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Guiding Clients Along the Contractor-Employee Divide

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By Casey C. Sullivan, Esq. on August 11, 2016 11:59 AM

The fight over worker status (Is she really a contractor? Is he an employee?) has become an increasingly common legal battle in the past years. The rise of the "gig economy" means that more and more people are working, at least nominally, as independent contractors or under other alternative employment arrangements. In 2005, the last time the Bureau of Labor Statistics collected data on the subject, seven percent of workers were independent contractors. In the more than 10 years that have followed, it's safe to say that the percentage has increased dramatically.

But even though a worker might be called a contractor by name, that doesn't mean she is a contractor, in the eyes of the law. A host of high profile class action lawsuits have recently asserted that thousands of "independent contractors" are actually employees, entitled to the benefits of any other employee. So what sets the two apart and how can you properly advise your clients on contractor-employee classification issues?

A Contractor by Any Other Name Would Not Smell as Sweet

Independent contractors face a host of responsibilities that their employee counterparts do not. For example, they must pay their full FICA taxes, instead of splitting that cost with their employer, and they are not entitled to employer-sponsored health insurance.

So, when a contractor can convince a court that they've been misclassified, millions of dollars could be at stake, including liability for taxes paid by those workers. Uber, for example, is currently looking to settle a worker misclassification class action for $100 million. In 2014, after the Ninth Circuit found that FedEx had misclassified its drivers, the company settled for $228 million.

While the precise formula for determining whether a worker is an employee or independent contractor varies by jurisdiction, a few factors tend to predominate. Courts, and the IRS, often look at the level of control a business exercises over a worker's behavior and finances, as well as the relationship, including written contracts, between the parties.

Helping Clients Reduce Their Risks of Liability

If a client is concerned about the status of their workers, there are a few options they can pursue to reduce their risk of liability. Hiring workers through a contracting agency, instead of directly, is a common approach, as it helps shift the employee obligations to the agency. Another option is seeing a determination from the IRS, by submitting Form SS-8. Of course, that also risks the possibility of an adverse determination.

Luckily for employers, even if they have misclassified their workers, they may be able to qualify for safe harbor, and protection from back employment taxes, in certain circumstances.

For more information on employee classification, labor, and employment law, see FindLaw's Corporate Counsel section.

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