Employee or contractor?

The gig economy is a revolutionary topic in the workplace that has only been accelerated by the pandemic.

In 2021, 23.9 million Americans were classified as occasional independent contractors and 17 million were full-time independent contractors. This means that approximately 36 percent of the U.S. workforce performed some form of freelancing in 2021. That is up from only 6.9 percent of the U.S. workforce who were considered gig workers in 2017. By 2025 to 2030, approximately 50 percent of U.S. workers are projected to be considered independent contractors.

It can be difficult for employers to keep up with changing trends and policy related to independent contractors, but it is essential to cover the liabilities these types of workers can present. Worker classification or misclassification is not simply a tax reporting issue. When you look at the statutory language, "any person"—which includes an employer, supervisor, manager, HR and others—who violates the Fair Labor Standards Act can potentially be sued both personally for civil liability and criminally, under certain circumstances.

Misclassification of workers as independent contractors can also leave employers liable for back pay of wages and overtime, unpaid tax withholdings, liability payments, benefits and a number of other mounting fees.

There is no single test to determine independent contractor status for all purposes in the event of litigation. This classification is an evolving topic and depends on other factors, including jurisdiction, venue and industry. Generally, determining independent contractor status requires a case-by-case analysis, which can be time consuming and lead to varying results.

Further, President Biden's administration made it clear that it plans to crack down on these types of issues. When he introduced his 2022 budget plan, Biden said one of his administration's main focuses would be addressing what it believes is the misclassification of workers as independent contractors. The plan called for $7.5 billion to be dedicated to the Department of Labor for addressing misclassification and employee protections. The administration has not been shy about the fact that it wants to have fewer independent contractors in the workforce and a more pro-union stance on these issues.

The gig economy, the rights independent contractors have within it, and the Fair Labor Standards Act are also under scrutiny by the National Labor Relations Board, the U.S. Equal Employment Opportunity Commission, Congress, state governments and other players.

For these reasons, it is imperative that employers distinguish independent contractors from employees within their companies to avoid liability and litigation. Below are several best practices that workplaces should follow:

1. Always have a written agreement with independent contractors. Under the current state of law, it is always best to have a contract or written agreement establishing the terms of the working relationship with an independent contractor.

2. Require independent contractors to complete a W9. This makes the distinction clear for tax purposes and potential audits.

3. Do not give an independent contractor a job title within your organization. A title can be used to represent employee status. Contractors should be hired to complete a task or project, not serve a role within the company.

4. Keep independent contractor files with vendor files. Contracts and documents shared between your company and independent contractors should be stored with those of other vendors providing a service to your company. They should not be considered and stored as personnel files. In the case of an audit, it will go a long way for independent contractors to have files that are separate from personnel files.

5. Do not provide independent contractors with employee-type benefits. This includes vacation, paid holidays, sick leave, retirement, and other benefits your company offers employees.

6. Do not conduct performance evaluations with independent contractors. Evaluations reflect an employer-employee relationship. If there are performance issues with the independent contractor, they should be addressed as a breach of contract issue, not as an employee disciplinary issue.

7. Determine if the company's competitors classify similar workers as independent contractors. In other words, understand how others in your industry are treating the same category of workers. Industry standards are often considered in cases.

8. Do not control the details of the independent contractor's work. Focus on the end result, not the details on when, how, and where the work is performed. Avoid having scheduled times for independent contractors to come into the office or workplace whenever possible. Do not prohibit an independent contractor from providing their services to other companies.

9. Avoid having an independent contractor do the exact same job as another employee at the company. And avoid having the contractor perform work that is integral to the business operations.

10. Pay independent contractors by an agreed upon fee. Independent contractors should not be paid in a form that is similar to a salary and should not be reimbursed for business expenses.

11. Avoid giving independent contractors physical items that indicate they have a similar status as employees. Avoid having independent contractors wear uniforms and/or badges. Do not give an independent contractor a business card that represents your company. And do not give them an employee handbook. Instead give them guidance about your code of conduct and inform them that while working with the company, you expect them to comply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Alessandra M. Nan, Phelps Dunbar, (c) Mondaq Ltd., 2023

From WCI's HR Answers Now ©2023 CCH Incorporated and its affiliates. All rights reserved.