Employees or Independent Contractors

Introduction
Nearly every employer has felt the urge to fire its employees and re-hire them as independent contractors or consultants.2 Employers want to avoid the costs and hassles of doing payroll. They want to avoid having to withhold and pay employee income taxes, Medicare, FICA, and federal and state unemployment taxes. A business without employees does not have to buy workers’ compensation insurance or worry about immigration issues and I-9 forms. Independent contractors do not earn vacation, sick leave, holiday pay, health insurance, bonuses or retirement plans. By reclassifying even some of its workers, a business may reduce the number of state, local and federal regulations with which it must comply. A worker may agree to the classification to get a larger paycheck without tax deductions, the ability to claim business deductions, and scheduling freedom.

Misclassification of workers can lead to costly litigation by a governmental agency or a disgruntled worker, or create due diligence issues for a transactional client. However the issue arises, the client will need advice on what law applies, who gets to decide the proper treatment as employee or independent contractor, and what risks worker or employer will face for a misclassification.

This chapter presents an overview of these legal issues and provides the tools to answer clients’ questions. It lays out the laws and tests most commonly used, and shows the application of these rules in real life. This Chapter does not address every law applicable to employee classification issues, or all possible consequences. For example, whether a person’s earnings come as an employee or independent contractor can have repercussions under bankruptcy and copyright laws, which are beyond the scope of this chapter. Many cases have addressed the legal issues involved in employee classification, some arriving at inexplicably inconsistent results. The law remains highly factually based. The practitioner must remain aware of these complexities and be prepared to provide individual analysis to any client with questions involving employee classifications.

Background
In some areas, the law is neutral. In the realm of employee classification, however, the law has a bias towards finding such a relationship. Keeping this bias in mind when advising clients can help the lawyer thread through the morass of case law statutes and regulations that might apply to a client’s situation. The law favors finding an employee- employer relationship for two main reasons: to protect workers, and to protect federal and state coffers.

Employee protection laws include minimum wage and overtime laws, laws governing child labor, equal opportunity laws, worker’s compensation and unemployment insurance programs, and occupational health and safety rules. Most of these protections do not apply to independent contractors. Thus, finding an employee-employer relationship allows agencies to maximize the protection these laws offer. The less altruistic reason – protecting governmental sources of income

– exists because trust taxes, such as Medicare and Social Security taxes, account for as much as 35% of all federal revenues.3 The employer- employee relationship provides a mechanism for timely collection of these taxes and enlarges the pool of responsible people from whom the government can collect the taxes.4

The development of employee protection laws has a long and sometimes violent history. The struggle of workers to wrest concessions from management goes back to colonial times in America. More than 100 years before Congress enacted the Fair Labor Standards Act (FLSA) in 1938, young women mill workers in Massachusetts went on strike to protest reduced wages.5 These hard-won laws serve valuable public purposes, and represent a compromise between the pull of labor groups and the push back of management and ownership. President Franklin

D. Roosevelt stated that the FLSA would “give a policy backbone to his belief that goods that were not produced under ‘rudimentary standards of decency’ should not be ‘allowed to pollute the channels of interstate trade.’”6

Of course, not everyone agrees that classifying more workers as employees benefits those workers. Allowing broad treatment of workers as independent contractors can benefit the worker and the economy as a whole. Some of these benefits include workforce flexibility, avoidance of fixed costs and other economic barriers to efficient contracting, and the satisfaction workers can achieve by being “their own boss.”7 The course through the competing interests of workers, employers and government will depend on the identity and needs of the client.

The ABC’s of Regulation
The pull of workers for legal protections and the push-back of employers seeking to limit the burden of regulation has created a confusing mosaic of agencies, laws and regulations. A lawyer analyzing employment status must consider an alphabet soup of regulation. Federal agencies include the Social Security Administration (SSA), the Internal

Revenue Service (IRS), the federal Department of Labor (DOL), the Equal Employment Opportunity Commission (EEOC) and even the Occupational Safety and Health Administration (OSHA). State agencies may include departments of labor (the Labor Commission in Utah), tax and revenue (the Tax Commission in Utah), and unemployment (in Utah, the Workforce Services or WFS).

Federal laws apply when a federal agency seeks to collect federal taxes or enforce a federal law or right. State laws apply when a state agency seeks to enforce its own statutory or common law worker protections. An agency’s purpose affects the standards it applies. As a result, a person can be an employee for wage and overtime purposes, but not under IRS tests; for worker’s compensation purposes but not for FLSA; or for respondeat superior purposes but not for employee taxes. The lawyer will need to know the type of work, the location of the business, and which agency is making the inquiry to accurately advise the client.

Categories of Employees and Independent Contractors
Employees receive regular paychecks, from which the employer withholds the proper amount of income, Social Security and Medicare taxes. In addition, the employer pays the employer portion of Social Security and Medicare taxes, and pays federal and state unemployment tax. At the end of the year, the employer gives each employee a W-2 form detailing the employee’s earnings and the amounts withheld by the employer. An independent contractor, on the other hand, gets a 1099 at year end, showing the gross amount earned. The independent contractor must pay its own taxes. Employees are covered by worker’s compensation insurance, minimum wage and overtime laws; an independent contractor cannot rely on wage and overtime protections, and will not be able to collect unemployment or worker’s compensation insurance if terminated or injured.

Initially, these distinctions make employee classification seem fairly straight forward; a worker is either an employee or an independent contractor. The simplicity fades in actual practice, however. The complex history of the reasons behind employee classification laws – that push and pull of competing interests – has lead to not just two classifications of workers, but four:

Common law employees, those workers the common law traditionally recognizes as employees, who do not fall into any other category;
Statutory employees, workers defined by statute as employees, even though they might otherwise be an independent contractor (corporate officers, 26 USCS § 3121 (d)(1); certain food and beverage delivery drivers, fulltime life insurance agents, piece goods workers who work at home and return finished good to the employer, and full time travelling salespeople selling at wholesale, 26 USCS § 3121(d)(3));
Statutory non-employees, defined by statute as not employees, even though they may work for just one employer and share other characteristics of an employee (certain direct sellers, real estate agents 26 USCS § 3508; and certain domestic companions, 26 USCS § 3506);
Independent contractors, workers who have their own business or profession and offer their services to the public.

In addition to these categories of workers, employee leasing continues to expand as a means of avoiding the hassles of being an employer, and raises its own issues, addressed below.

Classifying Workers – The IRS Tests
The IRS collects employment taxes. It provides both general guidelines and specific tests to determine whether a worker should be classified as an employee or independent contractor. The broad principals of classification are:

If the business controls the methods and details of the work, an employer-employee relationship likely exists. The amount of control actually exercised by the employer does not matter, “it is sufficient if the employer has the right to do so.”
Workers who “follow an independent trade, business, or profession, in which they offer their services to the public, generally are not employees.”

The description of the job and the intent of the parties does not matter. If an employer-employee relationship exists, the parties cannot change that relationship by agreement or terminology.8

In addition to reiterating those general standards, the IRS’s Revenue Ruling 87-41 also set out twenty detailed factors to assist the practitioner in classifying a worker as an employee or an independent contractor under the common law rules. See Sidebar, “IRS Twenty Factor Test.”

On its website, the IRS organizes the twenty factors into three groups: Behavioral Control, Financial Control, and Type of Relationship.9 The behavioral control factors involve the business’ right to control how the worker does the job; the financial control factors address issues such as timing and method of payment, provision of tools and resources, the opportunity for profit or loss, and whether the business reimburses expenses. Relationship factors include whether a contract exists, when and on what grounds each party can end the relationship, how long the relationship may last, and what benefits the business provides to the worker.

Employees under FLSA
The Fair Labor Standards Act requires the payment of minimum wage and overtime for most workers in the U.S. It covers enterprises with annual sales exceeding $500,000. It also covers employees in enterprises of any size, if they (or their employer) engage in interstate commerce. Since most employees use some aspect of interstate commerce (the U.S. Mail, a telephone, email, a credit card terminal, for example), the latter test greatly extends the reach of the act.

FLSA contains numerous exemptions to its broad coverage, however. Some exclusions depend on the type of work (for example, certain domestic service workers and computer service workers; certain amusement park workers) and some depend on the location of the work performed, such as outside salespersons who “customarily work away from the employers place of business.” The exemption for executive, administrative and professional employees requires a minimum salary level, as well as specific job responsibilities.10 Many of the exemptions lack any apparent rational basis, and seem driven more by lobbyists than any distinction among types of jobs.

The standards for classifying workers under FLSA overlap, but do not mirror, the IRS standards. The DOL applies a six prong test to determine a worker’s proper classification under FLSA:

Whether the work an integral part of the employer’s business.
Whether the worker’s managerial skills affect his or her opportunity for profit or loss.
The relative investments in facilities and equipment by the worker and employer.
The worker’s skill and initiative.
The permanency of the relationship.
The nature and amount of control exercised by the employer.11

The DOL cautions that “an agreement stating that [the worker] is an independent contractor is not controlling” because the reality of the working relationship, not its label, determines the appropriate classification.12

State Law Issues
States also have worker classification laws. As employers seek to minimize their overhead by classifying workers as independent contractors, states have become more interested in enforcing these laws. Between 2007 and 2014, 24 states, including Utah, enacted laws directed at reducing employee misclassification.13 The federal government has supported this push with grants to help states identify

misclassified workers. In 2013, the federal Department of Labor budget included $10,000,000 in grants to states, and $4,000,000 for its own internal investigators to recover unpaid employment taxes.14 This recent governmental focus on worker-classification makes it more important than ever for lawyers to have the tools and knowledge to give clients accurate information on this subject. See Sidebar, Recent Changes in State Laws for a discussion of some recent state law changes.

Utah
In Utah, the Department of Workforce Services (WFS) and the Labor Commission are the primary agencies concerned with employee classification. The Labor Commission makes initial determinations about coverage under workers’ compensation laws, and WFS oversees the unemployment claims. The Labor Commission and WFS each apply slightly different tests for when a worker is an employee; those tests also differ slightly from the tests applied by the IRS or DOL.

Workers’ Compensation Factors
Worker’s Compensation laws have a very broad reach and are intended to be liberally applied. Olsen v. Samuel McIntyre Inv. Co., 956 P.2d 257, 260 (Utah 1998). The Utah statute defining an independent contractor for workers’ compensation purposes focuses almost entirely on control. To be an independent contractor not covered by workers’ compensation insurance, the worker must remain independent of the employer “in all that pertains to the execution of the work.” Utah Code Ann. § 34A-2-103(2)(b)(i).

Broad coverage under workers’ compensation insurance benefits both workers and employers. The employee gets automatic coverage, without the need to prove damages, but in exchange, gives up the right to greater damages through a lawsuit.15 Payment of workers’ compensation premiums insulates the employer and other responsible parties from all litigation involving injured workers. In fact, the Workers’ Compensation Act lays out steps an employer can take to bring contractors and others not ordinarily considered employees into the umbrella of its workers’ compensation coverage as “employees.” Utah Code Ann. § 34A-2-103 (7)(f )(ii) and (iii).

Case law in Utah has long recognized this breadth of coverage. In Murray v. Wasatch Grading Co., 73 Utah 430 (Utah 1928), the state hired the defendant to build a highway near railroad tracks belonging to the Denver & Rio Grande railroad. The railroad asked plaintiff, its employee, to assist the defendant. Plaintiff was injured while doing so. The court found that the plaintiff was employee of defendant highway construction company for workers’ compensation, because his work was subject to its control. Id. at 441. See also Utah Home Fire Ins. Co. v. Manning, 1999 UT 77, P12, P18 (Utah 1999) (subcontractor with independent business who was hired by general contractor was employee of general contractor for workers’ compensation purposes because general contractor had the right to control the work performed by subcontractor).

Employee Classification for Unemployment Purposes
Unlike most other classification schemes, Utah’s unemployment act focuses on the independence of the worker’s business. The law presumes an employee-employer relationship unless the employer can show that “the individual is customarily engaged in an independently established trade, occupation, profession or business.” Only after that test is met will the courts look at the employer’s control over the “means of performance” of the work. Utah Code Ann. § 35A-4-204(3)(a) and (b). A showing that a worker has an independent business, raises “a rebuttable presumption that the employer did not have the right of or exercise direction or control over the service.” Utah Admin. Code R994- 204-303 (1)(c).16

Recent Utah case law reflects this focus. In Petro-Hunt, LLC v. Dep’t of Workforce Servs., 2008 UT App 391, the court never reached the issue of control, as the evidence did not show that the worker had an independently established business. 2008 Utah App. at P22 & P31. Similarly, although the worker in BMS Ltd. 1999, Inc. v. Dep’t of Workforce Servs., 2014 UT App 111 (Utah Ct. App. 2014) had signed an “independent contractor’s agreement” with BMS, the court found the worker to be an employee. The worker “had not owned a delivery business prior to his relationship with [BMS], did not have a separate place of business or a business license, had not advertised his delivery services, and had not intended to establish an independent business.” 2014 Utah Ct. App. at P14. BMS thus identifies for the practitioner several ways a worker can meet the independence test, by organizing as a separate business, obtaining a business license, using business cards, or advertising its general availability to other businesses. While none of these acts by itself can guarantee the outcome, each makes a finding that the worker is an employee more difficult in a review by WFS.

ENFORCEMENT ISSUES

Statutes of Limitation

The applicable statute of limitations in employee classification issues depends on who is bringing the action and whether the employer acted willfully. The limitations periods set out in Table 1 provide guidance; some statutes have detailed provisions that can vary or add requirements to the time periods. Note also that some periods do not begin to run until “the taxpayer file[s] the required return, or the Tax Commission file[s] on the taxpayer’s behalf in order to administratively determine the amount of tax due.” Gay Hill Field Serv. v. Bd. of Review, 750 P.2d 606, 609-610 (Utah Ct. App. 1988). The practitioner should always research the applicable statute of limitations, whether advising a client who wants to avoid litigation, or representing an actual or potential plaintiff or defendant.

 

 

 

 

 

Agency, Authority
Limitations Period
Applies to
FLSA — 29 USCS § 255
2 years
Employee claims against employer for unpaid minimum wages, unpaid overtime compensation
IRS — 26 USCS § 6501 (a)
3 years
Time for IRS to assess withholding taxes
IRS — 26 USCS § 6501 (c)(1)
None
Failure to file return or willful attempt to evade tax, with or without false return
IRS — 26 USCS § 6502 (a)
10 years
Time after assessment of tax for IRS to levy or bring action
Utah Tax Commission — Utah Code Ann. § 59-1-1410 (1)
3 years
Time for Tax Commission to assess withholding taxes
Utah Tax Commission — Utah Code Ann. § 59-1-1410 (3)
None
Failure to file return, or willful attempt to evade tax, with or without false return
Utah Workforce Services — Utah Code Ann. § 35A-4- 305 (1)(g); Utah Code Ann. § 78B-2-305 (4)
3 years
Time for WFS to file action to collect contributions, interest, penalties, and assessed costs
Individual/ Workers’ Comp. — Utah Code Ann. § 34A- 2-417
6 years
Filing of claim for reimbursement of medical expenses
Individual — Utah Code Ann. § 78B-2-305; Utah Code Ann. § 78B-2-307; Utah Code Ann. § 78B-2-309
3, 4 or 6 years
Time period depends on cause of action, whether tort claim, unwritten contract or written contract

 

Penalties and Fines
Regardless of how the issue arises, the employer will bear the brunt of the penalties and costs of misclassification. Some of the fines and penalties an employer can face are detailed in Table 2. The lawyer should ensure that owners and officers of separately organized entities understand the possibility of personal liability and the possibility of criminal penalties for some willful behavior.

 

Statute or Regulation
Amount of Fine/Penalty
Notes
Failure to file withholding return, 26 USCS § 3509(b)
5% of the tax due for each month the tax remains unpaid, up to a maximum of 25%
Potentially liable parties for IRS fines include owners, officers and anyone authorized to sign payroll
Failure to deposit (pay) withholding taxes, 26 USCS § 3509(a)
0.5% per month up 25%
Reduced by amount of any failure to pay penalty
26 USCS § 6601
Interest on unpaid taxes
Accrues on all unpaid amounts due
Failure to deposit Trust taxes, 26 USCS § 3509
2% of the tax due for each month the tax remains unpaid, up to a maximum of 15%

Willful evasion, 26 USCS § 3509,

26 USCS § 7201, 26 USCS §

7202, 26 USCS § 7203
Criminal penalties, range from maximum of $10,000 up to $500,000 for a corporation, plus prison
For willful evasion of taxes or willful failure to pay or file return
Penalties, 26 USCS § 6656, 26

USCS § 6672
Penalty equal to 100 % of the unpaid tax
Against any responsible individuals
Wage and overtime violations, 29 USCS § 216(a)
Fine up to $10,000 plus prison up to 6 months
For willful violations
Wage and overtime violations, 29 USCS § 216(b)
Unpaid wage or overtime + equal amount as penalty plus attorneys fees and costs
Employee may recover from employer
Retaliation, 29 USCS § 216(c)
Legal and Equitable remedies plus attorneys fees and costs
For retaliating against employee who complains or takes action
Utah Labor Commission, Utah Code Ann. § 34A-2-209
Class B Misdemeanor for failure to obtain workers’ compensation insurance
Applies to employer and officers
Utah WFS – failure to pay Utah Code Ann. § 35A-4-305
Payment of unpaid contributions plus interest at 1% per month
Plus a 5% penalty if not paid within 10 days of written demand
Utah WFS – failure to file Utah Code Ann. § 35A-4-305
5% of the contribution due if 15 or fewer days late, additional 5% if

later, up to 25% maximum, with $25 minimum per filing
WFS can “determine” the wages paid, and determination becomes final if employer does not contest within

10 days

 

A New Wrinkle: Leased, Occasional, and Temporary Employees
Employers often turn to temporary workers, leased employees and other types of “contingent” employees to increase their bottom line. Using third party sources for workers to fill staffing needs allows employers to avoid the headache and overhead of an internal payroll. Employers may also seek to avoid federal regulations that only apply to businesses of a certain size.17 Unfortunately for the employers, off- payroll workers may remain employees, depending on the amount of control and whether the worker has a bona fide independent business.

It does not matter that the temporary or occasional worker agrees to the classification, or works for the employer for only a short time, as the Microsoft case covered in the Sidebar below demonstrates. It also may not matter that the business hires the worker through a temporary agency or employee leasing service. Regulations at both the federal and state levels sometimes treat such employees as joint employees of both the end-user and the leasing agency.18 A determination that an off-payroll worker is an employee can allow such workers to participate in benefits offered to other employees and affect the employer’s liability under the FMLA, AEDA, ADA and other federal acts.

The Costs of Misclassification
The alphabet soup of regulation can leave employers uncertain about their choices for classifying workers. Even an employer who acts in good faith can wind up on the wrong side of an employee classification dispute. The costs can escalate quickly, as a complaint by a single worker put the entire workforce at issue. See, e.g., McGuire v. Department of Employment Sec., 768 P.2d 985 (Utah Ct. App. 1989). McGuire, a quadriplegic, hired a series of nurses to provide him care, treating each as an independent contractor. One of the nurses filed for unemployment benefits. A resulting audit led to a determination that McGuire had misclassified all six nurses he had hired. 768 P.2d at 986-987. The costs of making a misclassification escalates with the size of the business involved and the number of affected workers, as demonstrated by recent cases involving Microsoft and FedEx Ground Systems, discussed in the Sidebars following the chaper.

Complications for the practitioner
Along with the alphabet soup of regulations, practitioners dealing with employee classification issues must also contend with sometimes conflicting case law. Two Utah cases, Tasters, Ltd. v. Department of Employment Sec., 863 P.2d 12 (Utah Ct. App. 1993) and New Sleep v.

Department of Employment Sec., 703 P.2d 289 (Utah 1985) demonstrate these complications. Both cases dealt with worker classification for unemployment insurance purposes. New Sleep involved waterbed installers, and Tasters involved product demonstrators in stores. The New Sleep court found the installers, mostly college students, to be empoyees, because none had an independently organized business. 703 P.2d at 291-292. In Tasters, the Utah Supreme Court found the workers to be independent contractors, reversing the Court of Appeals and the Department of Employment Security’s finding that the workers were employees. The Taster’s Court made no finding that the workers had an independently established business. See 863 P.2d at 24-25.

New Sleep was decided under the old A-B test; Tasters under the IRS 20 factor test. That difference does not fully explain the divergent outcomes of these two cases, however. As the Court of Appeals noted in the first appeal, “In amending the statute … the legislature did not change the test’s emphasis on ‘control and direction,’ or on ‘independent establishment in business’ . . . but merely attempted to clarify its application.” Tasters, Ltd. v. Department of Employment Sec., 1991 Utah App. LEXIS 80 at *11 & n.3, 163 Utah Adv. Rep. 64 (Utah Ct. App. 1991). Mostly, the Court seemed upset with the way the Department of Employment Security reached its determination. See,

e.g. Id. at 20 and 21 (discussion of areas where the board exceeded its discretion).

The treatment of “name bands” playing short term gigs in hotels and clubs provides another set of difficult to reconcile cases. Utah has long held that all the band members are employees of the establishment, not the booking agent or band leader. See, e.g., Utah Hotel Co. v. Industrial Comm’n, 151 P.2d 467 (Utah 1944), Black Bull, Inc. v. Industrial Comm’n, Dep’t of Employment Sec., 547 P.2d 1334 (Utah 1976), Bigfoot’s, Inc. v. Board of Review, 710 P.2d 180 (Utah 1985). The court in Black Bull justified this result by noting the difficulty of collecting unemployment insurance premiums from “some transient music makers who no doubt have vanished with the four winds into the fogs of the seven seas.” 151 P.2d at 1336. The Utah cases stand in stark contrast to a U.S. Supreme Court case, Bartels v. Birmingham, 332 U.S. 126 (U.S.1947) also involving the employment status of name bands. The Supreme Court came down on the other side of the issue, finding that the band leader was an independent contractor, and the employer of the band members.19 Although Bartels, a Social Security case, involved a different sets of rules, the underlying tests all rely on issues of control and independence. The practitioner must remain aware of these divergent outcomes in advising clients.

Conclusions
The law of employee classifications remains in flux, as employees strive to reduce their overhead and administrative burdens, and governmental agencies attempt to maximize tax revenues and employee protections. The practitioner must consider the many legal complexities surrounding this area of the law. Those complexities include the multiple agencies charged with enforcement, the goals of those agencies, and the conflicting interests of employers and workers. In addition, outcomes are highly factually dependent. Understanding the legal issues and the client’s factual situation will allow the practitioner to provide clients with competent legal advice in this area.

SIDEBAR 1
IRS Twenty Factor Test

 

The twenty factors set out in Revenue Ruling 87-41 address almost every aspect of the relationship between a worker and employer. The IRS developed the factors from prior cases and rulings, to help agents, courts and others determine whether a worker should be classified as an employee or an independent contractor. The factors provide guidelines only, and the relative importance of the factors will vary with the circumstances. The twenty factors are paraphrased as follows:

Instructions: Can the business instruct the worker about when, where and how to complete the work? If so, the worker is ordinarily an employee.
Training: Training generally indicates an employee-employer relationship.
Integration in the workforce: higher integration generally shows an employee-employer relationship.
Services Rendered Personally: A requirement that the worker must complete the services personally indicates control over the methods, a hallmark of an employer-employee relationship.
Hiring, Supervising and Paying Assistants: The ability of a worker to hire assistants, and supervise and pay those assistants, likely makes the worker an independent contractor.
Continuing Relationship: A continuing relationship typically evidences an employee-employer relationship.
Set Hours of Work: This indicates control and an employee- employer relationship.
Full Time Required: This also indicates an employee-employer relationship.
Doing Work on Employer’s Premises: Another hallmark of control and therefore an employee-employer relationship.
Order or Sequence Set: This also indicates control and an employee-employer relationship.

 

Oral or Written Reports: This factor indicates “a degree of control.”
Payment By Hour, Week or Month: Payment by time period worked, rather than by result, generally supports the finding of an employee-employer relationship.
Payment of Business And or Traveling Expenses: An independent contractor typically pays its own expenses, while an employer will reimburse its employees for on the job expenses.
Furnishing of Tools And Materials: An independent contractor typically furnishes its own tools and materials.
Significant Investment: The greater the investment in the work by the worker, the higher the likelihood that the worker is an independent contractor.
Realization of Profit or Loss: the right to realize a profit or loss generally demonstrates that the worker is an independent contractor.
Working For More Than One Firm At A Time: An independent contractor may perform services for many people at the same time, while an employee typically works for only one employer.
Making Service Available To General Public: An independent contractor holds himself out as available to the general public.
Right To Discharge: The greater right the business has to terminate the employee, the more likelihood that the worker is an employee.
Right To Terminate: A worker who has the right to unilaterally end the relationship is more likely an independent contractor.
The Revenue Ruling warns users to apply “[s]pecial scrutiny . . . in applying the twenty factors to assure that formalistic aspects of an arrangement designed to achieve a particular status do not obscure the substance of the arrangement.”

SIDEBAR 2
Recent Changes to State Laws Concerning Independent Contractors

 

Many incentives exist for companies to classify workers as independent contractors instead of employees. The harms from misclassification include lost tax revenues, harm to workers from lost benefits and economic disadvantage to competitors who classify their workers as employees. Craig v. FedEx Ground Package Sys., 686 F.3d 423, 430-431 (7th Cir. Ind. 2012). Between 2007 and 21014, twenty-four states, including Utah, enacted or updated legislation designed to reduce the misclassification of employees as independent contractors.

The Utah statutory changes of interest include a 2008 amendment thatbroadenedthedefinitionofthosewhocommitworkers’ compensation fraud to include people who “intentionally, knowingly, or recklessly * *

misclassify an employee as one of the following so as to avoid the obligation to obtain insurance coverage as mandated by this chapter or Chapter 3: * * * (A) an independent contractor.” Utah Code Ann. § 34A-2-110 (2)(a) and(b)(iii)(A). In addition, in 2011 the legislature created a “Worker Classification Coordinated Enforcement Council,” intended to “coordinate regulatory and law enforcement efforts related to misclassification.” Utah Code Ann. §§ 34-47-201 and 34-47-202(1). The Council has members from the Labor Commission, Workforce Services, the Department of Commerce, the Utah Tax Commission and a non-voting member from the Utah Attorney General’s office. Utah Code Ann. §34-17-201.
Other states enacting statues designed to limit employee mischaracterization include:

Arizona: Act Defining “Indications of Control” (H.B.2150) (enacted 3/29/12)
California: Independent Contractor Willful Misclassification Law (S.B.459) (enacted 10/9/11)
Colorado: Misclassification of Employees as Independent Contractors Law for Purposes of the Colorado Employment Security Act (H.B. 09-1310) (enacted 6/09)

 

Connecticut: Act Concerning Employee Misclassification (S.B. 454) (eff. 7/1/08); and Act Implementing the Recommendations of the Joint Enforcement Commission on Employee Misclassification (H.B. 5204) (enacted May 5, 2010)
Delaware: Workplace Fraud Act (Title 19, Section 3501 et seq.) (enacted 7/31/09)
Florida: Act Defining the Term “Independent Contractor” (H.B. 311) (enacted 5/4/11)
Illinois: Employee Classification Act (820 ILCS 185) (eff. 1/1/08)
Indiana: Independent Contractor Information Sharing Law (S.B. 0478) (eff. 7/1/09)
Kansas: Misclassification of Employees to Avoid Tax Withholding, Contributions and Reporting Requirements (H.B. 2135) (enacted May 12, 2011)
Louisiana: Act Providing Graduated Penalties for Misclassification (S.B. 472) (eff. 8/1/12)
Massachusetts: Independent Contractor Misclassification Law (enacted 1990, as amended 1992, 1993, 1998, 2004)
Maryland: Workplace Fraud Act of 2009 (S.B. 909) (enacted May 7, 2009) and Amendments to Workplace Fraud Act (S.B. 272) (enacted 5/2/12)
Maine: Act to Ensure that Construction Workers are Protected by Workers’ Compensation (LD 1456, HP1008) (eff. 1/1/10), Independent Contractor Status of Truckers and Couriers (LD 1099, SP 332) (eff. 5/31/11), Uniform Definition of Independent Contractor for Unemployment Purposes (LD1420, HP437) (eff. 6/10/11)
Minnesota: Act Clarifying Definition of Independent Contractor and Creating Pilot Project for Construction Contractors (S.F. 1653) (enacted 5/14/12); Independent Contractor Law (MN Stat. 181.723) (eff. 7/1/08)

Nebraska: Employee Classification Act (for Construction and Delivery Services) (LB 563) (eff. 7/15/10)
New Hampshire: Act Relative to the Definition of Employee (S.B. 92) (eff. 1/1/08)
New Jersey: Construction Industry Independent Contractor Act (N.J.S.A. 34:20-1 et seq.) (enacted 7/13/07)
New York: Construction Industry Fair Play Act (S 5847C) (A 8237A-2010) (enacted 8/27/10), Commercial Goods Transportation Industry Fair Play Act (A 8451-2013) (eff. 4/10/14)
Pennsylvania: Construction Workplace Misclassification Act (H 400) (enacted 10/13/10; eff. 2/10/11)
Rhode Island: Suspected Misclassification Information Sharing Law (H 7564) (enacted 6/25/12; eff. 6/25/12)
Vermont: Act Related to Misclassification of Employees to Lower Premiums for Workers’ Compensation and Unemployment Compensation ( H. 647) (eff. 7/1/10)
Washington: Determination of Independent Contractor Status Law (H.B. 1701) (eff. 6/12/08)
Wisconsin: Worker Classification Compliance Law (S.B. 672) (eff. 1/1/11)
Source: http://independentcontractorcompliance.com/legal-resources/ state-ic-laws-and-selected-bills/

 

SIDEBAR 3
Development of Utah Statutory Rules and Analysis Factors

 

Employment classification under Utah Workers’ Compensation law has long focused on control. In the main opinion in Stover Bedding Co. v. Industrial Comm’n, 99 Utah 423 (Utah 1940) the court found the worker was an independent contractor because the evidence showed “that there was no control or right of control over the details of his work as a salesman.” Id. at 427. While the court also mentioned “nature of the business or occupation; which party furnishes the instrumentalities and tools; the place of work; the time of employment; the method of payment; and the intent of the parties to the contract,” it never addressed the existence of an independent business. Justice Wolfe, in a dissent, reviewed the historical development of the law and argued for the adoption of a test that focused more whether “the so-called independent contractor really is engaged in an independent calling.” Id. at 429. Neither the Utah legislature nor courts have taken his suggestion. See, e.g., Bennett v. Industrial Comm’n, 726 P.2d 427, 429 (Utah 1986) (“it will almost always follow that if the evidence shows that an “employer” retains the right to control the work of the claimant, the claimant is the employer’s employee for workmen’s compensation purposes”); Mallory

v. Brigham Young Univ., 2014 UT 27 at P20-P22, 332 P.3d 922 (Utah 2014) (right to control is sufficient to finding a applying master-servant relationship for workers’ compensation purposes).

The law used to determine a worker’s status for unemployment purposes has not remained so static. Initially, Utah used a two part (“A- B”) test: to be an independent contractor, the worker must be “free from control or direction over the performance of those services” and be “customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the contract of service.” In 1981 Utah moved to a three part test, often referred to as the “ABC Test,” still used by many states.1 The three-part ABC test requires finding that the worker is (A) free of control “both under his contract of hire and in fact;” (B) the service the worker provides is “outside the usual course of the business . . . or is performed outside of all the places of business of the enterprise” and (C) the individual is customarily engaged in an independent business.2 In 1986, Utah went back to a two-part test, retaining the A and C prongs of the ABC test.3 In 1989 1996 Utah adopted the IRS’s 20 part test. Tasters, Ltd. v.

Department of Employment Sec., 163 Utah Adv. Rep. 64 (Utah Ct. App. 1991). It continued to use variations on this test, see, e.g., 1991 Ut. HB 26, Ch. 174 (setting out one version of the 20 part test) until 1996, when it enacted the current test.

Currently Utah uses a two part test that requires an initial finding that the worker has an independently established business or trade. Utah Code Ann. § 35A-4-204(3)(a). Only after that finding is made does the inquiry move to control issues. Utah Code Ann. § 35A-4-204(3)(a) and (b). Regulations enacted under the Code set out a fifteen point test divided into these two areas of inquiry. Utah Admin. Code R994-204-

303. The factors are:

Factors for determining whether the worker has an independently established business:

Separate Place of Business. A separate place of business favors classification as an independent contractor.
Tools and Equipment. A worker who has a substantial investment in the tools needed to do the job will more likely be classified as an independent contractor.
Other Clients. If the worker provides similar services to other clients, the likelihood exists that the worker is an independent contractor.
Profit or Loss. An independent contractor can realize a gain or loss from the operation of his or her independent business.

 

Advertising. An independent contractor may advertise or otherwise let the public know his or her availability to perform services.
Licenses. A worker who has obtained a business license and other licenses needed to carry on his or her business is most likely an independent contractor.
Business Records and Taxes. The worker’s business records and tax records should match the reality of the business relationship with the employer.
If the employer meets the burden of proving the worker has an independently established business, a rebuttable presumption exists that the employer did not have a right to control the methods or details of the work. That presumption can be overcome, however.

Factors to measure control and direction:

Instructions. The need to follow instructions from the employer on the methods of completing the work is a key hallmark of an employee.
Training. The more training the employer supplies to the worker, the more it looks like an employer-employee relationship.
Pace or Sequence. A requirement to complete the work at a particular pace or in a particular sequence indicates an employer-employee relationship.
Work on Employer’s Premises. Requiring work to be performed at the employer’s place of business indicates an ability to supervise the work, another hallmark of an employer-employee relationship.
Personal Services. An employee generally must complete all assigned work, and cannot hire assistants or third parties to perform the work.
Continuous Relationship. “A continuous relationship does not exist where the worker is contracted to complete

specifically identified projects, even though the services relationship may extend over a significant period of time.”

Set hours of work. Having set works to complete the work shows an employer-employee relationship.
Method of Payment. Payment by the hour, day, week or month indicates an employer-employee relationship, “unless it is just a convenient way of paying . . . a fixed price agreed upon as the cost of a job.”

These fifteen factors “are intended only as aids in the analysis of the facts of each case. The degree of importance of each factor varies depending on the service and the factual context in which it is performed.” Utah Admin Code. R. 994-204-303. The practitioner should be careful to note the version of the rule in effect at the time of any court decision.

SIDEBAR 4
The High Cost of Misclassification

In the 1980s Microsoft hired a number of workers on a “temporary basis.” It classified these workers as independent contractors and paid them out of its accounts payable account instead of through its payroll department. The workers were otherwise “fully integrated” into Microsoft’s workforce, and some worked for Microsoft for years. Vizcaino v. Microsoft Corp., 97 F.3d 1187, 1190 (9th Cir. 1996), aff’d en banc Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997); cert denied, Microsoft Corp. v. Vizcaino, 522 U.S. 1098 (U.S.S. Ct. 1998). When Microsoft hired the temporary workers, it told them that they were not eligible for any benefits. Id. The IRS audited Microsoft in 1989 and 1990. It determined that Microsoft should have classified the temporary workers as employees. Microsoft agreed to the reclassification and paid the back taxes and other penalties. 97 F.3d at 1191.

The story does not end there, however. Microsoft hired some of the “temporary” workers as regular employees, and offered the others the choice of being terminated or continuing to work for Microsoft through a temporary agency that would provide payroll services. Id. A group of the former temporary workers then sought to participate in Microsoft’s employee stock option plan and other employee benefits. At this, Microsoft balked, and class action litigation ensued. In the litigation, Microsoft argued that the workers had agreed to forego all participation in employee benefits when they signed their independent contractor agreements. Microsoft convinced the lower court, but the appellate court disagreed. Id. at 1197. As common law employees, the workers were entitled under ERISA to participate in the employee stock option plan not only during the time they were misclassified by Microsoft, but also after they become employed through the temporary agency. Id.

Microsoft then sought a rehearing en banc. The Ninth Circuit affirmed the appellate ruling en banc. Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997). Following that decision, Microsoft reached a settlement in which it agreed to pay the plaintiff class nearly $97 million, including just over $27,000 in attorney’s fees, Vizcaino v. Microsoft Corp., 142 F. Supp. 2d 1299 (W.D. Wash. 2001), aff’d Vizcaino v. Microsoft Corp., 290 F.3d 1043 (9th Cir. 2002), cert denied, Vizcaino v. Waite, 2002 U.S. LEXIS 8338 (U.S. S. Ct. 2002). This case and the FedEx cases discussed above demonstrate the high cost of misclassifying workers.

SIDEBAR 5
FedEx Ground Cases – Determining the Right to Control

 

FedEx Ground trucks deliver packages and overnight letters to businesses. The trucks sport the FedEx logo and drivers wear a FedEx uniform. Yet FedEx long treated these drivers as independent contractors. Each driver signed an “Operating Agreement” stating on page one that “Both FedEx Ground and Contractor intend that Contractor will provide these services strictly as an independent contractor, and not as an employee of FedEx Ground for any purpose.”

In the early 2000s, drivers for FedEx Ground Systems across the country began filing class action lawsuits against FedEx, alleging that FedEx wrongly classified them as independent contractors. Many of the separate class actions (including a Utah case) were consolidated into one multidistrict litigation in the Northern District of Indiana (the MDL court). In December 2010, the MDL court granted full or partial summary judgment in favor of FedEx and against the drivers in nearly all the cases. In re FedEx Ground Package Sys., 758 F. Supp. 2d 638 (N.D. Ind. 2010).

The MDL found that Operating Agreement language persuasive “because the intent expressed was so clear.” 758 F. Supp. 2d at 658. The Court also cited to provisions in the Operating Agreement that gave the drivers “entrepreneurial opportunities.” Id. at 658-659. These opportunities included the right to hire helpers or replacement drivers, their responsibility for acquiring and keeping their vehicles in good repair, and their ability to “sell” their routes to another driver.

The decision by the MDL Court in 2010 made it appear that the FedEx drivers would remain independent contractors across the country. The tide has now turned, as several appellate courts have recently found the drivers to be employees. In August 2014, the Ninth Circuit court reversed the MDL court’s summary judgment in two remanded cases, Slayman v. FedEx Ground Package Sys., 2014 U.S. App. LEXIS 16623 (9th Cir. August 27, 2014), based on Oregon law, and Alexander v. FedEx Ground Package Sys., 2014 U.S. App. LEXIS 16585 (9th Cir. August 27, 2014), decided under California law. In both Slayman and Alexander, the Ninth Circuit found the drivers to be employees as a matter of law. The Ninth Circuit wasted no time in going beyond the words of the Operating Agreement; immediately after its opening sentence in Alexander, the Ninth Circuit Court said:

The drivers must wear FedEx uniforms, drive FedEx-approved vehicles, and groom themselves according to FedEx’s appearance standards. FedEx tells its drivers what packages to deliver, on what days, and at what times. Although drivers may operate multiple delivery routes and hire third parties to help perform their work, they may do so only with FedEx’s consent.

2014 U.S. App. LEXIS 16585, *2-*3. Nor did the “entrepreneurial opportunities” on which the MDL court relied convince the Ninth Circuit. A driver seeking to hire a helper, or expand his routes could do so only with FedEx approval. Alexander, 2014 U.S. App. LEXIS 16585 at *30; see also Slayman, 2014 U.S. App. LEXIS 16623 at *25. Because the actual text of the Operating Agreement gave FedEx significant right to control the manner and methods the drivers used to complete their work, the court ruled that the drivers must be classified as employees. See 2014 App. LEXIS 16585 at *16-17; 2014 App. LEXIS 16623 at *20-21.

Another of the remanded cases, Craig v. FedEx Ground Package Sys., 686 F.3d 423 (7th Cir. Ind. 2012), involved Kansas law. When the driver appealed after remand, the Seventh Circuit determined that it could not determine the drivers’ employment status under Kansas law, and certified the question to the Kansas Supreme Court. Id. at 431-32. The Kansas Supreme Court issued its ruling on October 3, 2014.

Craig v. FedEx Ground Package Sys., Case No. No. 108.526 (Kan. 2014). That court noted that although the question appears simple – is the driver an employee or independent contractor – the answer “defies such simplicity.” After agreeing with the Seventh Circuit that the case was a close one, the Kansas Court said “the company carefully structured its drivers’ operating agreements so that it could label the drivers as independent contractors in order to gain a competitive advantage.… This is a close case by design, not happenstance.” The Kansas Court concluded that the drivers were employees, saying FedEx “established

an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.” Id.

In addition to these three cases, other courts have reached similar results recently.1 Alexander alone directly affects nearly 2,300 FedEx Ground drivers in California. As the Seventh Circuit noted in Craig, these decisions will likely directly affect thousands more drivers at FedEx as well as many other workers in other industries. 686 F.3d at 430-

431. According to one commentator, these decisions will cost FedEx hundreds of millions of dollars, in addition to the costs of litigation. “FedEx avoided health care, workers’ compensation, paid sick leave and vacation, retirement and more. FedEx made drivers pay for their uniquely FedEx branded trucks, FedEx branded uniforms, and FedEx scanners. Plus, fuel, insurance, tires, oil changes, maintenance, even workers’ compensation coverage.” FedEx will also have to assume these costs going forward, and will have to pay these drivers a competitive wage (including overtime pay), and pay all penalties assessed against it by governmental agencies.