved in every aspect of the operation,” she said. The officer noted, among other aspects of Uber’s business:

Defendants vet prospective drivers, who must provide to Defendants their personal banking and residence information, as well as their Social Security Number. Drivers cannot use Defendants’ application unless they pass Defendants’ background and DMV checks.

Defendants control the tools the drivers use; for example, drivers must register their cars with Defendants, and none of their cars can be more than ten years old. . . .  Defendants monitor the Transportation Drivers’ approval ratings and terminate their access to the application if the rating falls below a specific level . . . .

While Defendants permit their drivers to hire people, no one other than Defendants’ approved and registered drivers are allowed to use Defendants’ intellectual property. Drivers do not pay Defendants to use their intellectual property.

Uber has appealed the ruling.

Takeaway:  Companies who use independent contractors as part of the new “sharing economy” should keep track of this case and regularly evaluate whether their independent contractors are improperly classified.

Discrimination Against Independent Contractors

When a worker in Minnesota experiences sexual harassment or is let go because of their race or other protected class status, generally that person can allege a discrimination claim under the Minnesota Human Rights Act (MHRA).  But what if that worker is an independent contractor rather than an employee?  Does the worker still have a claim under Minnesota law?

The MHRA prohibits an employer from engaging in unfair discriminatory practices.  To bring a claim against an employer, a person must be an employee of the company.  Generally independent contractors are not considered employees.  The MHRA does, however, include independent contractors who are commissioned salespersons within its definition of employee.

Are other independent contractors left without a claim under Minnesota law?  Perhaps not.  The MHRA also prohibits “business discrimination.”  The MHRA provides that it is an unfair discriminatory practice for a business “to intentionally refuse to do business with, to refuse to contract with, or to discriminate in the basic terms, conditions, or performance of the contract because of a person’s race, national origin, color, sex, sexual orientation, or disability, unless the alleged refusal or discrimination is because of a legitimate business purpose.”  Minn. Stat. § 363A.17.

An independent contractor who has contracted with the discriminatory company through a legal entity, such as a limited liability company, will not be able to bring a claim of business discrimination in their personal capacity.  Instead, as determined by the Minnesota Supreme Court, the claim must be brought by the contracting entity.  See  Krueger v. Zeman Construction Co., 781 N.W.2d 858 (Minn. 2010).

Takeaway:  While independent contractors generally may not be able to bring a discrimination claim against an employer under the MHRA, the contractor may have a claim for business discrimination.  Note that certain protected classes, such as age and religion, do not find protection under this part of the MHRA.

Control Over the Method and Manner of Performance of Work (Part 2 of 2)

Under Minnesota law, the most important factor in determining whether an individual is an independent contractor or an employee is the degree of control which the purported employer exerts over the manner and method of performing the work contracted.  The more control there is, the more likely the person is an employee and not an independent contractor.  The total circumstances, including the practices and the customs of the industry, must be considered to determine if control is present.

In addition to the criteria listed here, courts may consider the following criteria when determining whether the purported employer exerts control over the method and manner of performance:

  • Set Hours of Work:  The establishment of set hours of work by the purported employer indicates control.
  • Training:  Training of an individual by an experienced employee, by required attendance at meetings, or by other methods, indicates control, especially if the training is given periodically or at frequent intervals.
  • Amount of Time:  Control is indicated where the worker must devote full-time to the activity.  Full time does not necessarily mean an eight-hour day or a five- or six-day week.  Its meaning may vary with the intent of the parties, the nature of the occupation, and customs in the locality.
  • Simultaneous Contracts:  If an individual works for a number of persons or firms at the same time, lack of control is indicated.
  • Tools and Materials:  The furnishing of tools, materials, and supplies by the purported employer indicates control over the worker.  When the worker furnishes these items, lack of control is indicated, except when the individual provides tools or supplies customarily furnished by workers in the trade.
  • Expense Reimbursement:  Reimbursement of either the worker’s approved business or traveling expenses, or both, indicates control over the worker.  A lack of control is indicated when the worker is paid on a job basis and is responsible for all incidental expenses.
  • Satisfying Requirements of Regulatory and Licensing Agencies:  Control is not indicated when the purported employer is required to enforce standards or restrictions imposed by regulatory or licensing agencies.

See Minn. R. § 5224.0330.

Takeaway for Employers:  Determining whether an individual is an independent contractor or employee can be difficult in certain circumstances.  Employers should pay careful attention to the factors identified under Minnesota law for making these determinations.

Control Over the Method and Manner of Performance of Work (Part 1 of 2)

Under Minnesota law, the most important factor in determining whether an individual is an independent contractor or an employee is the degree of control which the purported employer exerts over the manner and method of performing the work contracted.  The more control there is, the more likely the person is an employee and not an independent contractor.  The total circumstances, including the practices and the customs of the industry, must be considered to determine if control is present.

Criteria that courts may consider when determining whether the purported employer exerts control over the method and manner of performance include the following:

  • Authority Over the Individual’s Assistants:  Control is indicated if the purported employer hires and pays the individual’s assistants and supervises the details of the assistants’ work.
  • Compliance with Instructions:  Control is indicated when an individual is required to comply with detailed instructions about when, where, and how he or she must work, including the order or sequence in which the service is to be performed.  Mere suggestions as to detail, or necessary and usual cooperation where the work furnished is part of a larger undertaking, does not normally show control.
  • Oral or Written Reports:  Control is indicated if regular oral or written reports relating to the method in which the services are performed must be submitted to the purported employer. Periodic reports relating to the accomplishment of a specific result may not be indicative of control if, for example, they relate to completion of a job, or they are needed to determine compliance with a contract.
  • Place of Work:  Control is indicated if work which could be done elsewhere is done on the premises of the purported employer.  When work is done off the premises, freedom from control is indicated except in occupations where the services are necessarily performed away from the premises of the purported employer.
  • Personal Performance:  Control is indicated if the services must be personally rendered to the purported employer.  Lack of control is indicated if the individual has a right to hire a substitute without the purported employer’s knowledge or consent.  This factor is less reliable when personal performance is required for very specialized work, when the work is hired based on professional reputation, or when the individual is a consultant known to be an authority in a particular field.
  • Existence of a Continuing Relationship:  The existence of a continuing relationship between an individual and the person for whom he or she performs services indicates the existence of an employment relationship.  Continuing services may include work performed at frequently recurring, though somewhat irregular intervals, either on call of the purported employer or whenever work is available.

See Minn. R. § 5224.0330.

What is the Difference Between Independent Contractors and Employees?

Whether an individual is an independent contractor or employee can have important consequences with respect to what laws apply, what taxes must be paid, and what benefits, if any, must be provided to the individual.  Under Minnesota law, the determination of whether an individual is an independent contractor or an employee is usually based on a multi-factor test.  In general, the factors that a court may consider are:

  1. Control of Method and Manner of Performance:  This factor is the most important.  It measures the degree of control which the purported employer exerts over the manner and method of performing the work contracted.  The more control there is, the more likely the person is an employee and not an independent contractor.
  2. Right to Discharge:  The right to discharge is indicative of an employment relationship, and it exists if the individual may be terminated with little notice, without cause, or for failure to follow specified rules or methods.  In contrast, there is no right to discharge if an independent worker produces an end result which measures up to contract specifications.
  3. Availability to Public:  If an individual makes services available to the general public on a continuing basis, independent contractor status is indicated.
  4. Compensation on Job Basis:  Independent contractor status is indicated by payment on a job basis rather than payment by the hour, week, or month.
  5. Realization of Profit or Loss:  Independent contractor status is indicated where an individual is in a position to realize a profit or suffer a loss as a result of his or her services.
  6. Termination:  The worker’s right to terminate the working relationship with the purported employer at will and without incurring liability for non-completion indicates employment.  Independent contractor status is indicated when the individual agrees to complete a specific job, is responsible for its satisfactory completion, and is liable for failure to complete the job.
  7. Substantial Investment:  A substantial investment by a person in facilities used in performing services for another indicates an independent contractor status.  The furnishing of all necessary facilities by the employer indicates the absence of an independent contractor status.
  8. Responsibility:  If an employing unit is responsible for the negligence, personal behavior, and work actions of an individual who has contact with customers or the general public while performing services, an employment relationship is indicated.
  9. Services Fundamental to Business:  Employment is indicated where the services provided are necessary to the fundamental business purpose for which the organization exists.

See Minn. R. §§ 5224.0330 and 5224.0340.

IRS Offers Amnesty Program for Employers Who Misclassified Employees as Independent Contractors: Is This a Trap for the Unwary?

On September 21, 2001, the Internal Revenue Service launched the Voluntary Classification Settlement Program (VCSP).  Under the VCSP, for up to three prior tax years, an employer can apply to retroactively reverse its determination that a class or classes of workers were independent contractors rather than employees for purposes of federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax.  In exchange, applicants to the program who are accepted will be liable for only 10% of the taxes that should have been withheld during the period of misclassification; in other words, 90% of the taxes that should have been paid are forgiven.  Is this too good to be true?  Perhaps it is.  We strongly suggest that you consult an attorney before you apply for the VCSP.

To apply, an employer needs to complete Form 8952, Application for Voluntary Classification Settlement Program (VCSP).  In the Instructions for Form 8952, the IRS sets forth eight eligibility requirements for the VCSP.  To be accepted into the program, an employer must:

  1. Want to voluntarily reclassify certain workers;
  2. Be presently treating the workers as non-employees;
  3. Have satisfied any Form 1099 requirements for every worker in each of the preceding tax years (up to three years back);
  4. Have consistently treated the workers as non-employees;
  5. Have no dispute with the IRS that the workers should be treated as employees for federal employment tax purposes;
  6. Not be under examination by the IRS;
  7. Not be under examination by the Department of Labor or any state agency for the proper classification of workers; and
  8. Either not have been previously examined by the IRS or DOL for the classification of workers or have complied with the results of any such previous examination.

The Application for VCSP must be signed by the taxpayer representative, not by a paid preparer, under penalties of perjury for false statement.

One problem with the VCSP, at the outset, stems from the difficulty in determining employer versus independent contractor status in the first place.  Deciding whether a worker is an independent contractor or an employee is a highly fact-intensive inquiry.  The labels that the worker and service recipient put on their relationship are not determinative.  For many employers, making the right call, 1099 versus W-2, is difficult.  Moreover, the relationship between worker and service recipient may change over time.  A worker who was truly an independent contractor at the beginning may have morphed into an employee with the passage of time, making it difficult to attest that workers who have been treated as independent contractors have always been employees.

Beyond that, the VCSP requires an employer to execute what is essentially an admission to having previously misclassified employees as non-employees.  That admission is signed by the taxpayer under penalty of perjury, and would be strong evidence of misclassification if admitted in any legal forum.

The existence of an admission to misclassification is potentially problematic because the VCSP affects only federal employment tax liability.  The VCSP does not limit state or local taxing authorities from seeking payments of back taxes, penalties or interest for having misclassified employees as non-employees.  Moreover, the VCSP does not limit the Department of Labor or state or local employment law authorities from investigating minimum wage or overtime liabilities that might be owed reclassified workers.  Furthermore, the VCSP does not shield an employer from liability for race, age, sex, disability or other protected class discrimination claims that might be brought by a reclassified worker because of the worker’s reclassification as an employee.  Additionally, if, by the taxpayer’s admission on Form 8952, a worker should have been classified as an employee, and thereby should have been allowed to participate or automatically enrolled in the employer’s pension and welfare benefit plans, participation in the VCSP could give rise to claims for benefits or other claims under ERISA.

Employers should consult competent legal counsel before applying to participate in the VCSP.

*This post was originally written by Steve Wilson.