Keep independent contractors independent
“Contract laborers,” “freelancers,” “casual workers,” “contract employees” — all fall under the category of independent contractors. But you will want to make sure you are not really using “employees” by any other name by paying close attention to the legal distinctions between employees and independent contractors. Employers in Maine and elsewhere are experiencing increasing investigations and claims based on treating workers as independent contractors. One of the highest priorities at the U.S. Department of Labor is identifying workers who are erroneously classified as non-employee, independent contractors for purposes of complying with minimum-wage, overtime and recordkeeping requirements of the Fair Labor Standards Act.
Under the FLSA and similar state wage and hour laws, only employees are entitled to minimum wages and overtime. In addition, generally only employees are subject to state and federal tax and Social Security withholdings. This can also apply to unemployment compensation, workers compensation coverage and health-and-welfare benefits. As a result, employers may be tempted to treat workers as independent contractors, with no withholdings or benefits.
Companies in violation can be required to pay unpaid overtime and liquidated damages, penalties and fines and attorneys' fees.
Unfortunately, there is no single legal test for what constitutes an independent contractor. Different state and federal agencies have their own tests.
Maine currently uses a common definition of independent contractor for purposes of workers' compensation, unemployment benefits and wage and hour requirements. The good news is that this single standard replaced the multiple tests previously used by various state agencies. The bad news is that the criteria are subject to much interpretation and are not always easy to apply.
Under Maine law, to be an independent contractor, the individual must:
• Have the right to control work, except as to final results.
• Be engaged in an independent business.
• Have the opportunity for profit and loss.
• Hire, pay and supervise any assistants.
• Make relevant services available to other clients.
In addition, the individual must meet at least three of the following criteria: the individual must have a substantive investment in tools, materials and knowledge for the job; be permitted to work for others; be responsible for satisfactory completion; have a contract that defines the rights of the parties; receive payment directly related to the work and not solely on time; perform work outside the scope of the employer's business; or have been deemed an independent contractor by the IRS.Courts and government agencies often focus on the following four elements:
• Who really controls the work that is being performed?
• Is the work performed the same as work performed by employees, and is it the type of work that the employer is in the business of providing?
• Does the worker have the opportunity to perform the same type of work for others?
• Is there a written agreement that gives the contractor the right to control the work?
It is critical to remember that courts and regulators look at all the factors, including the existence of a written agreement, standing alone can guarantee the outcome.
Given the potential risks of misclassification, you should examine your use of independent contractors to make sure they really are independent. A helpful starting point may be to ask whether your circumstances even lend themselves to the use of an independent contractor. If your company needs to control a worker's activities, your best bet may be simply to treat your worker as an employee.
Eric J. Uhl, a partner in the Portland and Boston offices of the law firm Fisher & Phillips, specializes in employment law and business-related litigation. He can be reached at euhl@laborlawyers.com
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