One of the regulatory and compliance traps faced by unwary small business owners is misclassification of workers. This issue is of keen interest to the state and federal government, not only because workers can lose out on employee protections such as minimum wage, overtime and unemployment insurance, but because the government loses tax, unemployment and workers compensation revenue streams.
Misclassification issues have become increasingly pertinent as work situations change and become more flexible, including due to the so-called, “gig economy.” These issues can also be politically charged, as we have seen in litigation involving both Uber and Lyft.
In the event a worker is deemed to have been misclassified as an independent contractor, a business can face significant exposure including back-pay, penalties and unemployment insurance compensation.
Federal and state laws create a confusing patchwork of considerations a business must consider in properly classifying workers.
Very generally, an “employer” is one who controls how work is done, the means for getting work done, and results. The New York Department of Labor focuses on supervision, direction and control based on numerous factors that can require a very granular analysis (e.g., the worker’s use of business cards, scheduling issues, and negotiation of pay rate).
Exerting control over, or supervising how, when and where services are provided, the equipment and tolls used, reporting, work schedules are all indicia of an employment relationship. On the contrary, to be considered an independent contractor, an individual must be free from supervision, control and direction about how to perform work. Independent contractor status is more likely where the person doing the work has his or her own business entity, sets schedules, and can accept or refuse work.
Business must also keep in mind that any labels, and their description of a working relationship, do not matter in the misclassification setting; for instance, there is no presumption or safe harbor created by virtue of issuing a 1099 as opposed to a W-2 form.
The law facing all businesses using independent contractors is complex and evolving. When there are violations, lawyers and regulators can create significant and costly problems for business including fines, back-pay, penalties and, possibly, lawsuits. Further, in New York any freelance or contract relationship may be governed by the “Freelance Isn’t Free Act, which imposes requirements on contractor relationships including a written contract and timely payments.
Any business hiring workers should consider consulting with counsel to mitigate risk associated with misclassification claims.
This content is provided as background and does not constitute legal advice. For more information or to schedule a free consultation, contact us at info@lalorattorneys.com / 646.818.9870.
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