Legal Considerations in Hiring Outside Contractors and Retirees

Transcription

1 Legal Considerations in Hiring Outside Contractors and Retirees April 19, 2018 Anne-Marie Vercruysse Welch Nancy Mullett (248) (616)

2 What Are We Going to Talk About Today? Importance of Identifying Proper Work Relationship o Employee v Independent Contractor (Individual) DOL s Position and Strategy: Then and Now Test for Determining Classification o Economic Reality Test Third Party Contractors o Joint Employer Where is MPSERS in all this? Best Practices 2 clarkhill.com

3 Why is it So Important to Properly Classify Workers? Districts are increasing their employment of outside contractors and retirees to service students. Important to understand the different worker relationships The misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy On average, in 2008, 30% of Michigan employers misclassify employees as selfemployed workers or under-report employee payroll.* Annually, this resulted in an estimated underpayment of state income tax of $20 to $33 million, and an estimated loss to the federal government of between $57 and $96 million. In 2009, the U.S. Government Accountability Office (GAO) reported that worker misclassification contributes to the tax gap (the difference between the revenue the federal government collects and what is legally owed) o Government sees this as an opportunity to increase tax revenues 3 clarkhill.com

4 Why is it So Important to Properly Classify Workers? Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, retirement benefits, family and medical leave and unemployment insurance If an employer incorrectly classifies an individual as an independent contractor rather than an employee, the employer can be held liable for violations of all the federal and state laws that apply to employees o These laws include general employee protections including wage and hour laws, worker s compensation, unemployment compensation, disability insurance, social security, and Medicare 4 clarkhill.com

5 EMPLOYEE VS. INDEPENDENT CONTRACTOR

6 When Should a Worker Be Classified as an Employee? Generally, someone is an employee if they: o perform services for the employer; and o the Employer controls what is being done and how it is being done Key element of employer-employee relationship is the Employer s right to control the details of how a service is performed Tax Implications of employer-employee relationship: o Employers must pay taxes to cover employees under workers compensation insurance & unemployment insurance from the employer s own funds o Employers are also required to pay payroll taxes o Employers must withhold the federal income tax from employee s wages, as well as part of Social Security and Medicare taxes and the Employer is then responsible for paying the taxes on the employee s wages from the Employer s own funds 6 clarkhill.com

7 When Should a Worker Be Classified as an Independent Contractor? An independent contractor is an individual who is in an independent trade, business, or profession in which they can offer services to the general public o Independent contractors can include doctors, dentists, veterinarians, lawyers, accountants, contractors, and subcontractors, etc. Key distinction from an employee : o Independent contractors are not considered employees when hired to perform a service by an employer rather they are self-employed and enter into contractual agreements with employers to perform a designated service in exchange for payment Oftentimes independent contractors are called upon in a consulting capacity, to contribute their expertise on a certain project that the employer alone may not have 7 clarkhill.com

8 Employee Withhold taxes such as federal income tax, unemployment tax Independent Contractor No withholding required Payments and taxes reported on IRS Form W-2 Generally entitled to benefits and most are covered by the Michigan Public School Employee Retirement System (MPSERS) Many legal protections when serving in their role as a public school employee Payments reported on IRS Form 1099 Generally not entitled to benefits such as sick days, retirement, and insurance Do not benefit from legal protections, ex. workers compensation 8 clarkhill.com 8

9 Why Do Employers Prefer the Independent Contractor Classification? The general protections that an employee enjoys do not apply to independent contractors o For example, employees are well-protected by the employment laws of the state, so they have the ability to raise employment dispute claims with the company Because the independent contractor does not have the same protections as an employee, he likewise cannot raise a dispute claim against an Employer Additionally, the independent contractor must file: o his own income tax; and o must also file for his own self-employment tax to cover Social Security and Medicare costs 9 clarkhill.com

10 Why Do Workers Prefer the Independent Contractor Classification? For the worker, independent contractor status allows him/her to: o Be his/her own boss; The contractor does not have to answer to someone on a regular basis and is not subject to supervision or other superior authority Remain economically independent from the company he is providing a service for o Payment depends on the quality and quantity of his individual work; Refrain from having state and federal taxes withheld from compensation Deduct various business expenses, such as travel, on his/her own personal income tax return; and To take advantage of various retirement plans 10 clarkhill.com

11 Is There Any Disadvantage to the Independent Contractor Classification? There are some notable disadvantages to being an independent contractor: o Lack of job security The independent contractor s work depends on how much business he can find, and if no business is in need of the contractor s services there is a high risk of not being paid Compensation is contingent on the quality and quantity of work o Economic Risk Although there is great flexibility in being an independent contractor, there is a lot more risk involved in payment and staying in business than an employees are likely to experience 11 clarkhill.com

12 DOL S EMPHASIS ON WORKER CLASSIFICATION

13 What Has the DOL Done to Address Worker Misclassification? DOL Strategic Plan clarkhill.com o Partnerships: DOL is working with the IRS and many states to combat employee misclassification and to ensure that workers get the wages, benefits, and protections to which they are entitled 26 states (not yet including Michigan) have partnered with the DOL to work together through information sharing and coordinated enforcement to ensure that states are using resources most strategically, effectively and efficiently to address worker misclassification o Performance Goal: To ensure that vulnerable workers are employed in compliance and to secure sustained and verifiable employer compliance, particularly among the most persistent violators o Targeted Industries: WHD s directed investigations will be concentrated in high-risk fissured industries that employ vulnerable workers or in program areas in which workers are at a higher risk of exploitation (i.e. agricultural, janitorial, construction, and hotel/motel industries)

14 What Guidance Has the DOL Provided to Help Employers Properly Classify Workers? On July 15, 2015, at the request of interested Employers, the Administrator of the Labor Department s Wage and Hour Division published a 15-page memorandum of guidance addressing the proper classification of workers The memorandum clarified that under the Fair Labor Standards Act, the definition of employee is much broader than what some employers believe and what some court rulings have determined o Practical Implication: Implementation of the department s guidance made it much more difficult for Employers to classify workers as independent contractors 14 clarkhill.com

15 Trump Administration On June 7, 2017 the DOL withdrew the previous guidance but did not change the legal responsibility of employers under the FLSA. This likely means a return to traditional standards and enforcement. Although the playing field may be leveling out, the risk of independent contractor misclassification liability remains substantial and the cost can be prohibitive, to a school district - especially from large lawsuits or administrative proceedings 15 clarkhill.com

16 Enforcement School districts are not off limits from investigation and enforcement If audited o o o o o o o o o o o All payroll records, journals, and other records of compensation General ledger Cash disbursement journal/check register Forms W2 s, 1099, etc. Annual financial report Copies of all contractor contracts List of all people who paid rent for use of facilities, equipment, etc. Vehicle usage and policies Employee Handbook Expense reimbursements Vendor lists 16 clarkhill.com

17 THE DOL S INTERPRETATION OF THE WORKER CLASSIFICATION TEST

18 What Test Should Be Used to Properly Classify Workers? Economic Reality Test Six (6) Factors to Consider When Classifying Workers: o (1) Extent to which the worker s services are an integral part of the employer s business; (Example: Does the worker perform an integral/discrete job that is one part of the Employer s overall operations?) o (2) Permanency of the relationship; (Example: How long has the worker worked for the same district?) o (3) Amount of the worker s investment in facilities and equipment; (Examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his/her own materials and supplies?) 18 clarkhill.com

19 What Test Should Be Used to Properly Classify Workers? Factors to Consider When Classifying Workers (cont d): o (4) Nature and degree of control by the principal; (Examples: Who decides the hours to be worked? Who is responsible for quality control? Does the worker work for any other district?) o (5) Worker s opportunities for profit and loss; (Example: Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?) o (6) Level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (Example: Does the worker advertise independently via business cards that do not contain any one district logo/information?) 19 clarkhill.com

20 How Should the Six Factors Be Analyzed To Determine Proper Worker Classification? Each factor should be examined and analyzed in relation to one another, and no single factor should be determinative The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis The factors are supposed to be used collectively to determine whether the worker is economically dependent on the employer, and therefore an employee, or truly in business for himself or herself as an independent contractor 20 clarkhill.com

21 THIRD PARTY CONTRACTORS

22 Third Party Contractors Private Company Provides Educational Staffing Services Who are Employees or Subcontractors of the Third Party Written Agreement that Identifies the Relationship o Third Party and District o Third Party and Staff o District and Staff Assigns Responsibilities Assigns Liability Addresses MPSERS SOLVES THE PROBLEM RIGHT? 22 clarkhill.com

23 Right To Control Test The Third Party Company may be considered a joint employer depending upon the amount of control it exercises over the worker during the term of the assignment. If the contractor is a third party the employer needs to make sure the terms of the relationship to the worker is clearly spelled out in an agreement. A determination is made by looking at the entire relationship o The nature and degree of control over the worker does the district instruct the individual as to when, where, and how work is performed? o The degree of supervision exercised over the work and by whom o The furnishing of work space and/or equipment and supplies o The amount and kind of training provided by the district o The power each has to determine the pay rates or method of payment o The right each has to hire, fire or modify working conditions 23 clarkhill.com

24 Liability Concerns for Joint Employer May be liable for discrimination and harassment claims FMLA issues Work related injuries Minimum wage and overtime payments If misclassified are they part of a district union? 24 clarkhill.com

25 RETIREES AND MPSERS

26 Retirees Retired Before July 1, 2010 General Rule: If a retiree works directly for a reporting unit (school district) and earns more than one-third of their final average compensation, that retiree must pay back each dollar earned above the limit, unless their situation meets one of the following exceptions (MCL (5)): o Retiree is employed by a reporting unit in a critical shortage area o Retiree has been retired for at least 12 months o Employment does not exceed three years o Employment does not count toward recomputation of retirement allowance o Reporting unit pays 100% of the contribution rates for the unfunded actuarial accrued liability for retiree health care and pension If retiree returns to work in a K-12 public school as an employee of a thirdparty contractor or as an independent contractor, there are no earnings limits clarkhill.com

27 Retirees Retired After July 1, 2010 and Before September 1, 2015 General Rule: If a retiree works directly for a reporting unit (school district) and earns more than one-third of their final average compensation, that retiree would forfeit their retirement allowance and their health care subsidy for each month they are employed, unless their situation meets one of the following exceptions (MCL (5)): o Retiree is employed by a reporting unit in a critical shortage area o Retiree has been retired for at least 12 months o Employment does not exceed three years o Employment does not count toward recomputation of retirement allowance o Reporting unit pays 100% of the contribution rates for the unfunded actuarial accrued liability for retiree health care and pension If retiree returns to work in a K-12 public school as an employee of a thirdparty contractor or as an independent contractor, there are no earnings limits clarkhill.com

28 Retirees Retired After July 1, 2010 and Before September 1, 2015 Substitute Teacher, Instructional Coach, or School Improvement Facilitator: If you re employed directly as Substitute Teacher, Instructional Coach, or School Improvement Facilitator, you may earn up to one-third of your FAC without penalty. This applies to employees who are employed directly by the reporting unit, or as an independent contractor, or as an employee of a third-party contractor. The reporting unit will pay 100% of the contributions for both pension and health care. clarkhill.com

29 Retirees Retired After July 1, 2010 and Before September 1, 2015 Critical Shortage Exemption: If you re employed by a K-12 Michigan public school in a critical shortage discipline, regardless of when you retired, you are exempt from the earnings limit until July 1, 2018 if all the following exist in your situation: o You are retired and have been collecting your pension for at least one year, and o You are employed by a K-12 Michigan public school that has a situation, not including a situation caused by a labor dispute, that requires the school to hire you in an area that has been identified by the state superintendent of public instruction as a critical shortage discipline, and o You are not employed in a critical shortage position for more than three years o The K-12 Michigan public school shall pay 100% of the contribution rates for the retiree health care and pension to ORS. clarkhill.com

30 Retirees Retired After July 1, 2010 and Before September 1, 2015 If you return to work indirectly in a Michigan K-12 public school or charter school/public school academy as an employee of a third-party, or as an independent contractor: o Core Services: If a retiree retires after June 30,2010 and works for a third party or as an independent contractor to perform core services, (but not a critical shortage) as defined by ORS, the retiree forfeits their retirement allowance and their health care subsidy for each month they are employed (MCL (8)) unless they meet the requirements under the substitute teaching, instructional coach/school improvement or critical shortage exceptions. Can t earn more than 1/3 FAC The K-12 Michigan public school shall pay 100% of the contribution rates for the retiree health care and pension to ORS. clarkhill.com

31 Retirees Retired After September 1, 2015 If a retiree works directly for a reporting unit (school district) and earns more than one-third of their final average compensation, that retiree would forfeit their retirement allowance and their health care subsidy for each month they are employed If you return to work indirectly in a Michigan K-12 public school or charter school/public school academy as an employee of a third-party, or as an independent contractor: o Core Services: If a retiree retires after September 1, 2015 and works for a third party or as an independent contractor to perform core services, (but not a critical shortage), the retiree forfeits their retirement allowance and their health care subsidy for each month they are employed clarkhill.com

32 EMPLOYEE CLASSIFICATION BEST PRACTICES

33 Designate a Department While the human resources function clearly owns employee issues, many districts do not monitor their independent contractor relationships Before hiring independent contractors, Employers should: o make clear which department within the organization is responsible to understand the law; o know which contractors have been engaged; o understand the terms of the engagement; and o monitor compliance o know your workforce clarkhill.com

34 Maintain Records of Classification Processes Employers should maintain basic records on the independent contractor determination process, and the facts used to make that determination o For example, they should keep records of business licenses, business cards, contractor tax records, project work plans showing limited engagements and correspondence from the contractor clarkhill.com

35 Carefully Review Type & Scope of Work to Be Performed The DOL believes most work should be performed by employees and that independent contractors should be used sparingly When Determining Whether to Hire an Independent Contractor, Employers should: o Conduct a careful review of the type and scope of work being performed before engaging the services of any nonemployee o Determine whether tasks can be performed by current employees, even if it means splitting such tasks among several employees clarkhill.com

36 Contract Around Potential Employer Liability Entering into independent contractor agreements or hiring a third party does not necessarily protect you from liability under the FLSA When entering into agreements with other service providers, Employers should: o Define each party s relationship to the other parties o Describe the specific services and conditions that apply to the work to be performed o Address criminal background checks o Obtain appropriate indemnification provisions to protect the company from the wage and hour claims of the service provider s workers o Avoid giving contractors rights or access that cut against the independent contractor determination clarkhill.com

37 Periodically Audit Existing Contractor Arrangements Sometimes workers inadvertently shift from contractors to employees If an otherwise-valid contractor arrangement becomes economically dependent on the work, then the relationship may convert to an employee entitled to overtime Adjust job descriptions and work to be performed if it appears that contractors may be shifting toward becoming employees clarkhill.com

38 QUESTIONS?

39 THANK YOU! 39 clarkhill.com

40 LEGAL DISCLAIMER NOTE: This document is not intended to give legal advice. It is comprised of general information. Employers facing specific issues should seek the assistance of an attorney. 40 clarkhill.com