Nationwide Law Firm Faruqi & Faruqi, LLP Highlights the Key Differences Between Employees and Independent Contractors
By: Faruqi
Tags: Employees, Law, Lawyers, Business, Business Development

While there are still some significant areas concern such high youth unemployment and the precariousness and volatility of the emerging gig economy, the good news is that the U.S. unemployment rate has fallen to a 50-year low. In some industries such as cyber security, life sciences, health care, and trucking, the availability of jobs significantly outstrips the supply of labor.

However, the bad news is that many workers across all sectors, fields, and levels of responsibility from entry-level to management are being misclassified as independent contractors instead of employees.

“It is important to note that some employers who misclassify workers are not doing so to achieve some kind of devious benefit or ill-gotten gain”, commented a representative from Faruqi & Faruqi, LLP, a national practice that focuses on complex civil litigation in the areas of wage & hour litigation, securities, merger and transactional, shareholder derivative, antitrust, and consumer class action. With, many employers are deliberately flouting employment laws in order to avoid their full financial and administrative obligations. Fortunately, the courts have repeatedly demonstrated zero tolerance for these transgressions, and ignorance of the law is not a defense.

According to Faruqi & Faruqi, LLP, generally there are three categories of inquiry that determine whether a worker is an independent contractor or employee: financial control, behavioral control, and the type of relationship. Each area is further discussed below.

Financial Control

A common and incorrect belief held by some employers, is that financial control of a worker begins and ends with how they are paid. For example, they assume that if a worker is paid through an invoice then they are automatically classified as an independent contractor, and if they are paid through a payroll process (e.g. direct deposit in their bank account every two weeks) then they are automatically classified as an employee.

Granted, this is one important detail of financial control that determines the classification, but it is by no means the full story. There are several other pieces of information that factor into the financial control equation, such as whether a worker may work for other businesses or clients at the same time (though not necessarily for competitors if a valid non-compete restrictive covenant is in place), and whether a worker is taking a financial risk and may incur a profit or loss.

A representative from Faruqi & Faruqi, LLP states that “independent contractors are autonomous business entities, which means they must be allowed to exercise certain functions and options that are unavailable to employees. For example, an employee may be banned from taking a second job or `moonlighting’ to augment their income. However, in most cases no such impediment — explicitly or implicitly — can be applied to independent contractors.”

Behavioral Control

Essentially, workers who are trained, managed, told when and how to work, and provided tools or equipment (even if these items are used off-site or in a home office), are likely classified as employees. Alternatively, workers who exercise a significant measure of control over their work process and who use their own tools and equipment, are likely classified as independent contractors.

According to Faruqi & Faruqi, LLP, “understandably, there is some grey area with respect to behavioral control. For example, there are situations when it is appropriate for employers to provide independent contractors with some measure of training, such as familiarizing them with a new internal process or protocol.” In the same sense, there are situations when it is appropriate for employers to ask employees to use their own tools and equipment, such as in organizations that implement a bring-your-own-device policy. However, what matters is whether the employer exerts a significant degree of authority over how, where, and when a worker carries out their tasks. The greater the level of control, the more likely it is that a worker should be classified as an employee.

Type of Relationship

If a worker is entitled to benefits including (but not limited to) workers’ compensation, or if they perform activities that are central to the organization’s core business purpose, then they are likely classified as an employee. If a worker is not entitled to benefits, or if they are not performing core business activities, then they are likely classified as an independent contractor.

Faruqi & Faruqi states that a critically important fact that employers must understand, and heed is that “it does not matter what a contract says, or what a worker may agree to explicitly, implicitly or tacitly. What matters is the actual, realistic factors of the relationship.” In other words, employers cannot defend a misclassification by saying that a worker signed a contract or agreed to a certain arrangement. The law is not circumstantial, and the onus is on employers to classify correctly.