Be Careful Before Classifying Workers as Independent Contractors

Do you have any workers that you classify as an "independent contractor"? Many construction employers do. But they often make this decision without first evaluating the legal test for contractor status. Employers often believe that if they simply agree to a contractor relationship, the law will honor that agreement. In fact, intent is only one of many factors that define contractor status.

The Fair Labor Standards Act (“FLSA”) regulates wage and hour matters, such as overtime and minimum wage, for employers throughout the country. The FLSA, however, applies only to employees. The Department of Labor (DOL) enforces the FLSA. DOL has adopted an “economic realities” test to determine contractor status. The test focuses on monetary risk. A worker that risks losing money on a job is typically a contractor. The money paid to a contractor is directly related to the end result. But a worker who receives the same amount regardless of result, or who receives payment based on time worked, is probably an employee.

DOL considers other factors relevant to the economic realities test: (1) whether the employer controls performance, including hiring, firing, and discipline; (2) whether wages are paid to the worker; (3) whether the worker invests in equipment; (4) the permanency of the relationship; (5) the skill required; and (6) whether the work is integral to the business. No one factor controls; all must be considered together.

In addition, DOL looks to whether the worker completes tax forms and is on payroll with deductions, whether the employer keeps books and records for the worker, whether the employer can approve employees of the worker, whether the worker has an economic interest in the work, and whether the worker must work at one location. The DOL does not consider relevant where the work is done, whether a formal work agreement exists, whether the worker is licensed, and whether the worker is paid a set wage as opposed to tips.

In determining control, DOL looks at whether a contract indicates which party controls performance; whether the employer controls the worker’s business; whether the contract is for an indefinite or relatively long period; whether the employer can discharge the contractor’s employees; whether the employer can cancel the contract and if so, with how much notice; and whether the work is similar to that done by employees.

Many employers have unpleasantly discovered, typically through a lawsuit or government audit, that the workers they felt confident were contractors were in fact employees. Penalties for failure to properly classify can be severe. They include penalties related to federal and state income tax withholding (these agencies have their own classification tests, further complicating the analysis), unemployment insurance contributions, workers’ compensation penalties, liability for minimum wages and overtime, and additional liabilities.

In addition, in difficult economic times, government agencies seeking additional revenue tend to be more aggressive in their efforts to find misclassified workers. The California Attorney General recently recovered millions of dollars from building contractors, transportation firms, and cleaning companies that had misclassified workers to evade workers’ compensation requirements. Industries in which classification decisions tend to be made in lockstep fashion are particularly appealing targets.

Consequently, at minimum, employers should (1) familiarize themselves with the legal requirements governing contractor/employee status; (2) conduct an audit of their practices to evaluate their level of compliance; (3) develop written policies on how to classify workers properly; (4) use job descriptions that identify whether a position is contractor or employee, including reasons supporting the classification decision; and (5) train managers so that practices are standardized throughout the company.

Finally, while this article has addressed certain legal requirements under federal law, the laws of each particular state must also be considered.

The potential liabilities relating to improper contractor classification are significant. By taking a hard look at the realities of classification decisions at the inception of work relationships, however, employers can take a significant step toward ensuring compliance in their workforce.

For more information on this subject, contact the Department of Labor website.

Contractors - Your General Liability Policy Might Be a Source of Cash For You

Recently, times have been hard for many different types of building contractors. With jobs more scarce, many have had to lay off workers or they simply haven't been able to keep people on full time. At my insurance agency, we have seen our contractor clients' payrolls shrink dramatically and while that indicates hard times, it also presents an opportunity for these businesses. If you are a contractor in the building industry with shrinking payrolls, then your general liability and workers compensation insurance policies could now be a source of ready cash for you.

To understand just how this works, remember that both the California general liability policy and the California workers compensation policy are rated based on payroll. What this means is that the building contractor estimates his payroll for the coming policy year at the beginning of the policy term. Many of these estimates are based on the actual amounts of payroll found on the previous year's audit. With that in mind, many construction contractors are carrying payroll levels on their policy many times greater than the actual payrolls they are running in this down cycle of our economy. If you are a business owner in this situation, you can wait until the final audit of this policy term and receive your refund then. The problem with this approach is that you will have to wait for the policy term to end, and then you will have to wait several more months for the final audit to be completed. In addition, you might have to continue to make monthly or quarterly payments on your policies that are overcharging you now because your payrolls are overstated. But there is a better way.

Take a look at your general liability policy and your workers compensation policy and look up the payrolls that you are being charged on each policy. Now estimate what your total payroll will be for the full policy term. If your anticipated payrolls are much lower than those shown on your current policy, then you can request that the insurance company reduce your payrolls on your policy to this new level and that will generate an instant refund check to you, or it will reduce the amounts of your remaining installments. Voila, instant cash flow. One word of warning here. Be sure that you leave enough payroll on your policy so that you don't generate an additional premium due after the final audit. Doing that can put a huge crimp on your cash flow. I call that problem "the audit trap" and will expand on that in my next blog.

To find out more about how you can save money, call us at 888-472-4915 or visit us online.