New Year's Resolution for 2016: Avoid Independent Contractor Misclassification

Alerts / January 5, 2016

The use of nonemployee workers is more prevalent than ever, and challenges to these relationships are growing just as rapidly. Entire business models are at stake.

The Internal Revenue Service (IRS), the Department of Labor, the National Labor Relations Board, state governments, and the plaintiffs’ bar have made it a priority in 2016 to attack the legitimacy of independent contractor relationships, claiming that many of these workers are really employees. Staffing agency workers may be deemed joint employees as well.

Government audits, investigations, and class action misclassification lawsuits have become rampant. Is your company exposed?

Read: Todd Lebowitz’s white paper, “Independent Contractor Misclassification: 2016 Legal Analysis,” examines the legal landscape for companies that use independent contractors and other nonemployee workers.

Who Is My Employee?

Parties cannot contract out of employment, tax, and benefit laws. The legal analysis of whether a worker is an employee therefore depends on the facts of the engagement, not what the parties call the relationship. A signed independent contractor agreement may be of little value if the nature of the relationship resembles employment.

Wage and hour laws, tax withholding requirements, employee benefit requirements, and other employment laws apply only to employees, not to independent contractors. A finding of misclassification, therefore, can mean that the full range of employment laws, tax laws, and benefit plan requirements that a company assumed were inapplicable suddenly apply. The consequences of past noncompliance can be staggering, both financially and in terms of disruption of a company’s business model.

Major lawsuits in 2015 against Uber and Lyft allege that independent contractor drivers were misclassified and, instead, are really employees under various employment laws. Delivery companies and retailers have been hit with similar lawsuits, alleging that their independent contractor drivers and installers are also misclassified. Even professional cheerleaders and exotic dancers made headlines in 2015 as class action plaintiffs.

What Employers Should Do Now

The tests for determining who is an employee vary by law, by state, and sometimes by industry. Federal tests differ from state tests. IRS tests differ from wage and hour tests. Unemployment tests differ from workers’ compensation tests. Companies may find the same relationship subject to 10 or more tests in a single state, with different outcomes sometimes possible under different tests. Multistate employers face the same problem, multiplied several times.

Because of the range of tests and the various ways that misclassification claims can arise, organizations should review and (in many instances) revise their relationships and contracts with nonemployee workers. Those that ignore the risks may be dragged into the misclassification morass, with limited defenses.

The consequences of misclassification can include fines, penalties, back taxes, back wages, assessments, and attorneys’ fees that can quickly reach seven figures or more. A finding of systemic misclassification can substantially affect the financial strength of large organizations and can bankrupt smaller ones.

Todd Lebowitz’s white paper, “Independent Contractor Misclassification: 2016 Legal Analysis,” examines the legal landscape for companies that use independent contractors and other nonemployee workers. It identifies advantages and disadvantages of the contractor model, analyzes the legal tests and risks, and provides 10 takeaways for companies that are using nonemployee workers.

Companies that plan ahead can often improve their chances of surviving a misclassification challenge. Although contractor misclassification claims are becoming increasingly difficult to defend, companies that are well prepared in 2016 will be better positioned to defend – or prevent – class action lawsuits and government actions alleging that independent contractors are employees in disguise.

BakerHostetler’s Independent Contractor Misclassification Team Can Help

Because every business is different, every fact pattern is unique. The best solution for one organization might not fit the needs of another. To help companies understand the complexities involved and to develop a thoughtful strategy that best meets their needs, BakerHostetler’s Independent Contractor Misclassification team is ready to help.

Our team takes a multidisciplinary approach to evaluating worker misclassification. We rely upon the collective experience of practitioners from Employment, Tax, Employee Benefits, and other disciplines to help organizations evaluate the risks of existing worker relationships and devise strategies to minimize 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.

To see the full range of BakerHostetler’s capabilities in this area, please click here.

For more information, please contact Todd H. Lebowitz at or 216.861.7899.

Authorship credit: Todd H. Lebowitz

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.

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