Are You an Employee Misclassified as an Independent Contractor?

With the growth of the so-called “gig economy,” many employees are reportedly being misclassified as independent contractors, creating a number of problems for workers. Ditto for employers who deliberately, or in error, have misclassified employees in violation of state and federal labor regulations.

Ride-sharing service Uber recently attempted to reach a multi-million dollar settlement with 400,000 of its drivers in California and Massachusetts over allegations of misclassification, but a federal judge rejected the proposed settlement. The company faces similar legal troubles in New York and the United Kingdom.

While Uber represents a high-profile example of independent contractor misclassification, the company is but one of many mired in the growing controversy.

Independent Contractor, Defined

The simple definition of “independent contractor” is a self-employed individual, essentially the owner of a small business, who offers their services directly to the public. Common examples include doctors and lawyers who operate private practices, as opposed to working for a hospital or major law firm. Certified public accountants, private tutors, teachers who offer private tutoring or lessons, tradespeople working out of their homes and/or vehicles, truckers who own and operate their own rigs, and freelance writers are other examples of independent contractors.

“…[a]n individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done,” according to the IRS. In other words, an independent contractor is one who sets their own hours and works in whatever way they deem necessary to get the job done, as opposed to schedules and procedures dictated by a corporation and its supervisors and managers.

Independent contractors are also responsible for their own withholdings. Generally, they are required to make quarterly tax payments (like businesses), and are subject to self-employment tax. However, they can also claim many deductions not available to employees who work for a company on a W-2 basis (independent contractor wages are reported by their clients on Form 1099).

The independent contractor enjoys a great deal of freedom in terms of scheduling, and can write off many expenses that employees cannot. However, unless they are fortunate enough to have a long-term assignment or contract with a client, they must also continually market their services and be on the hunt for new business. Independent contractors are responsible for their own health care coverage and retirement, and in many cases must carry some type of liability insurance or bond (all of which are generally tax-deductible). Some professionals must be licensed by the state, even if the law does not require it. A business or professional license or certification is an excellent way to build credibility in one’s chosen field.

What is an Employee?

An employee is a worker whose schedule and methods of carrying out tasks are subject to the control of the company where they are employed. Their pay is subject to withholding for Social Security and Medicare as well as federal and (where applicable) state income tax. Under most circumstances, an employee cannot deduct expenses such as transportation, specialized equipment required for the job, and on-the-job transportation costs. However, most employers are required to furnish these things at no additional cost to the employee. Employees also enjoy job protections under state and federal law and qualify for benefits such as medical care and retirement.

This is one of the issues at the heart of current litigation involving employee misclassification.

A Growing Issue

The use of independent contractors grew by nearly 40 percent between 2005 and 2015, according to the National Bureau of Economic Research. During that period, the Government Accountability Office found that a sizable number of those classified as independent contractors did not meet the appropriate definition.

The Worst of Both Worlds

As noted earlier, the independent contractor lacks basic job and safety protections under the law, but enjoys a great amount of freedom in setting their working hours and conditions, and with careful planning and by taking advantage of all available deductions, winds up paying relatively little in income tax.

On the other hand, an employee who is either deliberately or erroneously misclassified as an independent contractor enjoys neither control over the terms of their employment nor access to available tax deductions. They are also denied other benefits that they are entitled to, such as overtime.

A particularly egregious case hearkened back to the “bad old days” of company stores and housing, a system in which employees were forced to pay their employer for their own food and lodging — at rates that were nearly equal to (and in many cases, in excess of) their pay, making them virtual slaves. As reported in USA Today, a number of Los Angeles trucking companies allegedly forced their drivers to lease their vehicles from the company, deducting the payments from their wages.

They were also required to pay for their own fuel, maintenance and insurance. Even after having to work as many as 20 hours per day, these drivers actually wound up owing money to their employers. When they became incapacitated or too ill to work, their vehicles – along with all the money they had paid — were taken back by the companies, which then turned around and leased or sold them to their replacements.

Harm Extends to Society at Large

When an employee is misclassified as an independent contractor, everyone — not just the worker — suffers the consequences. In addition to safety concerns, misclassified employees wind up not paying contributions to social insurance programs, such as workers compensation and unemployment insurance, which are meant to benefit everyone. By not having the appropriate taxes withheld, federal, state and local governments are deprived of the revenue needed to effectively run the government.

It is also patently unfair to those employers who are conscientious about following the law and treating workers in accordance with fair labor practices and regulations — often, at considerable expense. This leaves these employers at a disadvantage when it comes to competing in a free and open marketplace.

These issues cross political and economic ideologies. It’s why the 36 states and a substantial number of law-abiding employers have joined with the U.S. Department of Labor to investigate and combat those who continue to misapply independent contractor status to employees.

Legislative Efforts to Curb Misclassification

In 2011, U.S. Rep. Lynn Woolsey of California introduced the Employee Misclassification Prevention Act, or EMPA. This bill would amend the Fair Labor Standards Act of 1938, requiring employers to keep wage and hour records of non-employees and notify an employee of their status. The bill also would also allow an employee to dispute their classification and give them the right to sue an employer for lost wages when they have been misclassified. Employers who disregard the law would be subject to penalties of up to $5,000 per violation.

EMPA, which has yet to become federal law, has been reintroduced several times since as the Payroll Fraud Prevention Act.

In California, the state legislature introduced Assembly Bill 5, which put into place a three-pronged test to help prevent workers from being misclassified. The bill’s author, Assemblywoman Lorena Gonzalez of San Diego says there is an “alarming rate of misclassification of workers in California, which has led to worker inequality and burdened taxpayers through their support of government programs and tax credits.”

The law places restrictions on how and when a company can classify a worker as an independent contractor, and provides greater protections and some benefits for those who work for companies such as Uber and Lyft.

Notably, the law does include exemptions for certain professions, though in some cases, the exemptions may be contentious.

What To Do If You Believe You Have Been Misclassified?

If you have reason to believe that you have been misclassified as an independent contractor, there are a number of steps you can take. One is to file a complaint with your state’s department of labor. You may also be eligible to pursue legal action against your employer, particularly if you believe they may be deliberately violating the law.

If you are not certain, apply the “ABC Test” to your job:

• Are you “free from the control and the direction of the company?”
• Is your work different from the “usual course” of the company’s primary business?
• Are you “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed?”

If the answer to any of those questions is “no,” you are legally an employee and may be able to sue your employer for lost wages and benefits.

Join a Free Independent Contractor Class Action Lawsuit Investigation

Even if you are classified as an independent contractor, you may be entitled to minimum wage, overtime pay, reimbursement for expenses, and meal and rest breaks, among other employee benefits.

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This article is not legal advice. It is presented 
for informational purposes only.