Independent Contractor Misclassification

Companies can save substantial money and limit headcount by using independent contractors instead of employees, but this business strategy is under vigorous attack by the Internal Revenue Service (IRS), the Department of Labor (US DOL) and state governments. Federal and state governments estimate that they are losing hundreds of millions of dollars from companies’ failure to withhold taxes, failure to pay into unemployment and workers’ compensation funds and failure to pay into Social Security.

Download: "Independent Contractor Misclassification: 2016 Legal Analysis"

Staffing agency and vendor-supplied worker relationships are under fire as well. These workers can be considered joint employees under many laws, creating potential liability under tax laws, employment laws and benefits laws, including the Affordable Care Act.

Million-dollar verdicts, fines and settlements have become commonplace as compliance efforts intensify. Are you protected?

Why BakerHostetler?

Independent contract misclassification analysis crosses several practice areas and cannot be evaluated purely as an employment law issue. The question of “Who is an employee?” requires analysis under employment law, tax law and benefits law, with varying standards applicable to different laws, different states and different industries. The same relationship can be deemed an independent contractor relationship under some laws but an employment relationship under others.

BakerHostetler’s Independent Contractor Misclassification Team takes a multidisciplinary approach to evaluating these relationships. We rely upon the collective experience of practitioners across Employment, Tax, Employee Benefits and other disciplines to help companies evaluate the risks of existing independent contractor relationships and to devise strategies for minimizing those risks. Our interdisciplinary team works seamlessly and collaboratively to help employers stay one step ahead of the game when retaining independent contractors and when litigation does arise, we are prepared to counter with a strong defense.

We help companies by:
  • Evaluating the risks in existing independent contractor relationships, taking into account the multiple legal standards that are applied under tax, employment and benefits law, as well as the varying tests applied by states in their unemployment, workers' compensation, wage and hour and tax laws. Industry-specific tests in several states must be considered as well.
  • Providing advice on Affordable Care Act compliance, including evaluating whether non-employee workers may be subject to the coverage requirements. Risk areas for companies extend beyond individuals treated as independent contractors and may include vendors, such as staffing agencies, who supply labor through contractual service agreements.
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  • Providing advice on best practices for using independent contractors, as well as advising on changes that can be made in the facts of the relationship to enhance the likelihood that independent contractor status would be upheld as valid. There is no one-size-fits-all solution, since individual business needs dictate which potential solutions make the most sense for each company.
  • Drafting and reviewing independent contractor agreements. The inclusion of certain terms can help support the validity of an independent contractor relationship, but these contracts must be drafted carefully so that they accurately reflect the facts of the relationship. Courts tend to disregard contracts that do not reflect the actual day-to-day relationship of the parties.
  • Drafting and reviewing contracts with staffing agencies, PEOs, and other providers of non-employee workers. A joint employment relationship is likely to exist between the company that employs these workers and the company that benefits from their services. The inclusion of various recitals, representations and indemnity clauses can reduce the risks to companies that use workers formally employed by another entity.
  • Defending companies in class action lawsuits, government audits and other proceedings in which the independent contractor relationship is challenged. These are high stakes matters in which a finding that one worker is misclassified can lead to a finding that all similarly situated workers should also be deemed employees. More than a dozen states have information sharing agreements with the USDOL and the IRS that are specific to independent contractor misclassification, meaning that even seemingly small individual claims like unemployment filings can mushroom into liability with six- and seven-figure consequences.
  • Creating processes for companies to impose internal controls on when and how independent contractors can be retained. The designation of a point person who must approve these relationships can be an effective tool in managing and controlling risks so that new relationships are not created that subject companies to new and unexpected liabilities.
Broad Range of Industry Experience

Our team has advised and defended clients in non-employee worker disputes and internal evaluations across a broad range of industries including:

  • Insurance
  • Electronics
  • Newspaper
  • Cable
  • Transportation
  • Entertainment
  • Technology
  • Energy
  • Real Estate
  • Healthcare
  • Property Management

Select Experience

Preventing Claims and Minimizing Risks
  • Developed individualized plans for numerous clients who use independent contractors, including recommending changes in specific facts of these relationships, redrafting contracts and revising business strategies.
  • Advised clients on Affordable Care Act compliance, including whether and how to count individual independent contractors and vendor-supplied labor, including groups of workers supplied by staffing agencies, PEOs and outside consultants.
Defending and Protecting Clients in Litigation and Administrative Proceedings
  • Avoided class certification and obtained extremely favorable settlement in a series of FLSA putative collective action cases alleging cable installers were misclassified as independent contractors instead of as employees.
  • Obtained defense verdict for transportation client sued for misclassification by security consultants seeking years of back pay and benefits.
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Experience

Preventing Claims and Minimizing Risks
  • Developed individualized plans for numerous clients who use independent contractors, including recommending changes in specific facts of these relationships, redrafting contracts and revising business strategies.
  • Advised clients on Affordable Care Act compliance, including whether and how to count individual independent contractors and vendor-supplied labor, including groups of workers supplied by staffing agencies, PEOs and outside consultants.
  • Drafted clauses and agreements with suppliers of non-employee labor, including staffing agencies and PEOs, to minimize risks related to misclassification and joint employment.
  • Enabled a public company to assemble and safely contract with a fleet of independent operators, as self-employed entrepreneurs, by arranging for the entrepreneurs to have access to a free-standing tax-qualified plan program promoted by a nationally known financial institution and a free-standing fully insured group health insurance plan program underwritten by a well-known health insurer.
  • Redrafted and modified employee benefit plans to protect them from exposure to claims by non-employee workers that they are entitled to participate in employer-sponsored plans.
Defending and Protecting Clients in Litigation and Administrative Proceedings
  • Avoided class certification and obtained extremely favorable settlement in a series of FLSA putative collective action cases alleging cable installers were misclassified as independent contractors instead of as employees.
  • Obtained defense verdict for transportation client sued for misclassification by security consultants seeking years of back pay and benefits.
  • Obtained reversal of independent contractor misclassification finding by New York State Department of Labor, after $420,000 in back assessments had been issued against client. BakerHostetler was hired three weeks before the hearing, after previous counsel had told the client that the case was unwinnable.
  • Obtained favorable settlement for staffing agency against class action claims that workers were misclassified as independent contractors and were paid incorrectly.
  • Protected and represented clients in misclassification audits brought by Department of Labor and various state agencies, obtaining favorable results including reversal of preliminary adverse findings.
  • Defended clients in tax dispute proceedings before the Internal Revenue Service on alleged independent contractor misclassification.

Recognition

  • BTI Client Service 30: BakerHostetler advanced 19 positions to #9 (2016)

Key Contacts

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In The Blogs

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Employment Law Spotlight
NLRB Blows Up Staffing Agency Model: Rewrites Joint-Employer Test
By Todd H. Lebowitz
August 30, 2015
Boom! In a 3-2 decision, the National Labor Relations Board spontaneously redefined joint employment in a way that threatens to turn almost every company that works with a staffing agency into a joint employer for collective bargaining...
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Employment Class Action Blog
DOL Memo Provides Script for FLSA Collective Actions Alleging Independent Contractor Misclassification
By Todd H. Lebowitz
July 16, 2015
The all-time best The Far Side cartoon (based on an unscientific survey, sample size of me) is the one with two deer standing in the forest, one with a red circular target imprinted on its chest. The other deer says, “Bummer of a...
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Employment Class Action Blog
Two California Juries to Decide Whether Uber and Lyft Drivers Are Employees or Contractors
By Todd H. Lebowitz
April 2, 2015
The core business models of both Uber and Lyft have just been turned over to two separate California juries. These groups of randomly selected citizens will determine whether the drivers for both companies have been properly classified as...
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Employment Law Spotlight
Latest Scoop From New Jersey on Independent Contractor Misclassification May Cause Employers Brain Freeze
By Todd H. Lebowitz
January 20, 2015
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Employment Class Action Blog
California Court Proves That They'll Print Anything These Days With Denial of Decertification in Newspaper Carrier Case
April 30, 2012
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