Misclassification of Employees as Independent Contractors

By Jennifer Buckley

If you read business headlines in trade publications these days, you have probably seen warnings about “Misclassification” of workers. You may be wondering what the recent fuss about “misclassification” is all about. While the law as to who may be an independent contractor rather than an employee has not become  more clear or more muddy in recent years, the fact is, the number of challenges to the status of workers so classified has, without question,  increased. The challenges are only expected to continue as states and the federal government seek tax revenue.

Take for example the underfunded liability of many state unemployment trust funds. Unemployment benefits paid out each year have resulted in further depletion of those funds. When a former worker files a claim for unemployment compensation, if you have treated the person as a contractor, you should not be surprised if you face an audit of all workers similarly classified by your company. Further, when a worker gets hurt working for you, it is likely that you will then face a claim that the worker was an employee and your insurance carrier may then ask some questions about who you are classifying as a contractor.

To make matters worse, some states are passing legislation that provide for assessment of penalties for misclassification of workers. These penalties include penalties to be assessed against agents and officers of corporations and partnerships. The penalties can be steep since the laws typically impose the penalty for each person misclassified. The states that have passed such legislation include California (no surprise there) but most recently, Illinois, in the heart of the Mid-West. The new Illinois law was designed to curtail employee misclassification in the construction industry. Other states have bills pending or legislation passed in the last few years that relate to the misclassification issue with some laws designed to clarify definitions, some providing expanded benefits for contractors and/or others providing for penalties.

Companies that utilize independent contractors should review the relationship to be certain it is proper, i.e., are the persons really an employee rather than a contractor. Such reviews would be prudent  now,  rather than after claims are filed. This issue is even more important for employers that classify several workers in this manner, as such workers may become the focus of an audit by a federal or state agency.

In Michigan, the courts look at whether there is a written agreement defining the relationship. While having an agreement is not the end of the story, since it can be helpful, companies, to the extent that they use contractors. should make sure that one is in place between it and the worker. Companies should also consider the degree of control, whether the worker works primarily for the company, who supplies the equipment, who determines hours, etc. The bottom line is that for years, this issue was largely ignored, but given the reality of tax coffers and funding sources for other employment issues, the government has put it on the front burner. This means it should be on your front burner.

Jennifer Buckley is a Member of Clark Hill, PLC and is in its Employment Law Practice Group. She has defended employers in actions brought by employees in state and federal court actions, before labor arbitrators and state and federal agencies for more than 25 years. She advises employers on employment legislation, best practices, and policies. Jennifer has been named one of the Top Lawyers by dbusiness Magazine, and for several years, a Michigan Super Lawyer and one of the Best Lawyers in America in 2012 and 2013. For questions, Jennifer Buckley can be reached at jbuckley@clarkhill.com or (313) 300-4141.