independent contractor liability

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Commentary:

As noted previously in prior articles and postings on this blog, Congress is poised to pass a labor and a tax bill that will discourage businesses from misclassifying employees as independent contractors and end the issuance of Form 1099s to workers who are not legitimate independent contractors.  Both bills…

Almost one year to the day following the joint statement by the Attorneys General of New York, New Jersey, and Montana that they intended to sue FedEx Ground for misclassifying drivers as independent contractors instead of employees, New York Attorney General Andrew Cuomo has commenced a lawsuit against FedEx Ground on behalf of the State of New York.  (New York State v. FedEx Ground Package System, Inc.)

The lawsuit was filed the same week as the Attorney General of the Montana, Steve Bullock, announced that his office settled its driver misclassification claims against FedEx Ground for $2.3 million.  The New York lawsuit also follows by two months the filing of a similar misclassification lawsuit by the Attorney General of Kentucky, Jack Conway, and comes three months after the Attorney General of Massachusetts, Martha Coakley, settled its driver misclassification claims against FedEx Ground for $3 million.

Cuomo’s lawsuit was filed in the New York Supreme Court for New York County. It alleges that, by classifying its drivers as independent contractors, FedEx’s Home Delivery unit fails to provide its drivers the rights afforded to “employees” under New York’s labor laws, which includes the Unemployment Insurance, Workers Compensation, Wage Payment, and Overtime laws.  According to the complaint filed in court, Cuomo alleges that “FedEx has the power to control, and does in fact control, almost all aspects of its drivers’ work” including “hours, job duties, routes, and even clothing.”  There are reportedly over 700 drivers in the Home Delivery unit.  (Click “More” for “Takeaway” below)

Less than three months after settling independent contractor misclassification charges with the Massachusetts Attorney General for $3 million, FedEx Ground has agreed to pay Montana $2.3 million to settle that State’s misclassification claims against the worldwide courier.

According to the Attorney General of Montana Steve Bullock, FedEx Ground is paying the State for its failure to pay unemployment insurance taxes for its drivers, whom the Attorney General claims were employees that FedEx Ground has been misclassifying as independent contractors. The $2.3 million includes interest and penalties for misrepresenting employee information in its quarterly unemployment insurance reports to the State.  (Click “More” for “Takeaway” below)

Yesterday, just outside Washington, D.C., state and federal workforce agency officials met to discuss their joint efforts to crack down on independent contractor misclassification.  The forum, entitled “Worker Misclassification: Federal-State Perspectives and Initiatives,” was one of the opening day’s general sessions at the National Conference on Unemployment Insurance.  (Click “More” for “Takeaways” below)

On October 13, 2010, Pennsylvania Governor Ed Rendell signed into law the Construction Workplace Misclassification Act, joining a growing number of states that have targeted an industry where misclassification of employees as independent contractors is believed to be most prevalent.

The law, which takes effect in 120 days following enactment, creates a strict definition of “independent contractor.”  No individual can be classified as an independent contractor unless he/she meets a three-part test where the individual:

(A)  has a written contract to perform services with the construction industry business;

(B)  is free from control or direction over the performance of such services under the contract and in fact; and

(C)  is customarily engaged in an independently established trade, occupation, profession or business.

This type of three-part standard is commonly called an “ABC” test – but the Pennsylvania standard is less onerous than the “ABC” laws governing independent contractors in the construction industry in New Jersey and New York, for example.   (Click “More” for link to “Steps to Ensure Compliance” below.)

New York has a new law seeking to curtail in the building and construction industry the practice of misclassifying employees as independent contractors (ICs).  On August 27, 2010, Governor Paterson signed into law the New York Construction Industry Fair Play Act.  The law, which goes into effect 60 days after enactment, only covers businesses in the construction industry.

The legislation resulted from findings by both the legislative and executive branches of government in New York that the practice of misclassifying employees as ICs and paying workers “off the books” was 50% more prevalent in the construction industry than in all other industries in New York.

A comprehensive review of the legislative background and an analysis of the law can be found in a published article by the publisher of this blog post in the New York Law Journal.

The federal court judge assigned to over 60 cases involving FedEx Ground drivers who claim they have been misclassified as independent contractors instead of employees has issued his second key ruling in the case.  In contrast to the judge’s conclusion in May that FedEx Ground drivers in Illinois were employees and not independent contractors under that state’s restrictive wage payment laws, on August 11 the judge reached a contrary conclusion under Kansas wage payment law, which uses the more prevalent “common law” test.

The 103-page decision under Kansas law was issued by Judge Robert L. Miller, Jr., the federal district court judge located in the Northern District of Indiana who has responsibility for many of the class actions filed against FedEx Ground.  Judge Miller’s decision is significant for at least two reasons.

As a regular subscriber to various alerts involving misclassification of employees as independent contractors, I see on a daily basis an array of articles by lawyers warning businesses of impending doom if they continue to use independent contractors. Consultants match these with advertisements and postings offering quick and guaranteed solutions to the misclassification dilemma. As is often the case, the answer lies somewhere in between.

No federal laws prohibit the use of independent contractors and only a few states limit their use. Therefore, there is no need for most companies to follow the ultra-conservative approach of discontinuing their use of non-employee contingent workers and reclassifying all 1099ers as W-2 employees – especially if your business structure relies in whole or in part on a contingent workforce. Reclassification of some or all of your 1099ers into W-2 employees, however, is one option that some companies may wish to consider among a range of alternatives, depending on a host of valid business and legal considerations. Some of the other alternatives available to companies include bona fide restructuring and employee leasing.