CWS 3.0: March 1, 2011 - Vol. 3.6

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Legal Eagle: Tightening IC Rules

Independent contractor classification remains a priority for companies and legislators alike. Companies are facing increasing scrutiny from government auditors, while state legislators are looking for ways to tighten up legal definitions pertaining to IC classification. 

Court Rulings

Various courts have made rulings in recent months regarding specific classifications. Legal Eagle reported last month on such rulings involving FedEx drivers. Another such case involves drivers for a publishing company. The Wisconsin Court of Appeals in December upheld a ruling that a group of delivery drivers for a rental property magazine publisher were properly classified as employees for state unemployment tax purposes. Start Renting Inc. had appealed the classification ruling of The Wisconsin Labor and Industry Review Commission, which was made following an audit of Start Renting by the Unemployment Insurance Division of the Wisconsin Department of Workforce Development. 

In its ruling, The Wisconsin Labor and Industry Review Commission (LIRC) had found only two drivers had been properly classified as independent contractors. The LIRC had found the other 34 workers to be Start Renting employees.

The drivers delivered Start Renting's magazine and a number of other publications throughout the week and were responsible for specific routes, used their own vehicles, and were paid "per drop." 

The Court noted that determining classification for unemployment compensation purposes requires a two-step analysis -- 1. Did the workers perform the services for pay? That step was easily met here (as it would be in most cases); and 2. Are the individuals exempt under a Wisconsin statute? This step was more complex. To meet it, seven of 10 statutory conditions must have been met in order for the drivers to be classified as independent contractors. The court found that the following five conditions were not met:

1. The drivers must "maintain a separate business" with the features of an actual business, which the statute defines as owning and maintaining an office and materials which are typical indicators of an existing business.

2. The workers must "control the means and methods" of the work performed under "contracts to perform specific services for specific amounts of money." This condition requires proof of more than one contract, the court said, which may take the form of multiple contracts with separate entities, or multiple contracts with the putative employer if the contracts were negotiated at arm's-length, with terms that will vary over time. Only two of the drivers met this condition. 

3. The workers must be paid on a commission, per-job, or competitive-bid basis. The court found that payment per-drop was more akin to payment on a piecework basis than payment on a per-job basis. 

4. "The fortunes of the worker's business hinge on business receipts and expenditures." Start Renting failed to cite any evidence showing that the drivers assumed the type of entrepreneurial risk the statute requires. 

5. The workers must have "recurring business liabilities or obligations." The vehicles being used were the drivers' private cars as well as business vehicles, and Start Renting failed to adequately distinguish these expenses as "business liabilities or obligations," the court determined. 

New Legislation

Meanwhile, legislators in Connecticut are introducing legislation to address IC classification in that state. The General Assembly introduced a bill in January that seeks to clarify the definition of independent contractor in the state. 

Under current law, to be considered an independent contractor in Connecticut, an individual must meet three criteria: A) The worker must be free from direction and control in the performance of the service both under the contract of hire and in fact; and B) the worker's services must be performed: either (a) outside the usual course of the employer's business or (b) outside all of the employer's places of business and C) the worker must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service being provided. 

The bill, S.B. 678, would change the definition of independent contractor to specifically "exclude any individual that is paid hourly, whose tools are provided by the person paying the worker, or who otherwise acts at the specific direction of the payor." The bill does not have a proposed effective date at this time. 

If anything, companies should note that court decisions have hinged on specific details within state statutes, and that these can vary considerably. Companies should seek experienced council when developing contracts for or engaging independent contractors. Courts will examine contracts and methods of work closely when considering individual cases, as would state auditors.

Disclaimer.This is not legal advice. Please consult with your attorney or legal counsel before making any decisions on these issues.

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