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| Ban the Label "Freelancer": Avoiding the Pitfalls of Improperly Classifying Your Workforce Companies today often designate a portion of their workforce as "freelancers", as part of their efforts to create a flexible workforce and reduce costs. However, while many believe they know what a "freelancer" is, in fact the word has no legal meaning, and even its "ordinary" meaning is up for debate. Some employers use the term "freelancer" as a synonym for an "independent contractor," others use it to mean a temporary employee, and still others use it to mean as some hybrid. If we employment lawyers have our way, the word "freelancer" will be forever banned, and replaced by one of two legally recognized designations of workers: employees and independent contractors. Within the "employees" category, there may be regular-full-time employees, regular-part-time employees, temporary employees, and/or leased employees. Independent contractors are not employees at all, but persons in business for themselves who provide services for a client-company. While the independent contractor/employee distinction is perhaps the most significant, carrying with it the biggest financial risks if workers who should be treated as employees are incorrectly treated as independent contractors, there are legal and practical ramifications associated with each of these different types of workers. To help alert employers to factors relevant to workforce classification, and the importance of getting it right, this article will clarify the common and legal meanings of the categories of workers comprising a typical company's workforce - "regular-full-time," "regular-part-time," "temporary," "leased," and "independent contractors" - and will summarize the legal and practical effects of the different categories. For most companies, "regular-full-time" employees comprise the bulk of the workforce. This is the "traditional" or "common law" employee. While there is no precise legal definition of a regular-full-time employee -this is the "default" category, so that unless an employee meets the criteria for a leased employee or independent contractor as described below, he or she is a "regular" employee- typically, regular full-time employees are scheduled to work at least 35 hours per week, and are eligible for coverage under the company's group health insurance and other benefit policies. All standard tax withholdings and deductions are taken from these employees' paychecks, i.e., federal, state, and local taxes, FICA, unemployment, and social security. Moreover, a multitude of employment laws-anti-discrimination, wage laws, family and medical leave laws, to name a few-govern an employer's relationship with its regular-full-time employees. As this term is commonly understood, part time employees are those who are regularly scheduled to work less than 35 hours per week (though companies can define "part-time" to mean even fewer hours, as do some employment-related laws). Regular-part-time employees' wages are subject to the same withholdings and deductions as those of regular-full-time employees. While entitlement to benefits is governed by the terms of a company's benefit plans in the first instance, part-time employees are often not covered by group health insurance and other benefit plans. This is because a typical plan provides that employees must work a certain number of hours on a regular basis in order to be covered. Be aware that, even though part-time employees are not typically eligible for coverage, employees who work 1000 hours or more in a 12-month period may be eligible for certain pension benefits - i.e., 401(k) benefits - under federal law. Moreover, certain state benefit laws, like New York's Disability Benefit Law, cover part-time employees. Many employers choose not to provide part-time employees with certain other benefits, i.e., supplemental disability, or paid vacation days. It is important to inform your part- time employees which benefits do and do not apply to them. Employers typically use the term "temporary employees" to mean all workers hired for short-term assignments. However, common parlance is misleading, as this term refers to two sub-categories of short-term employees with very different legal positions: those employed by the company, and those employed by an outside agency, properly known as "leased employees." Temporary employees who are employed by the company are typically hired for a specific project, with the understanding that the employer expects the employment relationship to end when the project ends. Companies often misclassify these employees as "independent contractors" or "freelancers" because of the short duration of their employment, but, unless they meet the criteria for "independent contractors" set out below, they must be treated like a regular-full-time or part-time employee. The temporary employee's wages are subject to regular withholdings and deductions, and he or she is entitled to benefits in accordance with the terms of the plan. Of course, pursuant to benefit plans, many temporary employees will not meet the service requirements and therefore may not be eligible for certain benefits. Again, however, if the employee works 1000 hours or more, he or she may be eligible for pension benefits, and may be eligible for state-mandated benefits even sooner. The only real difference between a temporary employee and a regular-full-time or part-time employee is that the temporary employee is advised when hired that he or she cannot expect his or her employment to last beyond a particular time or event. Employers should be careful when hiring temporary employees to advise them that they are not guaranteed a job for the life of the project, i.e., they are employees at will. Often time, companies hire personnel through leasing agencies whose business is to place individuals at companies. Leased employees may be leased for short or long-term positions. Those who are leased for short-term assignments, i.e. to fill in for an employee who is on leave, are often referred to as "temporary" employees. But leased employees can also fulfill a company's long-term needs. For instance, a company may lease a team of individuals to staff its mailroom or technical support function on an ongoing basis. The key difference between leased employees and regular employees is that leased employees are employees of the leasing agency. Although the company where they perform their work (the "client-company") could be deemed a "joint employer" with the leasing agency, typically the client-company's intent is that the leased employees be employed by the leasing agency alone. The leased employees should be treated accordingly, to the extent practical, meaning that the leasing agency should be responsible for recruiting and hiring the leased employee, with the client-company simply advising the leasing company of the skills and qualifications that it seeks. The leasing agency should also be responsible for compensating the employee, for providing benefits, if any, and for dismissing the leased employee. Typically, these responsibilities are delineated by a contract between the client-company and the leasing agency. In fact, the client-company should allow the leasing agency to take actions regarding the leased employee's employment status (i.e., training, disciplining, transferring, dismissing) whenever possible. This will help prevent the client-company from being treated as a "joint employer" with the leasing agency, for purposes of liability under the gamut of workplace laws. While it may not be practical, from a business perspective, to have the leasing agency take action in every instance, the leasing agency should be involved as soon as possible with issues concerning the terms and conditions of its employees' work for the client-company. However, even the most cautious client-company cannot prevent the leased employee from naming it as a joint employer in a work-related lawsuit. Therefore, as a further safeguard, companies should negotiate a contract with the leasing agency that specifically addresses the consequences of legal action by a leased employee. independent contractors This is perhaps the most misused, misunderstood category of a company's workforce, and getting it wrong opens a company to the significant liability. Though there are many "tests" used by the courts, the Department of Labor, the IRS, and other government agencies, all of them attempt to zero in on one key aspect: whether the purported "contractor" is really in business for him or herself, or whether the person is dependent on the employer for his or her livelihood. Some of the factors considered by the courts and government agencies include: • The degree of control exerted by the alleged employer over the worker.Thus, if an employee is misclassified, the employer may be responsible for paying back wages for overtime pay with interest, social security taxes, unemployment insurance, the value of group health and other benefits, taxes and workers' compensation for a miscategorized employee. Moreover, liquidated damages and penalties may very well be imposed, as may criminal penalties. Thus, it is critical to analyze the true nature of your company's relationship with its so- called "independent contractors". Will the worker be using company equipment, or provide his/her own? Will the worker be closely supervised and/or working alongside employees who perform essentially the same functions as the purported "contractor," the worker may very well be an employee? Does the contractor perform work for other companies? How long has the person been working with your company? Do not take comfort in the fact that a worker agrees to "independent contractor" treatment of wages - unfortunately, if the relationship sours, the worker may turn against the company, and his or her earlier agreement will not prevail over the realities of the working relationship. Indeed, Microsoft Corporation faced just such a situation, when employees of the company, who had agreed to independent contractor status, filed a class action seeking back pay and benefits. In a separate action, the IRS sought back taxes and penalties. Microsoft ultimately settled the class action for millions of dollars relating to failure to provide benefits, and paid millions more in back taxes, not to mention legal fees. Given the risks involved and the multitude of working arrangements, each situation should be reviewed carefully on an individual basis. Employers can avoid the pitfalls that befell Microsoft, and countless other companies, by paying careful attention to the so-called "economic realities" of their relationship with a worker. A good strategy is to negotiate - and abide by - a contract that gives the contractor as much freedom as possible regarding scheduling and completion of the work, and by focusing on the results of the work, not the manner in which it is completed. Consider the criteria listed above when structuring the relationship. Employers should also avoid having independent contractors sign non-compete agreements that limit the contractor's right to perform similar work for a competing organization, because these agreements give the contractor a strong argument that he or she is economically dependent on the company. © 2001 Davis & Gilbert LLP |
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