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Why Is the Government Saying Our Independent Contractors Are Our Employee?

By December 19, 2013No Comments

Our national employment based system was built alongside a Twentieth Century welfare state system of government mandated and tax incentivized employer paid and provided benefits. Those benefits include: unemployment compensation to provide a safety net for a loss of job, workers’ compensation to provide a safety net for injury at work; Social Security to provide an old age income or dependents income on a worker’s death; tax incentivized employer sponsored retirement plans to also provide similar benefits; Medicare and Medicaid to provide payment for health related medical care; and tax incentivized employer sponsored health insurance to also pay for medical care. Employers also face increased insurance liability expenses and tax withholding administrative costs relating to hiring employees. Finally, an entire system of employment laws favoring collective bargaining, employee rights and restrictions on employment termination make hiring employees a potentially expensive proposition. This system survives into an era where modern businesses are trying deliver products and services at greater speed and lower cost, the cost burdens of hiring workers as employees drives businesses to look to alternatives such as contract workers.

Two recent “unpublished” decisions of the Minnesota Court of Appeals have shed light on the battle going on between the business sector that favors contract workers who are provided no employment benefits and the employee based system that does.

One recent decision reclassified an independent contract driver for a transportation company. In that case, Morrow v. Alpha & Omega USA, Inc., the company scheduled the delivery trips and notified a driver that the delivery was available. The driver chose whether to accept the delivery. If accepted, the driver was paid a commission based on the amount the customer paid for the transportation. The driver provided the transportation – either their own or leased from the company. The driver was responsible for the maintenance costs and fuel and incidental business costs such as a data phone to accept dispatches. The company was paid a monthly dispatch fee by the driver. The contract between the company and the driver was terminable on thirty days notice. The company terminated the contract, and the driver sough unemployment compensation, a benefit only available to employees.

The Minnesota Court of Appeals upheld a determination in favor of benefits for the driver. The court indicated that it was not the contract between the parties that determined the relationship but the actual arrangement and the conduct of the parties. The court looked to the: “(1) right to control the means and manner of performance; (2) the mode of payment; (3) the furnishing of material or tools; (4) the control of the premises where the work is done; and (5) the right of the employer to discharge.”

In ruling for reclassification, the court found significant factors for employment: a continuing relationship between the driver and the company; daily work performed; set work availability; counseling by the company of the driver regarding job practices; the lack of others, assistants, doing the work for the driver; the right to end the contract without liability to the company; a lack of providing the services of the driver to other companies; and a lack of investment by the driver in the facilities used for performing the work.

The other recent decision reclassified a seasonal worker engaged as “mad scientists” to provide educational enrichment instruction to school children during their summer break. In that case, Elias v. Annica, Inc., the company provided material and equipment for the assignments. The instructor was required to attend meetings, care for the equipment and materials and to find substitutes in the event the instructor was unavailable for an accepted assignment. The instructor received assignments based on their stated availability for a four to eight week period. The instructor was paid a flat rate per assignment. The contract between the company and the instructor only became an issue when the instructor filed for unemployment compensation and listed the company as a prior employer for work history purposes.

The Minnesota Court of Appeals upheld a determination of benefits for the instructor, and the corresponding repayment tax, against the company. The court considered the same five factors as set forth in the Morrow case discussed previously.

In ruling for reclassification, the court found significant factors for employment: the instructor compliance with company provided policies, lesson plans and required apparel; that the instructor must personally perform the services and cannot delegate them to others except substitutes trained by the company; mandatory training of the instructor by the company; provision by the company of the materials and equipment; and the right to end the contract without liability to the company.

These cases shed some light on the difficulty businesses have in reducing their employee related expenses by hiring independent contractors. Providing training; requiring certain logos or apparel be worn; having a contract that can be terminated by the business without any penalty to it; providing materials or equipment; having regular work locations, time or regularity (and the contractor not working for others); or requiring personal performance by the contractor can all lead to reclassification to employment status by the government.
These cases neither provide all of the troublesome factors that trip up businesses relating to reclassification nor do they concern all of the potential situations where reclassification may occur. They are mere real world case studies where businesses faced the stark reality of reclassification. Reclassification may occur for unemployment compensation, workers’ compensation, federal payroll tax withholding, federal and state income tax withholding, and insurance audits. Reclassification costs money in taxes, penalties and interest and increased insurance premiums. Our firm provides assistance to businesses in navigating these treacherous waters between the historical employee based system and the potentially cost saving approach of using independent contractors.

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