The Economic Policy Institute, a respected nonprofit, nonpartisan think tank, has just released a working paper authored by a respected professor who co-authored a number of early academic studies detailing independent contractor misclassification in two Northeastern states. The working paper, entitled “(In)dependent Contractor Misclassification,” surprisingly contains little more than a restatement of widely acknowledged propositions of the economic and legal aspects of independent contractor misclassification and references to prior studies and reports by federal and state government agencies. The author assails the use of independent contractors, noting that they lack access to workers’ compensation, are not entitled to unemployment, minimum wage or overtime, and pay the full FICA tax. However, the working paper overlooks key conclusions of the recently issued, comprehensive report issued by the U.S. Government Accountability Office (GAO) on the contingent workforce including independent contractors. Two of the empirical findings in that report, as noted in one of my recent blog posts, are that 85% of independent contractors “appeared content with their employment type,” and that significantly more independent contractors (57%) were “very satisfied” with their jobs than those who held standard full-time employment (45%). The working paper also overlooks the recent statement by the Secretary of Labor Thomas Perez that while the use of independent contractors has been abused, “there’s an important place for independent contractors” in our economy.
The working paper repeatedly characterizes independent contractor misclassification as a form of theft and fraud, yet it also acknowledges that one of the causes is “ignorance” of the laws and can be the result of “honest mistakes on the part of businesses.” In addition, the working paper notes that there are a multitude of situations where workers and employers “operat[e] in the gray zone between wage employment and self-employment.”
The author of the working paper advocates an increase in fines for intentional independent contractor misclassification rather than a wholesale change in the legal tests for determining independent contractor status, which, the author notes, differ considerably under various federal and state laws.
Finally, the paper reviews a number of recent court decisions involving independent contractor misclassification. It highlights decisions involving FedEx Ground and other transport companies, citing to one of our blog posts, “Earthquake in the Independent Contractor Misclassification Field: Changed Landscape Following Serious Legal Blow to FedEx Ground by Federal Appellate Court.” Concurring with my view of the impact of the two FedEx decisions we reviewed, the working paper suggests that such recent court decisions “are likely to have ramifications beyond FedEx Ground for company practices in the package delivery and heavy freight shipping industries.”
As I noted in that blog post, those FedEx decisions did not involve intentional misclassification but rather spoke to the consequences of misplaced misclassification. I stated:
“FedEx Ground lost these two decisions because of a misplaced reliance on an IC agreement and its policies and procedures that were good, but by no means good enough. A quick review of the language in the Operating Agreement and the policies and procedures would give one the impression that FedEx knew what to write and how to write it, but close scrutiny by a court found one fallacy after another – sufficient in degree to lead the court to rule against FedEx. By their very nature, therefore, IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”
For those businesses that use independent contractors and wish to comply with the law in a manner recognized by Labor Secretary Perez as legitimate, this new working paper from the Economic Policy Institute merely restates the question faced by such companies – how do we enhance our compliance? – but provides no answers. Businesses that worry about the risks of unintentional independent contractor misclassification are, however, readily able in most situations to minimize their exposure by use of one of three alternatives: (1) restructuring, re-documenting, and re-implementing independent contractor relationships consistent with the applicable tests under federal and state laws; (2) reclassifying independent contractors, either voluntarily or by means of government programs; or (3) redistribution of independent contractors by use of a knowledgeable staffing or workforce management company. Tools by which that can be accomplished are detailed in the 2015 Update of my White Paper on minimizing the risks of independent contractor misclassification.
Written by Richard Reibstein.