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Misclassification of Workers - Proskauer Rose LLP

Misclassification of Workers - Proskauer Rose LLP

© 2010

© 2010 Proskauer Rose LLP 2. Additionally, those companies do not have to pay and withhold payroll taxes that they would otherwise be required to pay and withhold under the Federal Insurance Contributions Act (“FICA”). 3. With respect to tax-qualified pension plans (such as 401(k) plans, defined contribution plans, and defined benefits plans), an employer may only maintain a tax-qualified plan for the exclusive benefit of its employees. Independent contractors are not eligible to participate in such tax-qualified pension plans. Thus, an employer can realize significant savings related to employee benefits by classifying workers as independent contractors, rather than as employees. B. ANTI-DISCRIMINATION LAWS AND OTHER EMPLOYEE RIGHTS 1. Independent contractors are not covered by many of the labor laws that protect employees. For example, they are exempt from minimum wage and overtime protections, as well as from most discrimination and occupational safety laws. Additionally, independent contractors do not have a right to unionize. C.C. Eastern, Inc. v. N.L.R.B., 60 F.3d 855, 857- 858 (D.C. Cir. 1995) (holding that the jurisdiction of the NLRB extends only to the relationship between an employer and its “employees”; it does not encompass the relationship between a company and its “independent contractors” and therefore characterization of a group of workers as “independent contractors” is dispositive as to whether they may elect a bargaining representative). In short, those who are misclassified as independent contractors are deprived of many, if not most, of the protections to which they would be entitled if they were properly classified as employees. 2. Under federal law – and to a large extent, under state laws as well – independent contractors have modest protection against discrimination in the workplace. For example, the principal federal anti-discrimination statute, Title VII, expressly excludes independent contractors from its protections. See Brown v. J. Kaz, Inc., 581 F.3d 175, 181 (3d Cir. 2009). 3. Depending on the statute and/or the jurisdiction, independent contractors may be covered under certain anti-discrimination or employment rights law. Recently, the New Jersey Appellate Division ruled that an independent contractor could proceed with a sexual harassment lawsuit under the New Jersey Law Against Discrimination. See Hoag v. Brown, 397 N.J.Super. 34 (App. Div. 2007). 6 6 In that case, Hoag, a female social worker, was employed by Correctional Medical Services Inc. (“CMS”), which provided mental health services for state prison inmates. The New Jersey Department of Corrections (“DOC”) is required to care for the health of state-sentenced inmates housed in New Jersey’s correctional system. As part of a privatization of its inmate health care system, the DOC contracted with CMS to provide psychological counseling services to inmates. While working at one of the DOC’s prisons, Hoag alleged that a corrections officer threatened, physically abused and sexually harassed her on a daily basis. She sued under the NJLAD. Id. at 43. A trial court dismissed Hoag’s LAD claim, stating that there was no employer/employee relationship between her and the DOC. However, after interpreting the language of the LAD statute, as well as cases involving employer liability under the

© 2010 Proskauer Rose LLP 4. This general lack of protection contrasts sharply with employees (and even, to some extent, potential employees such as applicants) who are covered by federal and state non-discrimination laws. C. OTHER EMPLOYMENT-RELATED LIABILITIES 1. The distinction between employees and independent contractors has significance for an employer’s liability exposure arising from the actions of such workers. 2. Under the theory of respondeat superior, an employer is vicariously liable to third-parties for its employees’ actions or omissions because such conduct is imputed to their employer – as long as the employee is acting within the scope of his or her employment. In this regard, employees present another “liablity” for employers to consider. III. SURVEY OF FEDERAL LAWS – INDEPENDENT CONTRACTOR OR EMPLOYEE? Workers are generally considered employees when someone else controls how and when they perform their work. In contrast, independent contractors are generally in business for themselves, obtain customers on their own, and control when and how they perform their services. The following “tests” offer guidance on how to make the distinction. A. “RIGHT TO CONTROL” TEST Under the “right to control” test, if the employer controls both the result of the job and the manner and means of accomplishing it, the worker is an employee. 1. Background a. Under common law agency principles, an independent contractor/employee inquiry focuses on the “right to control.” The “right to control” test requires an evaluation of all the circumstances surrounding the relationship between the company and the worker, and depends upon a number of factors, none of which is dispositive. b. Control of the Result and the “Manner and Means” Conscientious Employee Protection Act, N.J.S.A. 34:19-1 to -8, the New Jersey Appellate Division reversed and held that an independent contractor can be considered an employee under LAD. Id. at 47-52. In so holding, the Appellate Division found that the state had substantial control over Hoag’s employment – the DOC provided orientation and training sessions for workers; it had the ultimate right to approve the dismissal of CMS personnel; and the DOC monitored daily work and provided daily supervision. Id. at 48-49. The court also found that Hoag’s job duties required close daily interaction with other DOC employees and the DOC provided the workplace and all the office supplies and equipment. Id. at 50. Perhaps most important, the court found that Hoag’s employment was fully integrated into the DOC’s business – she was a necessary part of the counseling program that the DOC was constitutionally mandated to provide and her daily activities were controlled and monitored by the DOC. Id. at 51. Because of all those factors, the Appellate Division concluded that, for purposes of invoking the protections under the LAD, Hoag was an “employee.” Id. at 53.

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