The “Dear Atty.” column is aimed at answering employers’ legal questions that surround issues in human resources. Attorney Pete Albrecht of Albrecht Backer Labor & Employment Law, S.C. welcomes you to submit questions here for future editions of “Dear Atty.”
The long-time director of our company’s IT department recently retired. He has approached the company about returning to do work in the IT department as a “consultant.” He has told us that, if we enter into an “independent contractor agreement” that there should be no problem with this arrangement. He said that it is a “win-win” for both parties, as the company would pay him less than when he had been employed and he would receive his independent contractor fees without having payroll taxes deducted. This whole arrangement seems like it’s too good to be true. Please tell me that I have no reason to worry.
The risk you face is that you may be misclassifying your former employee as an independent contractor. The so-called employee misclassification issue has become a hot topic recently as the economy has changed, and hundreds of growing businesses such as Uber are turning away from traditional hiring practices and increasingly relying on contract workers.
When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance and workers compensation. Misclassification also results in lower tax revenues for the government and an uneven playing field for employers who properly classify their workers. Misclassifying employees as independent contractors also can be an expensive mistake for an employer to make. An employer could end up owing thousands of dollars in unpaid payroll taxes.
On July 15, 2015, the Department of Labor (DOL) issued an Administrator’s Interpretation indicating that the DOL intends to closely scrutinize the misclassification of employees as independent contractors. The DOL has taken the position that most workers are employees for purposes of the Fair Labor Standards Act (FLSA). The FLSA, generally, governs the payment of minimum wage and overtime.
The Law: In order to make a determination whether a worker is an employee or an independent contractor under the FLSA, courts use the multi-factorial “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself. The courts have described independent contractors as those workers with economic independence who are operating a business of their own; the focal point is whether the individual is economically dependent on the business to which he renders service or is, as a matter of economic fact, in business for himself.
With this in mind, if your former employee will only be providing services to your company, as opposed to having contracts with several other companies, it is likely under the economics reality test that he will be seen as an employee, not an independent contractor.
In addition, the economic realities of the relationship, and not the label an employer gives it, is what matters. Thus, an agreement between an employer and a worker labeling the worker as an “independent contractor” is not indicative of the economic reality of the working relationship and is not relevant to the analysis of the worker’s status. So, the fact that you may enter into a written independent contractor agreement with the former employee has little or no bearing as his status as an independent contractor verses employee.
The economic realities test is somewhat complex and involves many different factors. The important point to be taken from all of this, however, is that the DOL has signaled that it intends to closely monitor independent contractor arrangements going forward.
If it looks like a duck and quacks like a duck its probably a duck. Similarly, if your former employee is doing basically the same job that he used to do and is doing it only for your company, he is probably an employee.
If you would like additional information about this topic, please contact Pete Albrecht. He is the president and a shareholder at Albrecht Backer Labor and Employment Law. Pete has represented employers for over 28 years and his law office is located in Madison, Wisconsin.