Independent Contractors Do’s and Don’ts James P. Greene Dykema 2723 South State Street Ann Arbor, Michigan 48104 (734) 214-7667 jgreene@dykema.com California | Illinois | Michigan | Texas | Washington, D.C. www.dykema.com
Advantages to Employers 2
Who Cares? IRS • More difficult to collect income taxes from independent contractors HHS • More difficult to collect payroll taxes from independent contractors Department of Labor • Potential abuse of minimum wage and overtime laws • Potential abuse of anti-discrimination laws 3
Who Cares? State of Michigan • More difficult to collect income taxes from independent contractors Michigan Unemployment Agency • Employers are not contributing to the UI fund Michigan Workers Compensation Agency • Workers are not protected • Employers are not contributing to the WC fund 4
How Big of a Problem? 5
What’s Being Done? Department of Labor • 2011 FY Budget included $25 million to combat misclassification of employees as independent contractors, including: –$12M and 90 FTE to WHD for targeted investigations –$11.25M and 2 FTE for grants to states to focus on misclassification –$1.6M and 10 FTE to Solicitor of Labor to pursue misclassification litigation 6
What’s Being Done? Department of Labor • 2012 FY Budget request of $50 million to pursue misclassification • 2013 FY Budget of $14 million for same 7
Michigan Task Force In February 2008, the State of Michigan created an “Interagency Task Force on Employee Misclassifications.” The task force was established to discover classification violations by working cooperatively with local, state and federal law enforcement agencies, including the IRS. 8
Risks Associated with Employee Misclassification 9
Risks (continued) Insurance Premiums • Back payment of premiums (if insurer permits) Penalties • Government fines • Payment of employment taxes – 100% of FICA contribution – Employer may not collect employee amount from misclassified worker 10
Who is an independent contractor? Each governmental unit and/or agency uses its own analysis to determine if a worker is an “independent contractor” No unit/agency has a precise definition – the totality of the circumstances must be analyzed. 11
Michigan Economic Reality Test The Michigan Unemployment Agency, based upon court decisions, uses the “economic reality test” to determine if a worker is an employee or an independent contractor. No one consideration used in the test answers the question; they must all be considered together. 12
Economic Reality Test Whether the employer will incur liability if the relationship terminates at will Whether the work performed is an integral part of the employer’s business Whether the employee depends upon the wages for living expenses Whether the employee furnishes equipment and materials Whether the employee holds himself out to the public as able to perform the same tasks 13
Economic Reality Test Whether the work involved is customarily performed by an independent contractor The factors of control, payment of wages, maintenance of discipline, and the right to hire and fire employees 14
IRS Test The IRS looks at the degree of control the employer exerts over the worker and the degree of independence exhibited by the worker. The IRS considers facts that provide evidence in the following three categories: Behavioral Control Financial Control Type of Relationship 15
Behavioral Control Control over when and where the work will be done Whether or not the employer provides instruction on how the work will be done Whether the worker uses the employer’s or his/her own tools and equipment Whether or not the employer provides training to the worker How the worker is evaluated (details or end result) 16
Financial Control Extent of unreimbursed business expenses Extent of worker’s investment in equipment and facilities Extent to which the worker’s services are made available to the relevant market Extent to which the worker can realize a profit or loss Method of payment 17
Type of Relationship Whether or not the employer provides the worker with employee-type benefits • Insurance • Pension plan • Vacation, holiday, or sick pay Whether or not the worker is provided a copy of the employee handbook Whether or not the worker is engaged with the expectation that the relationship will continue indefinitely The extent to which the worker’s services are a key aspect of the 18 employer’s regular business
US Supreme Court In resolving disputes under the Fair Labor Standards Act, the US Supreme Court has said that no single factor is determinative, but depends upon the whole activity. The factors the Court has considered significant include: The extent to which the worker’s services are an integral part of the employer’s business The permanency of the relationship 19
US Supreme Court cont. The amount of the worker’s investment in facilities and equipment The nature and degree of control by the principal The worker’s opportunities for profit and loss The level of skill require in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise 20
Painter Bob
A Straightforward Example Painter Bob • Bob advertises in the local newspaper to get jobs • He maintains his own brushes, ladders, and drop cloths, and buys his own paint • He is paid by the job • When the paint job is complete, Bob no longer works for the customer/employer • Bob is an independent contractor
Painter John
A Straightforward Example – Part 2 Painter John • John reports to work at the same company every day • The company provides John with the paint, brushes, ladders and other materials to do the job • The company sets John’s working hours • John works for the company full time • John is an employee of the company
Painter Paul
A Little Murky Painter Paul • Paul reports to work at the same company 3 or 4 days a week. He works only 3-4 hours each evening. • Paul advertises in the local newspaper to get additional day jobs. • The company provides Paul with the paint, brushes, ladders and other materials to do the job. • The company pays Paul by the hour and Paul has some discretion on the days he works. • Paul has worked for the company in this capacity for several years.
Treated as an Employee How you treat a worker is part of the total picture in determining his/her classification as an employee or independent contractor. Did you give the worker an employee handbook? Did you give the worker some employee benefits? (paid sick days, access to EAP or reduced membership to gym?) Did you evaluate the worker using the same forms as are used for employees?
Employment Agencies Solve the Problem,…Right? Employment agencies hire, fire and pay the workers. Employment agencies are responsible for withholding income and payroll taxes, paying the employer’s portion of FICA, and possibly providing fringe benefits to the workers. The contracting company pays the agency with a vendor check. So what could go wrong?
“Joint Employers” A contracting company may be considered a “joint employer” depending upon the amount of control it exercises over the worker during the term of the assignment. A determination is made by looking at the entire relationship.
“Joint Employers” Factors to consider in determining if there is a joint employment relationship include: The nature and degree of control over the worker The degree of supervision exercised over the work The furnishing of work space and/or equipment The power each has to determine the pay rates or method of payment The right each has to hire, fire or modify working conditions
Liability of a Joint Employer Anti-discrimination • May be liable for discriminatory treatment or hostile work environment FMLA • Leased employees who work for a full workweek are counted toward the 50 minimum for FMLA coverage • Agency responsible for notices • Contracting employer may be responsible for accepting a leased worker returning from FMLA leave
Liability of a Joint Employer FLSA • Both employers are liable for minimum wage and overtime requirements NLRA • Temporary employees from an agency may be included in a bargaining unit if they share a “community of interests” • Both employers may be held liable in an unfair labor practice
Liability of a Joint Employer OSHA • Leasing employer will likely be liable for work-related injuries
Best Practices When Leasing Employees Seek an indemnity agreement in the contract with the staffing agency so that the agency retains liability for employment-related claims and agrees to indemnify the client for any losses they may incur attributable to the actions of the agency Contract should include a provision making the agency responsible for payment of all employment taxes
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