Independent Contractors

This blog has previously covered the potential pitfalls of classifying workers as independent contractors. While classifying a worker as a “1099” offers many potential benefits on the business side, it can expose the company to significant tax liability, statutory penalties, and monetary damages.

The difficulty for employers is determining which workers may be properly classified as independent contractors. The IRS, Department of Labor, and South Carolina courts all have different tests. On August 9, 2017, the South Carolina Court of Appeals issued a decision that provides some insight on how South Carolina courts make the determination.

In Sellers v. Tech Service, Inc. et. al., the classification issue arose because an employee for an HVAC company sought workers compensation benefits after being injured on the job. The employer’s workers compensation insurance carrier argued that the employee was not entitled to benefits because he received a 1099. However, the fact that a business chooses to treat a worker as a 1099 (or even the existence of a contract stating that the worker is an independent contractor) is not determinative and the court had to investigate the facts further.

The Court stated that “the primary consideration in determining whether an employer/employee relationship exists is whether the alleged employer has the right to control the employee in the performance of the work and the manner in which it is done.” The court identified four factors used to determine the right of control: (1) direct evidence of the right or exercise of control; (2) furnishing of equipment; (3) the method of payment; and (4) the right to fire.”

The Court ultimately found that the worker was an employee, not an independent contractor. The Court’s factual findings on each element are detailed and can be read in full here (SC Advance Sheet, August 9, 2017, pp 14-27). In summary, the Court found:

  • The Company had the right to control the time, place, and amount of the employee’s work.
  • The Employee wore a company uniform, carried company business cards, and otherwise held himself out as an employee.
  • The Company paid for the costs associated with the employee’s work van.
  • There was no independent contractor agreement in place.
  • The Company furnished employee with the tools/equipment to do HVAC construction/repair.
  • Employee received the majority of his income from the Company, and only small amounts for plumbing and other jobs for different companies.
  • The Company had the right to fire the Employee.

It is important to keep in mind that in the context of workers compensation benefits, South Carolina’s policy is to resolve any doubts in favor of the employee, which is what the Court did in this case. If this were a tax case before the IRS, or a wage and hour claim before the Department of Labor, the result may have been different. Regardless, this case provides insight into the issues that employers need to address when making classification determinations.

These issues are very dependent on your individual facts and circumstances; please consult with legal counsel when making decisions regarding employee classification.

As this blog previously covered here and here, the United States Department of Labor under President Obama cracked down on misclassification of workers as independent contractors and broadly interpreted who was considered a “joint employer.” Today, new U.S. Secretary of Labor Alexander Acosta announced that the DOL would withdraw its previously-issued guidance from 2015 and 2016 on these topics. You can find the announcement here.

This should be welcome news for most companies as the previous guidance took an expansive view of when a worker is considered an “employee” (as opposed to an independent contractor) and when a company is considered an “employer” of a particular worker (particularly in the context of temporary hires and workers employed through staffing agencies). Interestingly, as you can see here, the DOL has removed the previous guidance from its website altogether.

However, it is important to note that the actual significance of this announcement is difficult to predict and remains to be seen. First, as the announcement makes clear, this is not really a change in the law per se because the guidance was only the DOL’s interpretation of the law. But, this announcement does signal that the DOL under Secretary Acosta will be taking a different approach to the concepts of joint employment and independent contractor classification. Second, it is unclear how this announcement affects the fact sheets and other DOL “guidance” on its website.

As to the issue of classifying a worker as an employee or an independent contractor, the FLSA (and the DOL’s interpretation of it) is only one of many things to consider. For instance, the Internal Revenue Service and the South Carolina courts have their own interpretation of what constitutes an “independent contractor,” and employers would be wise to tread carefully when making classification decisions as the penalties for misclassification can be steep.

As to the joint employment issue, the Fourth Circuit (which includes South Carolina) has developed its own test to determine when an entity is a joint employer for purposes of Title VII liability. The Fourth Circuit’s test is outlined in detail in this blog post and the announcement from the DOL will not impact this decision.

blog2015HRLawUpdateBannerHaynsworth Sinkler Boyd’s Employment Team is pleased to offer the 2015 HR Law Update in six cities this Fall.

Hot Topics. Through these six sessions, you’ll learn about hot topics HR managers are facing today: Immigration, Criminal Background Checks, Independent Contractors, FLSA Violations, Pregnancy Non-Discrimination, and more.

Don’t miss out. In one morning, we’ll cover the basics of HR law in a fast-paced, plain-English way that will provide a whole new level of understanding to anyone who has to deal with the thousands of facets of employment law.

September 22nd – Anderson, SC

September 23rd – Spartanburg, SC

November 11th – Sumter, SC

November 12th – Lexington, SC

December 1st – North Charleston, SC

December 2nd – Florence, SC

Each seminar will start with Registration & Continental Breakfast at 8:00 am. Sessions will begin at 8:30 and conclude by Noon.

To Register, click on the desired city above or visit www.hsblawfirm.com and look for Upcoming Events.

SESSION #1 – Wage and Hour Compliance: The most common FLSA violations. A discussion about most common unintentional FLSA violations, as well as situations to avoid. Presented by Chris Gantt-Sorenson

SESSION #2 – Immigration: What you need to know about President Obama’s executive action on Immigration. Presented by Garrett D. Steck

SESSION #3 – Independent Contractors: Are workers truly independent contractors or are they really your employees under the law?  An overview of current federal and state guidance on the classification, including practical application and tips for drafting your contracts to avoid the consequences of incorrectly classifying workers.  Presented by Emily H. Farr

SESSION #4 – Can the Box be Banned? Employers with a Legal Duty to Conduct Criminal Background Checks. Presented by Andrea H. Brisbin

SESSION #5 – Pregnancy Non-Discrimination Act:Directives from the Supreme Court’s ruling in Young v. UPS and its impact on the EEOC’s guidance and the Pregnancy Non-Discrimination Act Amendments. Presented by Pierce T. (Perry) MacLennan

SESSION #6 – Open Forum: A free exchange of information and ideas covering today’s topics and beyond. Attendees are encouraged to come ready with questions to ask the lawyers.

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New guidance released July 15, 2015, from the Department of Labor (DOL) narrows independent contractor classification so that “most workers are employees under the FLSA.” The DOL’s guidance makes it clear that the amount of control an employer has over a worker is not as important in properly classifying the worker. Instead, the DOL details an “economic realities” test that must be used “to determine whether the worker is economically dependent on the employer (and thus the employee) or is really in business for him or herself (and thus its independent contractor.)”

According to DOL, you need to consider the following factors when determining if a worker is truly an independent business or is economically dependent upon the employer:

  1. Is the work an integral part of the employer’s business? DOL says that an independent contractor’s work is unlikely to be an integral part of the employer’s business.
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? An independent contractor is one whose managerial decisions (whether to hire others, purchase more equipment, advertise, etc) are more likely to lead to profit or loss beyond the current job.
  3. How does the worker’s relative investment compare to the employer’s investment? The worker’s investment must be significant in magnitude relative to the employer’s investment in the overall business to indicate an independent contractor. DOL emphasized a Tenth Circuit opinion that determined a rig welder’s investment in equipment of $35,000-$40,000 did not indicate the welders were independent contractors when compared to the employer’s investment in the business.
  4. Does the work performed require special skill and initiative? This factor considers special business skills and judgment in moving the business forward, rather than technical skills in performing the work.
  5. Is the relationship between the worker and the employer permanent or indefinite? The more permanent the job, the more likely the worker is truly an employee.
  6. What is the nature and degree of the employer’s control? Again, the DOL guidance de-emphasizes the importance of this factor, explaining that this should not be given undue weight. However, the amount of control an employer has over a worker helps determine if the worker is truly in business for himself or not.

It is clear from the guidance that DOL views most workers as employees; therefore, the classification of independent contractors should be used sparingly. You should review all of your independent contractors in light of this guidance to make sure they are properly classified because a finding of misclassification can result in significant liability for unpaid overtime, unemployment and worker’s compensation insurance premiums, as well as other potential statutory penalties and liabilities.

You can read the full guidance, with examples of each factor, here: http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf