2012 Winston & Strawn LLP

Transcription

1 2012 Winston & Strawn LLP

2 Employee or Independent Contractor? Brought to you by Winston & Strawn s Labor and Employment Relations Practice Group 2012 Winston & Strawn LLP

3 Today s elunch Presenters Jennifer Rappoport Labor and Employment Los Angeles JRappoport@winston.com Marlén Cortez Morris Labor and Employment Chicago mcmorris@winston.com 2012 Winston & Strawn LLP 3

4 Overview Why engage independent contractors? Risks of misclassification of workers Tests used by courts and enforcement agencies for employee/independent contractor determination Recent IRS initiatives on independent contractor classification Recent enforcement actions New laws regarding independent contractors, and potential penalties that may arise as a result of misclassification Best practices for avoiding misclassification 2012 Winston & Strawn LLP 4

5 Why Use An Independent Contractor? If worker is treated as an independent contractor: Paid on a 1099 basis no employer tax withholding No overtime (unless provided by contract) Provide their own tools and equipment No reimbursement for business expenses (unless provided by contract) Generally not protected by fair employment laws Not covered by workers compensation Allows staffing for specific projects and needs Minimizes recruitment and retention costs, and, in some cases, overhead and supervision costs Opportunity to learn what people can do before hire Provides flexibility to both parties 2012 Winston & Strawn LLP 5

6 Risks of Worker Misclassification While independent contractors may provide a greater return on investment than hiring new employees in some cases, this approach is not without risk Misclassification issues continue to be front and center in state and federal legislation, enforcement actions by state and federal agencies, DOL and IRS audits, and wage and hour litigation 2012 Winston & Strawn LLP 6

7 Risks of Worker Misclassification A federal study in 2009 estimated that: U.S. government loses $2.72 billion a year due to misclassification of employees as independent contractors State governments lose nearly $200 million a year in employment insurance compensation for every 1% of employees who are misclassified President Obama s Misclassification Initiative FY 2011: $25 million to increase audits and enforce misclassification FY 2012: $240 million FY 2013: Budget request seeks an additional $14 million 2012 Winston & Strawn LLP 7

8 Risks of Worker Misclassification Severe penalties for employers Vizcaino v. Microsoft, 120 F.3d 1006 (9th Cir. 1997), cert. denied, 522 U.S (1998): Settlement of $97 million for independent freelancers hired under independent contractor written agreements to do production editing, proofreading, formatting, indexing, and software testing Estrada v. FedEx Ground Package Sys., Inc., 64 Cal. Rptr. 3d 327 (Cal. App. Ct. 2007): Verdict for drivers found to be employees, $5 million compensation and $13 million in attorneys fees IRS audit of FedEx found the company misclassified package pickup and delivery contractors, and owed $319 million in back taxes and penalties for tax years Although this was later rescinded after an appeal by FedEx, the IRS did find that the drivers were employees of the company, which could result in tax liability for future years Winston & Strawn LLP 8

9 Worker Classification Tests Courts and different agencies apply different tests in examining whether a worker is an employee or independent contractor Right-to-control v. entrepreneurial opportunity Economic realities test Hybrid tests California ABC test IRS factors 2012 Winston & Strawn LLP 9

10 The Right-to-Control Test Common law test Factors the extent of control which, by the agreement, the employer may exercise over the details of the work; whether the worker is engaged in a distinct occupation or business, independent of the business; whether the work, in the locality, is usually performed under the direction of the employer or by a specialist without supervision; the skill required in the particular occupation; whether the employer or worker supplies the instrumentalities, tools, and place of work for the worker; the length of time for which the worker is employed; the method of payment, whether by time or by the project; whether or not the work is part of the regular business of the employer; and whether the parties believe they are creating an employer and employee relationship Winston & Strawn LLP 10

11 Right-to-Control v. Entrepreneurial Opportunity No one factor is determinative, but courts have emphasized the right to control the manner and means of the worker s performance of the work. FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009): D.C. Circuit expressed dissatisfaction with the right-tocontrol test and announced a new element for determining employee classification: entrepreneurial opportunity Winston & Strawn LLP 11

12 Economic Realities Test For purposes of determining whether an individual is an employee under the FLSA, the U.S. DOL uses the economic realities test. The definition of an employee under the FLSA is very expansive and broader than the common law test. It has been held to be a matter of economic realities. Ultimate question is whether, as a matter of economic reality, the worker depends on the employer Winston & Strawn LLP 12

13 Economic Realities Test In United States v. Silk, 331 U.S. 704 (1947), the U.S. Supreme Court found the following factors important: The degree of control exercised by the alleged employer; The extent of the relative investments of the alleged employee and employer; The degree to which the employee s opportunity for profit and loss is determined by the employer ; The skill and initiative required in performing the job; The permanency of the relationship; and The extent to which services performed by the worker are a key aspect of the regular business of the company 2012 Winston & Strawn LLP 13

14 Economic Realities Test Immaterial factors to whether there is an employment relationship The place where work is performed; The absence of a formal employment agreement; Whether an alleged independent contractor is licensed by state/local government; and The time or mode of pay does not control the determination of employee status. Bottom line: if the worker is controlled by and depends on the employer, the worker is an employee rather than an independent contractor 2012 Winston & Strawn LLP 14

15 Hybrid Test Some courts will use a hybrid test that combines the right-to-control and economic realities tests California S.G. Borello & Sons, Inc. v. Dep t of Indus. Relations, 769 P.2d 399 (1989): whether the employer retains the right to control all meaningful aspects of the business relationship is the principal test, with an emphasis on the integration of workers into the employers overall business operations 2012 Winston & Strawn LLP 15

16 Hybrid Test Narayan v. EGL, Inc., 616 F.3d 895 (9th Cir. 2010): drivers found to be employees using hybrid test where: The delivery services provided by the drivers were an essential part of the regular business of the company; The company instructed its drivers on proper conduct when receiving assignments and packages, handling of damaged freight, how to communicate with the dispatch, and when to arrive for work; The company controlled the details of the drivers performance as it related to uniforms and vehicles; The work did not require a high level of skill; Many of the relationships were of long duration; and The contracts signed by both parties contained automatic renewal clauses and could be terminated by either party upon 30 days notice or breach of the contract Winston & Strawn LLP 16

17 ABC Test For purposes of state unemployment taxes, some states use the ABC Test, which presumes an employment relationship. California Illinois Others Since the test presumes employment relationship, to be considered an independent contractor, the employer must meet three criteria: 1) the worker is free from control or direction in the performance of the work; 2) the work is done outside the usual course of the company s business and is done off the premises of the business; and 3) the worker is customarily engaged in an independent trade, occupation, profession, or business (e.g., operates under a trade name, has own business cards, or works for other companies) 2012 Winston & Strawn LLP 17

18 IRS Test For purposes of withholding federal income tax, the IRS uses the following factors to determine whether a worker is an employee or an independent contractor Behavioral Control facts that show whether the business has a right to direct and control, including: Instructions an employee is generally told: When, where, and how to work What tools or equipment to use What workers to hire or assist with the work Where to purchase supplies and services What order or sequence to follow Training an employee may be trained to perform services in a particular manner 2012 Winston & Strawn LLP 18

19 IRS Test Financial Control facts that show whether the business has a right to control the business aspects of the worker s job, including: The extent to which the worker has unreimbursed expenses The extent of the worker s investment The extent to which the worker makes his/her services available to the relevant market How the business pays the worker The extent to which the worker can realize a profit or loss 2012 Winston & Strawn LLP 19

20 IRS Test Type of Relationship facts that show the type of relationship include: Written contracts describing the relationship the parties intended to create Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay The permanency of the relationship Whether the services are provided as a key activity of the business 2012 Winston & Strawn LLP 20

21 Worker Classification Tests Irrespective of test used, whether a worker is an employee or an independent contractor is a factspecific analysis Label of employee or contractor not determinative 2012 Winston & Strawn LLP 21

22 Independent Contractor: IRS Initiatives IRS Employment Tax National Research Project Employment tax audit of 6,000 randomly selected companies; 2,000 each year for three years beginning in February 2010 In September 2011, the IRS announced its Voluntary Classification Settlement Program ( VCSP ) 2012 Winston & Strawn LLP 22

23 IRS Voluntary Classification Settlement Program What is it? How does it benefit the IRS? How does it work? Who is eligible? How to apply? Risks of volunteering Only 540 employers have applied to participate May 23, 2012 IRS News Release 2012 Winston & Strawn LLP 23

24 Department of Labor Initiatives Department of Labor s Misclassification Initiative Launched in 2010 Targeted wage and hour investigations in industries with the most classification problems Coordination with states on enforcement litigation against multi-state employers On September 19, 2011, as part of its Misclassification Initiative, the DOL and IRS signed a Memorandum of Understanding ( MOU ) to allow the sharing of information regarding worker misclassification How it works We re standing united to end the practice of misclassifying employees. - Secretary of Labor Hilda Solis 2012 Winston & Strawn LLP 24

25 DOL Enforcement Actions In 2011, the DOL s Wage & Hour Division collected more than $5 million in back wages for minimum wage and overtime violations that resulted from employees being misclassified as independent contractors In 2012, the DOL s Wage & Hour Division has committed to increasing its investigations by 35% 2012 Winston & Strawn LLP 25

26 State Misclassification Initiatives 13 states have signed memoranda of understanding with the DOL s Wage & Hour Division to combat misclassification of workers California Illinois 34 states have formed task forces aimed at combating employee misclassification across all industries 2012 Winston & Strawn LLP 26

27 Recent State Enforcement Actions Connecticut and Rhode Island DOL s Wage & Hour Division is currently conducting a multi-year enforcement initiative focused on the construction industry Since 2008, the Wage & Hour Division s Connecticut office has conducted 183 investigations of construction industry employers in these two states, recovering nearly $3.3 million in back wages for 1,226 employees, including for misclassification of workers as independent contractors DOL issued 23 Stop-Work orders against subcontractors working on a $26 million HUD project after finding that the firms had misclassified their employees and failed to have adequate workers compensation insurance For Fiscal Year ending June 30, 2011, Connecticut s DOL issued a total of 159 Stop-Work orders to employers who did not comply with the state s workers compensation laws In January and February 2012, Connecticut s DOL issued Stop-Work orders to 19 construction companies, collecting $250,000 in civil penalties 2012 Winston & Strawn LLP 27

28 Recent State Enforcement Actions Massachusetts Aggressive enforcement efforts targeting independent contractor misclassification in a range of industries $3 million settlement with FedEx Ground Restaurant industry also a focus Joint Task Force on the Underground Economy and Employee Misclassification New York Recovered nearly $6.5 million Focus on construction sites, restaurants, and retail establishments Washington Focus on hair, nail, and skin care industries 2012 Winston & Strawn LLP 28

29 Recent State Enforcement Actions Texas FedEx Ground Sys. Inc. v. Tex. Workforce Comm n, No. D-1-GN (filed in Travis County District Court, Aug. 6, 2012): In 2008, the Texas Workforce Commission issued a ruling to FedEx that it had to pay unemployment taxes for its drivers. The Commission determined the amount of unpaid unemployment taxes from 2005 to 2010 to be $900,000. On August 6, 2012, FedEx sued the Commission in state court, challenging the Commission s ruling that FedEx must pay unemployment taxes for its Texas delivery drivers, claiming the delivery drivers are employed instead by independent contractors. FedEx asserts it never had the right to control how its contractors or their drivers operated because: The drivers are hired by companies that contract with FedEx to deliver packages, not directly with FedEx; Contractors were free to decide when to work, how many vehicles to use, how to load those vehicles, what routes to take, how to juggle competing customer demands, how to deal with excessive volume, and even whether to work at all; FedEx doesn t pay contractors on a salary or hourly basis, but instead for actual performance of the delivery services; FedEx is not responsible for hiring, training, managing, compensating, or terminating any Texas drivers 2012 Winston & Strawn LLP 29

30 Recent Proposed Legislation Federal Employee Misclassification Prevention Act Would create a new federal offense for intentional and unintentional contractor misclassification Increased penalties Recordkeeping requirement Notice requirement Payroll Fraud Prevention Act Increased penalties Recordkeeping requirement Notice requirement Fair Playing Field Act Would eliminate the safe harbor provision of Section 530 of the Internal Revenue Code 2012 Winston & Strawn LLP 30

31 New Legislation States Since 2010, 11 states have passed laws curtailing the use of independent contractors or increasing penalties for misclassification 10 other states had similar laws in place prior to 2010 At least 18 state legislatures have proposed bills intended to limit the use of independent contractors or make misclassification more costly 2012 Winston & Strawn LLP 31

32 New Legislation States Illinois, New Jersey, New York Employee presumption for workers in the construction industry Connecticut, Kansas Increased civil penalties and imposition of criminal penalties Maine Rebuttable presumption of employee status for workers in the trucking and messenger service industries Vermont Per se violation for misclassification Wisconsin Recordkeeping requirements Painting, drywall, and construction industries 2012 Winston & Strawn LLP 32

33 New Legislation States California Senate Bill 459 Effective January 1, 2012 Key provisions Willful misclassification Increased penalties Intersect with Private Attorney General Act ( PAGA ) Notice posting of violation Enforcement 2012 Winston & Strawn LLP 33

34 Avoiding Misclassification Employers can adopt strategies to minimize risk through how independent contractor relationships are structured and documented Written agreements Corporate policy on engagement of independent contractors Project vs. at-will, long-term, or exclusive contracts Pay for performance vs. time worked Contractor should be invested Train employees who manage independent contractors No unnecessary restrictions on other opportunities 2012 Winston & Strawn LLP 34

35 2012 Winston & Strawn LLP Questions?

36 2012 Winston & Strawn LLP Thank You.