misclassification liability

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In the past three years, 16 states have passed legislation seeking to curtail the misuse of the independent contractor classification. Yet, despite congressional studies finding that misclassification contributes to the federal and state tax gaps and deprives misclassified employees of workplace protections, Congress has not made independent contractor legislation a national priority until this year.

Now, the second of two bills has been introduced in Congress this year that will not only discourage businesses from continuing to issue Form 1099s to workers who are not legitimate independent contractors, but also will impose obligations on businesses to inform individuals they treat as independent contractors how to challenge their classification.

While the other shoe may be about to drop on companies that may be misclassifying employees as independent contractors, Congress has tempered this latter bill by including a limited form of amnesty for businesses that have had a reasonable basis for past misclassifications.

Neither of the two federal bills, if enacted, would legislate an end to the use of independent contractors; rather, businesses may continue to use independent contractors if they satisfy the legal tests for independent contractors under federal and state laws. As set forth in a forthcoming blog post on this site, businesses can avail themselves of timely alternatives to the costly and often unacceptable alternative of reclassifying independent contractors as employees.

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.

 
On July 15, 2010, the Massachusetts Attorney General’s Office announced that it had reached an agreement with FedEx Ground to settle a citation that the company was misclassifying its drivers as independent contractors (ICs) instead of properly classifying them as employees.  FedEx agreed to pay $3 million to settle the charges against it, including claims that it violated the Massachusetts Independent Contractor Law and improperly failed to pay the state payroll taxes and workers’ compensation and unemployment assistance premiums by treating its Ground Division drivers as ICs.  FedEx denied any liability in settling the case.

On the same day, FedEx Ground reportedly launched a new business model in Massachusetts for its ground and home delivery drivers. The new business model gives its single-route drivers three options for continuing to work with FedEx on a going-forward basis: (a) become a multi-route Independent Service Provider (ISP) by incorporating as a business, purchasing from FedEx Ground three or more work areas in the same geographic area and entering into an agreement with FedEx on an approved ISP arrangement for the work areas; (b) become an employee driver of an approved FedEx Ground ISP (that is, become a driver for a another driver that has set up a business as an ISP); or (c) terminate his or her relationship with FedEx Ground at the expiration of its current Operating Agreement, which will not be renewed, leading to loss of “employment” with FedEx Ground.

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.