Tips for Reviewing Independent Contractor Agreements
As seen in Construction Executive
Ensure Classification Compliance as DOL Focuses on Construction Industry
August 30, 2016
By Lori Brown
Just as the Department of Labor (DOL) proposed major changes to the nation’s overtime rules in 2015 (taking effect Dec. 1, 2016), the DOL also doubled down on its “misclassification initiative. By collaborating with several states through work-sharing agreements, the initiative is designed to promote information sharing and coordinated enforcement efforts against independent contractor misclassification.
According to the DOL, misclassified workers are often denied access to critical benefits and protections. The other driver of these combined federal and state initiatives is simple: money. By leveraging an independent or contingent workforce, employers avoid paying state and federal unemployment taxes and workers’ compensation premiums, as well as Social Security and Medicare taxes. For the construction industry, lowering labor costs through contracted, independent labor can lead to lower bids and higher profits.
The problem? Revenue-starved federal and state governments believe the proliferation of misclassified workers is a primary culprit for their financial situation. Moreover, the penalties and fines for misclassification are significant and include unpaid federal and state taxes, unemployment insurance and workers’ compensation premiums, to name a few.
Reviewing Independent Contractor Arrangements
While use of independent contractors can be financially advantageous, the classification must be legally defensible. As with most complex issues, the road to compliance starts with a diagnosis. With as many as three different federal tests (Internal Revenue Service, DOL and common law factors) and myriad state tests in play, it’s complicated to say the least.
While the following list is by no means exhaustive, here are some practical tips for determining whether it’s time to take a closer look at your independent contractor arrangements:
- Are you engaging former employees as independent contractors?
- Are your independent contractors performing the same work as your W-2 employees?
- Do you have independent contractors who have been working for your company for more than a year?
- Are your independent contractors attending regularly scheduled meetings alongside your W-2 employees?
- Do you expect your independent contractors to work only for your company?
- Are your independent contractors wearing your uniforms or badges?
- Could your business function without the work performed by your independent contractors?
After completing this diagnostic phase, the degree of defensibility of independent contractor classifications will likely lead to one of the following compliance strategies.
- Restructure, clarify and document your defensible model. Even with the regulatory climate as it is, a company that has yet to examine its workforce may not want to simply “cut and run” from its contingent model. Rather, adjustments to the relationship, possibly through an individualized written agreement, could enable the arrangement to withstand scrutiny.
- Reclassify to a W-2 payroll structure. Of course, certain companies, as a result of agency action or self-audit, may decide in favor of eliminating risk of misclassification as much as possible and shift their independent contractors to employee status. This strategy is not without risk, however, and should be handled in a way that minimizes any presumption that prior classifications were improper.
- Use compliant staffing vendors. The economic shift toward independent contractors or contingent workers has given rise to many companies that assume the risk of independent contractor compliance and manage the relationship with the independent worker. Depending on the arrangement, some even treat the worker as an employee and handle all required payroll deductions on a federal and state level. While these entities can certainly help ease the headache of classification, companies should remain mindful they may still be liable for using the services of a misclassified worker.
As federal and state regulators, as well as unions and plaintiff’s lawyers, sharpen their focus on the independent contracting model, this is by far one of the most costly compliance risks facing construction companies today. Accordingly, there’s no better time to construct a compliance plan designed to protect your company and limit your vulnerabilities.
This is the second article in a two-part series on the key challenges facing construction executives in managing their workforce. Click here to view the previous article on major changes to the nation’s overtime rules that take effect on Dec. 1.
Lori Brown is President and Chief Operating Officer of ComplianceHR, a web-based platform that helps companies make critical employment decisions, such as who can be retained as an independent contractor and which employees need to be paid overtime. She has more than two decades of experience as an employment litigator and in counseling organizations on employment law compliance strategies. Ms. Brown can be reached at 646.490.3593 or firstname.lastname@example.org.