Independent Contractor? Are You Sure?

Is that FedEx® delivery driver an employee or an independent contractor? Is that janitor a franchise owner or an employee? Companies such as Federal Express, Jani-King and Coverall North America have a lot of money riding on whether they have correctly classified individuals as independent contractors or franchisees rather than as employees. While Coverall, Jani-King and others are still awaiting a determination of whether they correctly classify janitors as franchisees, Federal Express has had mixed results after years of litigation. Significantly, although many courts have held that its drivers are in fact independent contractors, the Ninth Circuit United States Court of Appeals recently held in favor of a class of drivers, directing the federal district court to enter an order finding that Federal Express’ California drivers were employees, not independent contractors. The case will now go forward with whether Federal Express owes the drivers for overtime compensation, benefits, penalties for missed breaks, and so forth.

How can a nationwide company such as Federal Express, with its policies and practices fairly uniform throughout the United States, be faced with different legal outcomes? While courts can, and frequently do, reach different conclusions based on similar facts and law, there is a more fundamental reason why Federal Express, and other multi-state businesses, face unique challenges when attempting to classify individuals correctly as non-employees: whether an individual is an employee or a contractor will depend upon not only the state, but also under differing laws within the state. For example, in one state alone, whether an individual is properly classified as a contractor, and thus not entitled to benefits such as group health insurance, might be determined under a “common law” test, while whether that same individual is entitled to overtime compensation as an employee, might be determined under a “economic realities” test. A third statutory test may apply to whether, in turn, that same individual is entitled to unemployment compensation. Thus, in a single state, whether an individual is properly classified as a contractor can have three different results. On top of that, the U.S. Internal Revenue Service (IRS) has its own, twenty-factor test to determine whether federal employment taxes are owed on payments to that same individual.

As a practical result, this means that for each state in which the services of individuals are engaged, you need to separately analyze whether that individual can be properly classified as a contractor. While this may mean that similarly-engaged individuals may be “employees” in one state and a “contractor” in another, the difficulties are potentially outweighed by the consequences of misclassification of an individual as a contractor: back wages for unpaid minimum wage and overtime compensation, damages for benefits that were not provided, back taxes for unemployment benefits, and fines and penalties for breaks that were not provided, failure to provide workers’ compensation insurance, and so forth.

In addition to analyzing each state in which individuals are engaged to provide personal services, consider whether to apply to the IRS for an independent-contractor determination. While a successful application will not necessarily protect your business from claims of misclassification (e.g., in claims seeking overtime compensation), it may help defeat such a claim or, at a minimum, minimize the likelihood of penalties.

For help in determining whether you have properly classified individuals as independent contractors as well as for strategies that can help reduce the risk of claims of misclassification, respond to this email or contact your Elarbee Thompson attorney.