Is That Contractor Really an Employee?
The misclassification of an employee as an independent contractor can prove costly for employers — including both community associations and managers. So it was good news when the Trump administration finalized a rule that loosened the test for determining whether a worker is an employee or an independent contractor. “Under Trump, the idea was to expand the number of individuals who would fall into the independent contractor definition,” says Jamie Dokovna, a shareholder in the Florida law firm Becker & Poliakoff who practices employment law. But the Trump rule never took effect. That’s why you need to refresh your knowledge of the test that has applied since the Obama administration and how it could land you or your clients in the enforcement crosshairs. “In the community association world, you see a lot of contractors who could be an employee or an independent contractor,” Dokovna says. “There are a lot of blurred lines and a lot of room for error.”
The Allure of Independent Contractors
Independent contractors are appealing to employers of all kinds for several reasons. The strongest draw though, generally is their lower price tag compared to employees. “Employers ultimately save money with independent contractors because they’re not paying payroll taxes; the contractor is responsible for making sure the taxes get paid,” Dokovna says. “They also don’t have to provide the tools to do the work or oversee it, and they don’t have to provide health insurance, a 401(k), or any of those things an employee would traditionally get.”
Tests for Determining a Worker’s Status
“The Trump administration’s rule updated the economic reality test, which is used to determine whether a worker is ‘economically dependent’ on an employer — and therefore is an employee subject to federal minimum wage and overtime standards,” says Dan Artaev, managing partner with Artaev at Law PLLC and former assistant attorney general for the Labor Division of the Michigan Attorney General’s Office. The analysis under the rule considered five factors, but two would have had the greatest weight. “Under the Trump rule, we were going to narrowly focus on two things — whether you controlled your own schedule and whether you individually had the ability to have profit or loss,” Dokovna says. This rule died on the vine, though. “Its effective date was in March 2021 and was pushed back to May,” Artaev says. “On May 5, the rule was withdrawn.” In other words, the Obama rule has remained operational. “Under Obama, and now Biden, there’s more of a look at the dependence factor — how dependent the worker is on the person paying for the services — and things like control,” Dokovna says. “They’re looking at things like the permanency of the relationship with the employer, whether you pay for your own tools of your trade, and if the types of services provided are the same as those provided by the company paying you.” For example, you might hire a landscaper and consider him to be an independent contractor. “But if he’s there every day, working a full schedule and not for anyone else, he could be considered an employee,” Dokovna says. “I’ve seen it with maintenance, too.” Artaev agrees: “If you have a full-time person on staff, dictate their hours and their appearance (such as a uniform), and expect them to be on call during certain periods, they’re likely to be an employee. “You can’t have your cake and eat it, too. That means you can’t exert substantial control over a worker, have them work 40 hours per week, and then give them a 1099 form.” Critically, you shouldn’t take false comfort from the terms of your written agreement with a worker. “Sometimes a client feels like they have a contract that says the person is a contractor, so it must be so,” Dokovna says. “But that’s not necessarily a shield from a potential claim for misclassification.” In fact, courts and governmental agencies have repeatedly ruled that the language in a contract is not decisive on the issue of whether an individual is an employee. Of course, every jurisdiction has its own case law and analysis. “But, in general, the nature and degree of control by the employer tends to be the most important,” Artaev says. “Also important is whether the person has other jobs or gigs.” Remember, too, that states can have even more restrictive tests. “A handful of states are more restrictive than the federal test, and, in my opinion, California has the most stringent test,” Dokovna says.
Why It Matters
“Government agencies generally analyze each situation in favor of an employment relationship, and independent contractor relationships are disfavored,” Artaev says. And, if you or one of your clients is found to have misclassified an employee as a contractor, an onslaught of repercussions could follow. According to Dokovna, the most significant consequences come on the tax front: “Most likely, you’re going to have an issue with the IRS. You’ll be liable for the withholding taxes you should have paid and your share of payroll taxes. Fines and penalties are possible.” Wage and hour violations could trigger a cascade of financial costs, too. “If you’ve improperly classified someone, they could sue you for wage violations, and they’ll also claim they were denied benefits,” Dokovna says. Artaev warns of other governmental agencies getting involved, as well. “There are also potential adverse actions from the state unemployment insurance agency, workers’ compensation agency, and occupational health and safety agency,” he says.
Proceed with Caution
The line between an employee and an independent contractor can be thin. “If you have any doubt, reach out to an attorney to fix the situation before it becomes a bigger problem,” Dokovna says. “It doesn’t make any sense to continue to ignore it because you’re just increasing the potential liability. “There may be short-term gains from misclassification, but, in the long run, you’re just increasing the potential liability.”