Independent Contractor or Employee: An Old Question Continues to Haunt Employers

Posted on December 23, 2009 by John Ho

In recessionary times like these, employers often rely more heavily on independent contractors to avoid the personnel costs associated with hiring regular employees. Doing so, however, creates risks. Now is a good time to make the effort to determine whether your independent contractors are really independent contractors. Just don’t expect the answer to come easily.

The issue of who is properly classified as an independent contractor (as opposed to employee) has been giving employers headaches for decades. As the United States Supreme Court noted over 60 years ago: “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent entrepreneurial dealing.” N.L.R.B. v. Hearst Publication, 322 U.S. 111, 121 (1944). It is little wonder that even the Supreme Court is troubled by this legal issue given the difficulties involved in the analysis. For starters, courts and government agencies (both state and federal) use different legal tests to make this determination. As a result, a single set of facts can produce different legal conclusions. Moreover, none of the tests utilized relies on definitive factors. As the Internal Revenue Service (“IRS”) states on its website, “[T]here is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”

Although the issue is old, it has continued vitality. There has been a significant increase in litigation, government enforcement and legislation over the misclassification of independent contractors in recent years. It is equally clear that the focus on independent contractor misclassification, far from slowing down, will only continue to pick up steam. The remainder of this blog summarizes some recent developments demonstrating that employers need to be very careful when using independent contractors.
 

New York State’s Joint Enforcement Task Force on Employee Misclassification (“Task Force”), formed in 2007, continues to address, among other things, the problem of employers who inappropriately classify employees as independent contractors.  According to the Task Force’s most recent Annual Report, it has uncovered approximately 12,300 instances of employee misclassification resulting in more than $157 million in unreported wages. Partly in response to the Report, Senate Labor Committee Chairman George Onorato, D-Queens, and Senate Insurance Committee Chairman Neil Breslin, D-Albany, renewed their push for passage of a bill which would, among other things, levy fines of up to $5,000 per employee for any construction company that misclassifies its workers as independent contractors. The bill also creates a presumption of employment status in the construction industry unless certain factors are established.

On August 21, 2009, the Massachusetts Supreme Judicial Court held in Somers v. Converged Access, Inc. that an employee who has been misclassified as an independent contractor is entitled, under Massachusetts law, to recover any wages and benefits he proves he was denied because of his misclassification, including holiday pay, vacation pay, and overtime. In so doing, the Court rejected the employer’s argument that it should not have to pay any damages because had it known the individual was an employee instead of an independent contractor, it would have paid him a lower hourly rate than he received as an independent contractor.

New York Attorney General Andrew M. Cuomo, Montana Attorney General Steve Bullock, and New Jersey Attorney General Anne Milgram have announced their intent to sue FedEx Ground Package Systems, Inc. (“FedEx Ground”) for violations of state labor laws stemming from the Company’s alleged misclassification of its drivers as independent contractors. The Attorneys General claim that such misclassification deprives drivers of workers’ compensation and other labor and employment legal protections received by FedEx Ground’s employees.

In Mohel v. Commissioner of Labor, a decision dated November 17, 2009, the New York Industrial Board of Appeals found that drivers of a limousine service were employees as opposed to independent contractors under the “right to control” test used by the New York State Department of Labor.

Finally, Beginning in early 2010, the IRS will launch an audit initiative that will audit the federal tax returns of 6,000 companies to assess compliance with tax and labor regulations. As part of this audit, the IRS will examine independent contractor misclassification. The initiative was prompted, in part, by advice from the United States Government Accountability Office to the IRS and United States Department of Labor to step up efforts to reduce the misclassification of independent contractors.

 
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Second Circuit Holds Employer May Be Liable for Age Discrimination By Its Independent Contractor

Posted on October 12, 2009 by Joseph Dole

According to a recent decision by the United States Court of Appeals for the Second Circuit, an employer is not necessarily insulated from liability for the discriminatory acts of its independent contractors. Halpert v. Manhattan Apartments, Inc., Slip Op. No. 07-4074-cv (September 10, 2009). The case arose when the plaintiff, Michael Halpert, interviewed for a position as a “Shower,” a person who shows apartments to potential buyers. The person who interviewed Halpert for the position was an independent contractor of the defendant Manhattan Apartments. He allegedly told Halpert that “they were looking for someone younger.” Halpert sued contending that he was not hired for the position because of his age in violation of the Age Discrimination in Employment Act (“ADEA”). Manhattan Apartments contended that it could not be held liable for any alleged discrimination because the person who made the decision was an independent contractor who was making the hiring decision for himself, rather than for Manhattan Apartments. Relying on the Second Circuit’s decision in Robinson v. Overseas Military Sales Corp., 21 F.3d 502 (2d Cir. 1994), the United States District Court for the Southern District of New York agreed, and granted summary judgment dismissing the complaint.

The Second Circuit reversed in an unsigned per curiam opinion. First, the Court held that the issue in the case was not controlled by its decision in Robinson, because Robinson only held that an independent contractor cannot bring a claim under the ADEA. The Court stated that the issue before it was a different one: whether an employer can be held liable for the alleged discriminatory acts of its independent contractor. In holding that an employer can be held liable, the Court stated that general principles of agency law applied to the question. Thus, an employer can be held liable for the discriminatory acts of its agents whether those agents are employees or independent contractors. An individual is an agent where he has been given actual authority to hire on behalf of the employer, or where the employer through its words and conduct has created an apparent authority to hire in the eyes of the job applicant.

What types of evidence are sufficient to render an independent contractor an agent of the employer? There is no one set of facts that is sufficient. In this case, the key facts on agency were disputed, causing the Court to hold that summary judgment on the issue was inappropriate. But this also means that Halpert had enough evidence to go before a jury on the question. According to the Court, Halpert had evidence that: Manhattan Apartments sponsored a training program from which “Showers” would be selected; that individuals chosen from the training program would receive commissions from Manhattan Apartments; and that Manhattan Apartments enlisted the independent contractors to interview candidates for the training program. In addition, Halpert apparently presented evidence that he was interviewed at Manhattan Apartments’ offices. Although Manhattan Apartments contended that the interviewer was doing the hiring for himself and would be paying the commissions, Halpert presented evidence to counter that contention. He alleged that the person who interviewed him stated that “they” were looking for someone younger, implying that the independent contractor was not hiring for himself. In addition, the independent contractor’s agreement with Manhattan Apartments did not address in any way the independent contractor’s purported responsibility for paying commissions to “Showers.”
 
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