Misclassifying Your Workforce Can Bite

A business owner and her lawyer are having lunch.  They were talking about Uber’s troubles.  Uber, the ride-share business, faced lawsuits over Uber classifying its drivers as independent contractors.  We now join the conversation in progress.

Business Owner:  Why does it matter whether someone is an employee versus an independent contractor?

       Lawyer:  Costs and liability are big reasons.  Whether a worker is an employee or independent contractor affects overtime entitlement, benefits, liability exposure, taxes, unemployment, worker’s comp, and which employment laws apply.  Making a mistake in classification can be costly.

Business Owner:  How so?

            Lawyer:  Take overtime for starters.  An employer is responsible for paying overtime if the worker is a non-exempt employee, even if the employer calls the worker an independent contractor.  A worker who successfully sues that he was an employee entitled to overtime that was not paid can get the unpaid wages, interest, liquidated damages, any penalties under state law, and his attorney’s fees and costs.  Then there are the attorney’s fees spent by the employer.

Business Owner:  That is not cheap.

            Lawyer:  That is not all.  There can be the audits, tax issues, etc.  The employee does not need to sue for that to happen.

Business Owner:  Oh, bother.  How do I properly classify someone?

           Lawyer:  There are several tests by the various governmental agencies and the courts.  You will have to pick the ones that apply to your business.  There are common themes between the tests, thankfully.

Business Owner:  Such as?

            Lawyer:  A written independent contract usually is important.  What has to be in the contract will depend on which test you need to satisfy.  Then there is control.  How much control the employer has over the who, what, when, where, and how of the job is considered.  Who provides the tools and materials also affects the outcome.  Then there is the risk of loss among other factors.

Business Owner: Any worker has a risk of loss.  The worker can be fired for doing a bad job.

            Lawyer:  There is more to the risk than that.  Who stands to lose money on a particular job is considered.  Here is an example that helps explain this.  Assume you and a painting company agree on a flat price of $3,000 for the company to paint your house.  You pick the paint, the finish, and agree on a schedule.  The painting company supplies the painters, the tools, and manages the painters and the pace of work.  The painting company, however, underestimated its costs and lost $200 because its total costs were $3,200.  The painting company’s employees are entitled to their wages regardless.

Business Owner:  What now?

            Lawyer:  Let me know if you want to go over how you classify your workers.  Any other questions?

Business Owner:  How come it seems like we are reading a script?

            Lawyer:  Because we are.

This post provides general information only.  This post is not intended to create an attorney-client relationship or to be legal advice about your situation.  Laws change and your situation may be different.  You should consult with a licensed attorney for legal advice specific to your circumstances.

© 2016 Matthew D. Macy