Misinformation about Independent Contractor Misclassification

A year and a half ago today, my blog post was titled, “How to Make Sense Out of All Those Alerts About IC Misclassification.”  I noted that, on a daily basis, I see an array of articles by lawyers warning businesses of impending doom if they continue to use independent contractors, and consultants offering quick and guaranteed solutions to the misclassification dilemma.  What I also see all too frequently is IC misinformation.

Take for example an article published by a legal commentator recently that asked the question, how long should a company keep an independent contractor (IC)?  The answer given was that six months is usually recommended as a safe duration and one-year should usually be considered an outside limit, “assuming that the other IC criteria are met.” The commentator added that every extra month the contracting relationship is extended, the worker starts to look more and more like a W-2 employee.

If, however, the other IC criteria are truly met, then why would a company wish to impose on itself a limit on the length of time that the IC should be retained?  Indeed, I am unaware of any per se rule that limits a genuine IC to working for only six months as an IC with a particular company.  If a business has retained an IC that meets the applicable IC criteria, then the business should be legally free to continue its IC relationship indefinitely.

As a practical matter, though, there are few ICs who meet all IC criteria if one is using the multi-factor common law IC test. That test considers and weighs all facts that are indicators of IC status against all facts that are indicator of employee status.  

One should not limit the examination of an IC’s status to the common law test, however, because some federal laws, as well as an array of state laws, do not use that test.  The economic reality test under the federal wage and hour law is different to an important degree than the common law test used under the federal tax and employee benefits laws.  Further, some states have their own statutes defining employees or ICs.  Sometimes a state law test includes the common law test as part of a multi-step “ABC” or other statutory test.  A process such as IC Diagnostics™ (see link on Resources page) takes into account these varied state law tests for IC status.

If all of the IC criteria are not met and the worker falls into the “grey area,” then limiting a company’s retention of the IC to six months or less than one year is not a bad rule of thumb, not only from an employee benefits standpoint but also from the employment and tax law perspectives.  But if workers fall within the proverbial grey area, there is a better approach than simply curtailing the use of the ICs.  Rather, there are proactive steps that can and should be taken to enhance IC compliance before some state or federal agencies or plaintiffs’ class action lawyers make their assessment of the company’s level of IC compliance.

Wherever a worker falls on an IC compliance scale, companies can and should consider taking steps to re-structure, re-engineer, re-document and re-implement the IC relationship in a manner that enhances compliance with applicable IC laws. Alternatively, other IC compliance options can be considered, such as re-classification or use of a workforce management company. IC compliance is not a static matter, and taking steps that are well-designed, fully informed, and state-of-the-art can oftentimes reduce or eliminate IC misclassification liability.

Your comments are invited.

Written by Richard Reibstein.

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