Friday, October 3, 2014

Misclassification of Independent Contractors = A Rough Road for Employers

FedEx deliveries are exciting, right? From the moment you order or send a package, track its progress and see the final “delivered” status, it is the ultimate adrenaline rush.

OK, perhaps I exaggerate. To be realistic, deliveries these days are pretty streamlined, simple and likely kind of boring. But last month package deliveries got a little more complicated for FedEx in Oregon and California.

How? Most of us would assume a person wearing a FedEx uniform, groomed to FedEx’s standards driving a FedEx truck and delivering packages on FedEx’s schedule would have to be a FedEx employee. But in Oregon and California, the drivers were actually classified by FedEx as independent contractors. Common sense says that wouldn’t be right, and the U.S. Ninth Circuit Court of Appeals agrees. Recently the court rendered a decision holding that the drivers in those states were actually employees.

This is a big deal. In fact, it has been called “an earthquake in the independent misclassification field.”

I can’t tell you what the exact financial effect will be on FedEx in California and Oregon, but can tell you it likely to be dramatic for FedEx and a lot of other companies.

Identifying an individual as an employee or independent contractor is tricky. A solid independent contractor agreement is great to have in place, but it won’t help ward off scrutiny from the IRS, the Department of Labor, and other local, state and federal authorities. There is a lot to consider before entering into a business relationship with someone as an independent contractor.

State laws may differ on who can be classified as an independent contractor, but the IRS has streamlined guidelines to help employers with classification. What should you consider before entering into an independent contractor relationship?

Overall, it is based on the degree of control a company has over an individual and can be broken down into a few areas.

  • Does the company tell the individual exactly what to do in delivering the final product or service?
  • Does the company determine or provide the equipment that is used how, what to wear on a job site and hours of work?
  • Is all work performed on an actual company-provided worksite?
  • Does the company provide training and education to perform the work?
  • Does the company say where to buy materials needed to perform the work?

If the answer is yes to any of these questions, the person is most likely to fall in the employee category.

It’s also important to consider the degree of control that the company has over other jobs or assignments a person can secure. If an individual is restricted or prohibited from taking additional jobs or assignments, or advertising services outside the company, this also would likely lead to employment status.

In a contracting relationship, a company does not have the authority to prohibit or restrict the contractual agreements a person can enter into with others. In any audit, the IRS would also consider how long the relation is in place or whether there was any expectation of the relationship being permanent.

Last of all, an independent contractor is fully responsible for keeping track of business expenses. The company is not involved and bears no responsibility for the individual’s expenses.
Determining the correct employment classification may not be as easy as tracking your FedEx package, but there are a number of resources to help.  For starters, the IRS has a 20-question that is extremely helpful and can be found here.
Monica Bitrick is CEO of Bitrick Consulting Group, an Idaho Falls human resources company.