Independent Contractor versus Employee - US Labor Dept and Your Career

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Welcome to our guest presenter!
Bruce L. Adelson, Esq.

INDEPENDENTCONTRACTORSV.
EMPLOYEES
THE US LABORDEPARTMENTAND
YOUR CAREER
By Bruce Adelson, Esq.
© Bruce Adelson, 2021 All Rights Reserved
4

What Do We Do Now?
Today’s Material is the Property of Federal Compliance
Consulting LLC & Bruce L. Adelson. All Intellectual Property
Rights Retained. Today’s Material is Educational &
Informational Only. No Legal Advice is Provided.
© Federal Compliance Consulting LLC and Bruce L. Adelson, 2021 All Rights Reserved. Unauthorized Use Prohibited
5

Independent Contractorsv. Employees
People such as doctors, dentists, veterinarians, lawyers,
accountants, contractors, subcontractors, public
stenographers, or auctioneers who are in an independent
trade, business, or profession in which they offer their
services to the general public are generally independent
contractors.
IRS
6

However, whether these people are independent
contractors or employees depends on the facts in each
case.
The general rule is that an individual is an independent
contractor if the payer has the right to control or direct only
the result of the work and not what will be done and how it
will be done.
The earnings of a person who is working as an
independent contractor are subject to Self-Employment
Tax.
IRS
7

You are not an independent contractor if you perform
services that can be controlled by an employer (what
will be done and how it will be done). This applies even
if you are given freedom of action. What matters is that
the employer has the legal right to control the details of
how the services are performed.
• If an employer-employee relationship exists (regardless of
what the relationship is called), you are not an
independent contractor and your earnings are generally
not subject to Self-Employment Tax.
IRS
8

• Worker misclassification involves classifying workers as 1099
independent contractors when they should be classified as W-2
employees. Businesses are required by law to ensure their
workers- both W-2 employees and 1099 independent
contractors- are properly classified.
• When workers are improperly classified, they are deprived of
various rights and protections including the minimum wage,
overtime compensation, unemployment insurance, healthcare,
pension, and workers’ compensation insurance.
• Misclassification undermines federal and state revenue
collections and creates unfair playing field for employers who
properly classify their workers.
9

Depending on the severity of infractions, fines for worker
misclassification levied by the IRS, DOL and state agencies
can total millions. IRS penalties for misclassifying workers
as 1099 contractors can range from 22%-43% of all
contractors’ earnings retroactive to the initial engagement.
10

Example….
$7.5 million settlement in a lawsuit involving 115
pharmaceutical delivery drivers who claim they were
misclassified as independent contractors and did not
receive proper overtime pay, according to a filing in the US
District Court for the Eastern District of New York.
The lawsuit is Fernandez, et al v. Kinray Inc., et al; case no.
1:13-cv-04938.
11

Independent Contractor v Employee
12

A US government ruling could, potentially, bring about the
reclassification of anywhere from 66,905 to 334,526
independent contractors to full-time workers and cost
employers between USD 1–6bn in payroll expenses each
year — in California alone.
This, according to “experts” cited in a white paper
published by the Joint National Committee for Languages
(JNCL) after more than 50 language industry
representatives met on Capitol Hill
Slator 2019
13

New Rules, Priorities, Enforcement
Independent Contractor
v.
Employee
14

Under Fair Labor Standards Act (FLSA), an employer is
required to pay its employees at least the federal minimum
wage, provide overtime pay in any workweek that an
employee works more than 40 hours, and keep and
preserve certain records regarding employees.
15

California Assembly Bill 5 Became Law in 9/19
• AB 5, passed and signed last month, virtually bars
Californians from working in the gig economy. The law,
which implements a California Supreme Court decision,
imposes a three-pronged test that identifies who’s still free
to be a contract worker and who has to be a hired
employee.
16

AB5 exempts several professions from this
test: doctors, insurance agents, lawyers,
hairdressers, engineers, to name a few.
However, translators and interpreters (T&I)
have not been included in this exemption.
ATA SPD Blog
17

FLSA applies only to employees, an employer does not
have to follow the law’s minimum wage, overtime pay, or
recordkeeping requirements for its independent
contractors.
Growing number of challenges by contract workers
claiming a right to collect minimum wages and overtime
pay on the basis that they should be considered
employees.
18

In a major win for gig economy companies, California
voters have passed a costly and controversial ballot
measure to exempt firms like Uber and Lyft from having to
classify their gig workers in the state as employees rather
than as independent contractors.
Backed by more than $200 million from Uber, Lyft,
DoorDash, Instacart and Uber-owned Postmates,
Proposition 22, or Prop 22, is the costliest ballot measure in
California's history.
CNN
19

• Ride-hailing drivers and the Service Employees
International Union filed a lawsuit against California on
Tuesday that asks the state Supreme Court to invalidate
Proposition 22 on grounds that it is unconstitutional.
• Proposition 22 sought to avoid classifying gig workers as
employees, as required by California law. The measure
was passed by 58% of the state’s voters in the November
election after companies like Uber Technologies Inc.
MarketWatch, January 2021
20

Razak v. Uber: The Third Circuit Addresses Driver
Classification – March 2020
Third Circuit uses a six-factor test from Donovan v. DialAmerica
Marketing, Inc.:
1) the degree of the alleged employer’s right to control the
manner in which the work is to be performed; 2) the alleged
employee’s opportunity for profit or loss depending upon his
managerial skill; 3) the alleged employee’s investment in
equipment or materials required for his task, or his employment
of helpers; 4) whether the service rendered required a special
skill; 5) the degree of permanence of the working relationship;
[and] 6) whether the service rendered is an integral part of the
alleged employer’s business.
21

Third Circuit notes that the extent to which an employer
controls a worker is “highly relevant to the FLSA analysis.”
Worker’s “degree of independent business organization
and operation.”
22

• A worker can be an independent contractor only if he or
she:
• A) Is free from the control and direction of the hirer in
connection with the performance of the work, both under
the contract for the performance of such work and in fact;
• B) Performs work that is outside the usual course of the
hiring entity’s business; and
• C) Is customarily engaged in an independently
established trade, occupation, or business of the same
nature as the work performed for the hiring entity.
• Is there a freelance worker who could possibly pass Part
B?
Times Union Of San Diego, 10/19
23

WhileAB 5 was written with companies like Uber in mind, the
translation and interpreting industry has spoken out in regards to
how this will affect a large number of professional linguists
working in the field.
Despite this opposition, the bill was passed without any sort of
exemption for translators and interpreters. Both the American
Translators Association (ATA) and the International Association
of Conference Interpreters (AIIC) have both spoken out against
the law, highlighting the need for an exemption.
Language Magazine, 10/19
24

This seems to essentially ban how many translation
companies conduct business currently. The ATA points out
that “few language service providers in our industry have
sufficient work to hire individual translators and interpreters
as employees for every language on the market….
25

Lorena Ortiz Schneider, a professional interpreter and
translator for 27 years, says her industry was overlooked
when discussions about exemptions were happening.
“Most people don’t know we exist,” Ortiz Schneider said,
referring to fellow translators and interpreters who work in
administrative hearings, courts, classrooms and medical
centers, mostly on a contract basis. They didn’t get an
exemption to AB 5, meaning the way they work, and
whether they’ll be able to work, is now in question.
Capital & Main, 10/19
26

“We mobilized too late, starting in mid-June,” Ortiz
Schneider admits. “We’re not a well-organized lobbying
group, historically.” She says that while AB 5’s goal of
protecting workers is worthy, it doesn’t take into account
how interpreters and translators work.
The 2010 Common Sense Advisory market research
study concluded that the vast majority of interpreters in
North America are independent contractors and that “being
nailed down to a ‘job’ would make meaningful
communication and language access virtually impossible.”
27

US Department of Labor (DOL) published its notice
proposing to withdraw the new rule – issued two weeks
before the change in Presidential Administrations –
allowing employers to more easily classify workers as
independent contractors under federal law.
The rule, entitled “Independent Contractor Status under the
Fair Labor Standards Act,” was considered a major win for
employers, and specifically for companies involved in the
gig economy.
28

In the rule withdrawal, DOL states that the rule’s narrowing
would result in more workers being classified as independent
contractors not entitled to the FLSA’s protections, contrary to the
FLSA’s purpose of broadly covering workers as employees. The
rule may also have a disproportionate impact on low-wage and
vulnerable workers, given that women and people of color are
overrepresented in low-wage independent contractor positions.
The Department cited a report which found that 42% of “gig
economy or platform workers” and 45% of “self-employed sole
proprietors” make less than $20,000 a year.
29

Employers must now rely on DOL’s previous guidance,
such as Fact Sheet 13, when classifying workers as
independent contractors or employees.
Employers who misclassify employees may be liable for
significant damages under both federal and state law and
should review the law in their respective jurisdictions to
ensure accurate classification.
30

The U.S. Supreme Court has on a number of occasions indicated that
there is no single rule or test for determining whether an individual is an
independent contractoror an employee for purposes of the FLSA. The
Court has held that it is the total activity or situation which controls.
Among the factors which the Court has considered significant are:
• The extent to which the services rendered are an integral part of the
principal's business.
• The permanency of the relationship.
• The amount of the alleged contractor's investment in facilities and
equipment.
• The nature and degree of control by the principal.
• The alleged contractor's opportunities for profit and loss.
• The amount of initiative, judgment, or foresight in open market
competition with others required for the success of the claimed
independent contractor.
• The degree of independent business organization and operation.
31

DOL suggests that revoked rule may also have
had a disproportionate impact on low-wage and
vulnerable workers, given that women and people
of color are overrepresented in low-wage
independent contractor positions
32

Definition of employee is becoming one that depends on
which party holds the White House.
Courts may view any DOL test with skepticism and thus
cause them to fall back on the same varying and elastic
tests they have used over the last 80 years in the absence
of a DOL definition of employee.
33

ABC Test
An individual must be classified as an employee unless:
• “(A) the individual is free from control and direction in
connection with the performance of the service, both
under the contract for the performance of service and in
fact; (B) the service is performed outside the usual course
of the business of the employer; and (C) the individual is
customarily engaged in an independently established
trade, occupation, profession, or business of the same
nature as that involved in the service performed.”
34

The ABC test imposes a higher burden on businesses
classifying workers as independent contractors than the
economic realities test.
Under the test, the vast majority of workers will likely be
considered employees, rather than independent
contractors. Proposed as the governing test under the
National Labor Relations Act as part of the PRO Act
recently passed by the U.S. House of Representatives.
35

Merely labeling a worker an independent contractor or
having them sign an agreement does not necessarily make
them an independent contractor and not entitled to
overtime.
Not always clear whether a worker is an employee or an
independent contractor. No set number of factors that
qualifies a worker and this determination must be made on
a case-by-case basis.
36

Factors indicating that a worker is an employee:
• Employer has the right to direct and control the worker (even if
he does not do so)
• Paid on an hourly, weekly, or monthly basis
• Uses equipment, tools, and materials provided by the employer
• Receives predetermined earnings and cannot realize
significant profits or loss
• Schedule dictated by the employer
• Trained by the employer, either formally or informally
• Receives benefits, such as insurance, pension, or paid
vacation or sick leave
• The relationship between employer and worker is ongoing –
not on a job or project basis
37

Factors indicating that a worker is an independent
contractor include:
• A contract stating the worker is an independent contractor,
although this is not determinative
• Free to determine how the work gets done
• Paid for each individual job
• Uses his own equipment, tools, or materials
• Can personally realize significant profits or losses in the
business
• Works temporarily or on individual jobs
38

• Facts that provide evidence of the degree of control and
independence fall into three categories:
• Behavioral: Does the company control or have the right to
control what the worker does and how the worker does
his or her job?
• Financial: Are the business aspects of the worker’s job
controlled by the payer? (these include things like how
worker is paid, whether expenses are reimbursed, who
provides tools/supplies, etc.)
• Type of Relationship: Are there written contracts or
employee type benefits (i.e. pension plan, insurance,
vacation pay, etc.)? Will the relationship continue and is
the work performed a key aspect of the business?
39

• There 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.
• The keys are to look at the entire relationship, consider
the degree or extent of the right to direct and control, and
finally, to document each of the factors used in coming up
with the determination.
IRS
40

Example – 2014
Lowe’s Home Centers agreed to a maximum
settlement amount of $6,500,000 plus an
additional 25% for attorneys’ fees to settle a
class action suit brought by its installation
contractors alleging they were misclassified
as independent contractors instead of
employees.
41

Lowe’s, which offers contractors to install products
purchased at its stores in customers’ homes, classified
these installers as independent contractors, while at the
same time allowing them to wear Lowe’s uniforms, attend
Lowe’s training sessions, and identify themselves as
installers for Lowe’s.
These actions and others blurred the fine line between
employee and independent contractor. As employees, they
would have been entitled to the benefits offered to other
employees, such as medical insurance, vacation leave,
disability coverage, and a 401(k) plan, and these benefits
added together equaled a large settlement demand.
42

Misclassify your independent contractor and you can face
government audits (unemployment social security…) and
wage and hour lawsuits from your contractors who claim
they are owed overtime.
Under federal law overtime liability is generally double
damages plus attorney fees, going back two to three years
– but state law can increase these amounts. In Maryland,
for example, overtime liability can be up to treble damages
plus attorney fees, going back three years.
43

44

New Rules, Priorities, Enforcement
Bruce Adelson
badelsonfcc@verizon.net
badelson1@comcast.net
LinkedIn
Twitter
301-762-5272
45

NATIONAL
COUNCIL
ON
INTERPRETING
IN
HEALTH
CARE
Bruce L. Adelson, Esq.
badelsonfcc@verizon.net
badelson1@comcast.net
LinkedIn
Twitter
301-762-5272
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