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California | Illinois | Michigan | Texas | Washington, D.C.
www.dykema.com
Independent Contractors Independent Contractors Do’s and Don’tsDo’s and Don’ts
Independent Contractors Independent Contractors Do’s and Don’tsDo’s and Don’ts
James P. GreeneDykema
2723 South State StreetAnn Arbor, Michigan 48104
(734) [email protected]
James P. GreeneDykema
2723 South State StreetAnn Arbor, Michigan 48104
(734) [email protected]
3
Who Cares?Who Cares?
IRS• More difficult to collect income taxes
from independent contractors
HHS• More difficult to collect payroll taxes
from independent contractors
Department of Labor• Potential abuse of minimum wage
and overtime laws• Potential abuse of anti-discrimination
laws
4
Who Cares?Who Cares?
State of Michigan• More difficult to collect income taxes
from independent contractors
Michigan Unemployment Agency• Employers are not contributing to the
UI fund
Michigan Workers Compensation Agency• Workers are not protected• Employers are not contributing to the
WC fund
6
What’s Being Done?What’s Being Done?
Department of Labor• 2011 FY Budget included $25 million
to combat misclassification of employees as independent contractors, including:–$12M and 90 FTE to WHD for
targeted investigations–$11.25M and 2 FTE for grants to
states to focus on misclassification–$1.6M and 10 FTE to Solicitor of
Labor to pursue misclassification litigation
7
What’s Being Done?What’s Being Done?
Department of Labor• 2012 FY Budget request of $50
million to pursue misclassification• 2013 FY Budget of $14 million for
same
8
Michigan Task ForceMichigan Task Force
In February 2008, the State of Michigan created an “Interagency Task Force on Employee Misclassifications.”
The task force was established to discover classification violations by working cooperatively with local, state and federal law enforcement agencies, including the IRS.
10
Risks (continued)Risks (continued)
Insurance Premiums• Back payment of premiums (if insurer
permits)
Penalties• Government fines• Payment of employment taxes
– 100% of FICA contribution– Employer may not collect
employee amount from misclassified worker
11
Who is an independent contractor?
Who is an independent contractor?
Each governmental unit and/or agency uses its own analysis to determine if a worker is an “independent contractor”
No unit/agency has a precise definition – the totality of the circumstances must be analyzed.
12
Michigan Economic Reality TestMichigan Economic Reality Test
The Michigan Unemployment Agency, based upon court decisions, uses the “economic reality test” to determine if a worker is an employee or an independent contractor.
No one consideration used in the test answers the question; they must all be considered together.
13
Economic Reality TestEconomic Reality Test
Whether the employer will incur liability if the relationship terminates at will
Whether the work performed is an integral part of the employer’s business
Whether the employee depends upon the wages for living expenses
Whether the employee furnishes equipment and materials
Whether the employee holds himself out to the public as able to perform the same tasks
14
Economic Reality TestEconomic Reality Test
Whether the work involved is customarily performed by an independent contractor
The factors of control, payment of wages, maintenance of discipline, and the right to hire and fire employees
15
IRS TestIRS TestThe IRS looks at the degree of control the employer exerts over the worker and the degree of independence exhibited by the worker.
The IRS considers facts that provide evidence in the following three categories:
Behavioral Control
Financial Control
Type of Relationship
16
Behavioral Control Behavioral Control
Control over when and where the work will be done
Whether or not the employer provides instruction on how the work will be done
Whether the worker uses the employer’s or his/her own tools and equipment
Whether or not the employer provides training to the worker
How the worker is evaluated (details or end result)
17
Financial ControlFinancial Control
Extent of unreimbursed business expenses
Extent of worker’s investment in equipment and facilities
Extent to which the worker’s services are made available to the relevant market
Extent to which the worker can realize a profit or loss
Method of payment
18
Type of RelationshipType of Relationship
Whether or not the employer provides the worker with employee-type benefits
• Insurance• Pension plan• Vacation, holiday, or sick pay
Whether or not the worker is provided a copy of the employee handbook
Whether or not the worker is engaged with the expectation that the relationship will continue indefinitely
The extent to which the worker’s services are a key aspect of the employer’s regular business
19
US Supreme CourtUS Supreme Court
In resolving disputes under the Fair Labor Standards Act, the US Supreme Court has said that no single factor is determinative, but depends upon the whole activity. The factors the Court has considered significant include:
The extent to which the worker’s services are an integral part of the employer’s business
The permanency of the relationship
20
US Supreme Court cont.US Supreme Court cont.
The amount of the worker’s investment in facilities and equipment
The nature and degree of control by the principal
The worker’s opportunities for profit and loss
The level of skill require in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise
A Straightforward ExampleA Straightforward Example
Painter Bob• Bob advertises in the local
newspaper to get jobs• He maintains his own brushes,
ladders, and drop cloths, and buys his own paint
• He is paid by the job• When the paint job is complete, Bob
no longer works for the customer/employer
• Bob is an independent contractor
A Straightforward Example – Part 2A Straightforward Example – Part 2 Painter John
• John reports to work at the same company every day
• The company provides John with the paint, brushes, ladders and other materials to do the job
• The company sets John’s working hours
• John works for the company full time• John is an employee of the
company
A Little MurkyA Little Murky Painter Paul
• Paul reports to work at the same company 3 or 4 days a week. He works only 3-4 hours each evening.
• Paul advertises in the local newspaper to get additional day jobs.
• The company provides Paul with the paint, brushes, ladders and other materials to do the job.
• The company pays Paul by the hour and Paul has some discretion on the days he works.
• Paul has worked for the company in this capacity for several years.
Treated as an EmployeeTreated as an Employee
Did you give the worker an employee handbook?
Did you give the worker some employee benefits? (paid sick days, access to EAP or reduced membership to gym?)
Did you evaluate the worker using the same forms as are used for employees?
How you treat a worker is part of the total picture in determining his/her classification as an employee or independent contractor.
Employment Agencies Solve the Problem,…Right?Employment Agencies Solve the Problem,…Right?
Employment agencies hire, fire and pay the workers.
Employment agencies are responsible for withholding income and payroll taxes, paying the employer’s portion of FICA, and possibly providing fringe benefits to the workers.
The contracting company pays the agency with a vendor check.
So what could go wrong?
“Joint Employers”“Joint Employers”
A contracting company may be considered a “joint employer” depending upon the amount of control it exercises over the worker during the term of the assignment.
A determination is made by looking at the entire relationship.
“Joint Employers”“Joint Employers”
Factors to consider in determining if there is a joint employment relationship include:
The nature and degree of control over the worker
The degree of supervision exercised over the work
The furnishing of work space and/or equipment
The power each has to determine the pay rates or method of payment
The right each has to hire, fire or modify working conditions
Liability of a Joint EmployerLiability of a Joint Employer
Anti-discrimination• May be liable for discriminatory
treatment or hostile work environment
FMLA• Leased employees who work for a
full workweek are counted toward the 50 minimum for FMLA coverage
• Agency responsible for notices• Contracting employer may be
responsible for accepting a leased worker returning from FMLA leave
Liability of a Joint EmployerLiability of a Joint Employer
FLSA• Both employers are liable for
minimum wage and overtime requirements
NLRA• Temporary employees from an
agency may be included in a bargaining unit if they share a “community of interests”
• Both employers may be held liable in an unfair labor practice
Liability of a Joint EmployerLiability of a Joint Employer
OSHA• Leasing employer will likely be liable
for work-related injuries
Best Practices When Leasing Employees
Best Practices When Leasing Employees
Seek an indemnity agreement in the contract with the staffing agency so that the agency retains liability for employment-related claims and agrees to indemnify the client for any losses they may incur attributable to the actions of the agency
Contract should include a provision making the agency responsible for payment of all employment taxes
Best Practices When Leasing Employees
Best Practices When Leasing Employees
Employers should verify that the employees are covered under the agency’s workers’ compensation policy.
Employers should accommodate the needs of a worker with a disability, unless it would be an undue hardship.
Employers should ensure that leased workers are not subjected to discriminatory treatment or harassment.
Employers should review their policies and benefit plans to ensure that leased employees are not eligible for company benefits.
IRS Voluntary Classification Settlement ProgramIRS Voluntary Classification Settlement Program
Eligibility• Are currently treating the workers as
non-employees• Have satisfied Form 1099
requirements for the workers for the past 3 years
• Have no current dispute with the IRS or the DOL regarding the workers’ status
• Have not been previously audited by the IRS or if so, have complied with the results of the previous audit.
IRS Voluntary Classification Settlement ProgramIRS Voluntary Classification Settlement Program
Requirements• Employer agrees to prospectively
treat the workers as employees in the future
• Employer agrees to extend the period of limitations on assessment of employment taxes for 3 years beginning after the date of the agreement
IRS Voluntary Classification Settlement ProgramIRS Voluntary Classification Settlement Program
Benefits• Employer will pay 10% of
employment tax liability that may have been due on compensation paid to workers for the most recent tax year
• No interest or penalties on the liability
DODO
Review all relationships with independent contractors and their duties under the guidelines for all agencies (IRS, DOL, State of Michigan)
Review all contracts/agreements with leasing agencies
Review all contracts/employment agreements with individual independent contractors
DON’TDON’T
Treat independent contractors as employees
Automatically refuse to address ADA accommodation requests by independent contractors