EMPLOYEE OR NOT? Independent Contractors and Interns http://delvacca.acc.com
Presented By: Eric A. Tilles Deputy General Counsel Labor, Employment and Regulatory Affairs Arkema Inc. Matthew J. Hank Shareholder Littler Mendelson, P.C. Philadelphia Office Bill Simmons Shareholder Littler Mendelson, P.C. Philadelphia Office
Independent Contractor CEO Intern Delivery Person
Why Do We Care? Because They Do: Internal Revenue Service U.S. Department of Labor Pennsylvania Department of Labor & Industry Workers Compensation Social Security Administration Class-action Lawyers
The Government Views Misclassification As A High-Stakes Issue In 2015, the New Jersey Department Of Labor Successfully Argued To The New Jersey Supreme Court That The Most Expansive Test of Employee Status Applies To New Jersey Wage and Hour Laws As of 2013, IRS Estimated That Companies Wrongly Retain About $3,710 In Taxes Per Misclassified Individual
Independent Contractors vs. Employees Various Multifactor Tests: Darden test Economic Reality Test Hybrid Test ABC Test Etc., etc.
Common-Law Test: Applies To ERISA and Many State Claims Focal Point Is Control Twelve Non-exclusive Factors Weighed: (1) Skill Required; (2) Source Of The Instrumentalities And Tools; (3) Location Of The Work; (4) Duration Of The Relationship Between The Parties; (5) Whether The Hiring Party Has The Right To Assign Additional Projects To The Hired Party; (6) Extent Of The Hired Party s Discretion Over When And How Long To Work; (7) Method Of Payment; (8) Hired Party s Role In Hiring And Paying Assistants; (9) Whether The Work Is Part Of The Regular Business Of The Hiring Party; (10) Whether The Hiring Party Is In Business; (11) Provision Of Employee Benefits; and (12) Tax Treatment Of The Hired Party Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992)
Economic Reality Test: Applies To Many Wage Claims Focal Point Is Economic Independence Four Non-Exclusive Factors Weighed: 1. Hiring And Firing Authority; 2. Authority Over Work Rules And Assignments; 3. Day-to-day Supervision, Including The Authority To Discipline; and 4. Control Over Workers Records. In Re: Enterprise Rent-a-Car Wage & Hour Emp. Practices Litig., 683 F.3d 462, 468-69 (3d Cir. 2012)
Hybrid Test: Applies To Discrimination Claims Combination Of Darden And Economic Reality Tests EEOC v. Zippo Mfg. Co., 713 F.2d 32, 38 (3d Cir. 1983)
ABC Test: Often Applied to Unemployment Benefits But Has Additional Applications In Some States (A) Such individual has been and will continue to be free from control or direction over the performance for such service, both under his contract of service and in fact; and (B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and (C) Such individual is customarily engaged in an independently established trade, occupation, profession or business. N.J. Stat. Ann. 43:21-19(i)(6)(A)-(C)(2013).
What s Bad About the Proliferation of Multi-Factor Tests? Allows For Agencies To Engage In A Results-Oriented Analysis Allows Courts To Use Results-Oriented Jurisprudence Discourages Entrepreneurialism And Encourages Individuals To Downplay Their Responsibilities Undermines Law s Predictability
The Ambiguity Costs Companies Money 2014: Home Improvement Company Paid $6.5 Million to Settle Misclassification Lawsuit 2013: Directory Assistance Company Paid $1.3 Million To Settle Misclassification Lawsuit 2012: Gentleman s Club Paid $12.9 Million To Settle Misclassification Lawsuit 2008 Delivery Company Paid $26.8 Million To Settle Misclassification Lawsuit
Yet The Use Of Independent Contractors Will Increase Staffing Industry Analysts Estimates That 17.7 Million People Work As Independent Contractors Now 63% Want To Remain Independent Competitors Will Use Independent Contractors 24 Million ICs Expected In 2018
Exposure Cannot Be Eliminated, But It Can Be Managed? Audit, Audit, Audit Follow Littler s Golden Rules Beware the Red Flags
To Audit or Not to Audit Pursuant to a 2012 study conducted by Staffing Industry Analysts: Have Been Audited, Either Internal or External Audit Median Buyer Estimates 90% of ICs Properly Classified Have Never Been Audited Median Buyer Estimates 50% of ICs Properly Classified
Same SIA Survey of Large Companies: When was your last internal IC audit? 27% 8% 28% 38% Last 6 months Last year 2+ yrs ago Never When was your last external IC audit? 15% 51% 10% 25% Last 6 months Last year 2+ yrs ago Never
Five Practical Steps to Begin Your Contingent Worker Audit 1. Identify every contractor, individual or organization providing services regularly for your company (either on site or off site) for the past 2 years, paid on some basis other than on W-2 employee basis. 2. Determine if you have written contracts in place with each provider and whether the contracts are up to date and protect your company interests.
Five Practical Steps to Begin Your Contingent Worker Audit 3. Nature of the work: Determine which services are staff augmentation, performing the same or very similar services as direct W-2 employees; is it a completely outsourced function?; is the service a core function of your business? 4. Examine how many providers devote their full working time to providing services to your company and how many solo-independent contractors are providing services for you. 5. Is the taxpayer ID someone s personal social security number?
Littler s Red Flags Engaging a former employee as a contractor or converting a contractor to an employee without proper analysis Being a contractor's first customer Engaging someone as a contractor who is/has been employed anywhere within the last 18 months Engaging someone as a contractor who will do the same work under similar conditions
Getting Practical Various tests employed by agencies and courts complicated Some red flags may be unavoidable Need for developing internal screening process Review all proposed contractor relationships before engagement Harness resources to deal with these issues Classify for employer purposes Defend / explain in event of inquiry / audit
Reducing Exposure Empower a contractor director to oversee compliance Apart from or in addition to a director, consider: Making business unit accountable for cost of misclassification Charge unit for cost of defense, if audited Charge unit for taxes, penalties, interest Engage third party company for vendor screening and management Consider arbitration program with class-action waiver Indemnification provisions with third parties Requiring more proof from prospective contractors demonstrating bona fide independent operations
But... What about Joint Employment? Even when you use a bona-fide contractor to provide workers, there is a risk of joint employment Staffing agencies, temp agencies, etc... Assumes contractor is workers employer, but still asks for more
Joint Employment Risk where two entities exercise significant control over the same employees. Graves v. Lowery, 117 F.3d 723 (3d Cir.1997) Contractor s employees are: Supervised by your employees On location with your employees, working side by side Covered by your policies Substantially affected by your employees Biggest practical area of risk in discrimination cases Same proliferation of tests Consider contractual remedies
Where Do Unpaid Interns Come From? Walling v. Portland Terminal Co., 330 U.S. 148, 152-53 (1947) Held that the FLSA s definition of employee does not include participants in an educational or vocational training program that provides no immediate benefit to the employer and that serves only the trainees interests.
May We Have Unpaid Interns? FLSA establishes 6-part test: Work must involve training similar to what would get in an educational environment The experience is for the benefits of the intern not the "employer" Work doesn't displace regular employees and is closely supervised by existing staff "Employer" does not derive immediate advantage from intern's work Interns not necessarily entitled to a job at conclusion Intern understands that intern not entitled to wage for time spent
It is Difficult to Meet This Standard In Glatt v. Fox Searchlight Pictures Inc., No. 11 Civ. 6784 (S.D.N.Y. 2013), unpaid interns on a film production set were held to be misclassified because: They performed low-level tasks that employees would have performed in their absence Internship had no unique educational value Internship was mainly for benefit of company
Misclassifying Interns Is Costly... 2014: Magazine Company Pays $5.8 Million 2014: Television Company Pays $6.4 Million
The Bottom Line Using interns is fraught: Unless you can prove that the internship was for the primary benefit of the individual, the intern was likely misclassified Unless you can prove that the internship served only the intern s interest, you cannot be certain that an intern is properly classified
Where Do We Go From Here? The Takeaways An organizations needs to know who "works" under its tent. Differentiating employees from others is complex and consequences of misclassification can be costly use a contractor director or third party to help administer. There can be a variety of non-employees in the workplace are they properly classified and are employees trained to deal with?
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