Risks When Classifying Employees and Independent Contractors in this "Gig" Economy

A Good Gig

Much has been written lately about the "gig" economy - an economy based on individuals selling their services on an ad hoc, freelance basis. (Just this week, on February 2, 2016, the New York Times had the article: “Uber Drivers and Others in the Gig Economy Take a Stand” by Noam Scheiber). We see a number of companies that are based on that model, Uber being one of the most prominent. The key for Uber, and other such entities (e.g., Lyft, AirBnB), is that the people providing services are not classified as employees but rather as independent contractors.

 

Why does that matter?

Independent contractors and employees are fundamentally different. Employees receive salaries, benefits, vacation days, workers' compensation insurance, and more. Independent contractors receive a 1099 and little else. The entity employing them is able to avoid payroll taxes, the cost of benefits, required insurances, resources, infrastructure and more. Clearly, it is more expensive to have an employee. And in a tough economy, businesses want - need - to cut expenses.

 

How can you tell the difference between an employee and an independent contractor?

Some employers believe that simply by telling their workers that they are independent contractors that they've covered their bases. Or that by having an agreement saying that they are will do it. That is a wrong assumption. The NYS courts have repeatedly held that an employer can classify a worker however it wants, but the true test isn't a title but a triad of facts: 1) What degree of control is exerted over the worker? 2) What degree of supervision is exerted over the worker? And 3) what amount of direction is given to the worker?

 

What constitutes control, direction and supervision?

Control, direction and supervision are the ability to dictate the terms and conditions of the job. A few examples: employees work specified hours, in a particular location, must attend certain meetings or training, provide reports on progress, and typically are integral to the business. Independent contractors, by contrast, work at their own hours, in their own locations, for more than one client, and have their own business.

 

What can happen if someone is classified incorrectly?

The risk to employers that their workers (full-time, part-time or even casual) are employees and not independent contractors is great. If someone is found to be improperly classified, the employer can be liable for various penalties including, but not limited to, federal tax (FICA and other withholdings), state tax, Affordable Care Act penalties, disability insurances, unemployment insurance, workers’ compensation insurance, benefits (including retirement benefits), interest and penalties.

 

What should I do?

If you are a worker and you believe that you’ve been classified incorrectly, you should reach out to a qualified attorney in your jurisdiction to sit down with you on a consultation basis to help you make a proper determination. If you have been improperly designated an independent contractor, the attorney can work with you to remedy the situation.

If you are an employer, you bear all the risks of misclassification. On a periodic basis, you should sit down with your attorney and review the job descriptions of your workers – including part-time and casual/seasonal ones. The attorney can help determine if you exercise the requisite control, supervision and direction to properly designate someone an employee. Or help you to ensure that you do not meet that threshold.

 

The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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