Independent Contractor Liability Exposure

Despite rapid growth, the gig economy continues to confound businesses and courts alike. An April 2015 study by the U.S. Government Accountability found that 40.4% of the country’s jobs are contingent—up 10% since 2005. Now, just a year after Lyft paid a $27 million dollar settlement to address potential employee misclassification, a court in Philadelphia ruled that, under Federal and Pennsylvania state law, Uber limousine drivers were properly classified as independent contractors (and not as employees).  Two similar businesses with two very different outcomes. How can you deal with the risks created by this uncertainty?

More often than not, I encounter businesses that misclassify employees as independent contractors because they don’t understand the law.  This confusion is normal, but businesses that misclassify employees face stiff penalties and consequences. An employer who misclassifies an independent contractor can be subject to past unemployment insurance, workers’ compensation premiums, back taxes, and employee pay for unpaid overtime wages and holidays.

The good news is that these issues can be addressed easily.

·         Get the right advice.  Restructuring, implementing valid independent contractor agreements, and reclassifying employees are all tasks that seem insurmountable, or feel like a waste of time given the risk/reward payoff, but are more readily achievable than you might think. Employment law is a specialty with its own set of nuances, so have someone well versed in employment contracts review your existing independent contractor agreements for language that indicates an employment relationship. 

·         Get counsel who understands your business.  While many attorneys are risk averse and will lean towards classifying the worker as an employee, a business focused attorney with employment law experience is likely to understand the business benefits of an independent contractor and help you mitigate risks through the steps outlined below. This is working for Uber!

·         Outline the policies and procedures you have in place with independent contractors and compare those to the equivalent policies and procedures for employees.  If there are more similarities than differences, these need to be modified through documentation and practice. 

·         Implement a strong independent contractor agreement that clearly establishes boundaries between an employee and an independent contractor.  These can vary by state.

·         Reclassify employees if necessary.  This can be a touchy subject as neither side enjoys conversations about changes to a work relationship (unless it’s about a raise!). So, ensure that there are witnesses present and the documentation presented and signed is clear and concise.

Independent contractors can be a wonderful and profitable way to supplement a business in any state.  However, the risks of misclassifying independent contractors should always be mitigated with the proper safeguards for the company, including independent contractor agreements and consistent practices. If steps are not taken to minimize risk exposure simple misclassification can lead to financial ruin through penalties and back payments.