Independent Contractor Or Employee – Revisiting The Distinction In Light Of Rising Incentives To Misclassify Workers

Christopher Haugen

By Christopher J. Haugen

“With certain new worker protections already in place, and with a clear trend toward increasing those protections, the appeal to classify workers as independent contractors undoubtedly increases.”

When employers hire an individual to do a job, the employer is faced with a decision about how to classify the worker; are they an independent contractor or an employee? When an employer classifies a worker as an independent contractor, the worker is not entitled to receive certain workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. This creates an incentive for employers to classify workers as independent contractors when possible.

LITIGATION AND GOVERNMENT ENFORCEMENT ACTIONS ON THE RISE RELATED TO MISCLASSIFICATION OF WORKERS AS INDEPENDENT CONTRACTORS

In recent years, there has been a spike in the amount of private litigation, government enforcement actions, and government oversight related to the misclassification of employees as independent contractors. In 2015, investigations by the wage and hour division of the U.S. Department of Labor (DOL), resulted in more than $74 million in back wages for more than 102,000 workers. There have also been a number of well-publicized lawsuits, including the California class action related to Uber drivers that survived summary judgment.

ADDED INCENTIVES TO CLASSIFY WORKERS AS INDEPENDENT CONTRACTORS

At the same time, private litigation and government oversight related to the misclassification of workers as independent contractors is on the rise, worker protections and benefits are also on the rise. In May 2016, the DOL issued a new rule updating overtime regulations, which would automatically extend overtime pay protections to over 4 million workers within the first year of implementation. The key provision of the new rule raises the threshold for overtime eligibility from $455 per week to $913 per week. The new rule was set to take effect Dec. 1, 2016, but a federal court in Texas issued a preliminary injunction blocking its application Nov. 22, 2016. On Dec. 1, the Department of Justice (DOJ) filed a notice of appeal related to this decision and sought expedited review by the Fifth Circuit Court of Appeals. In addition to the new federal overtime rules, Minnesota increased its minimum wage applicable to large and small employers Aug. 1, 2016. Starting in 2018, Minnesota’s minimum wage will begin to rise annually to match inflation. Moreover, in 2016, the city of Minneapolis attempted to raise its minimum wage to $15.00 per hour through a ballot measure, but that attempt was blocked by the Minnesota Supreme Court in August.

With certain new worker protections already in place, and with a clear trend toward increasing those protections, the appeal of classifying workers as independent contractors undoubtedly increases. However, as discussed above, with private litigation and government actions and oversight against employers that misclassify their workers as independent contractors on the rise, any decision to classify a worker as an independent contractor should be carefully reviewed in light of the applicable standards.

A REFRESHER ON THE STANDARD FOR DETERMINING WHETHER A WORKER IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR

Unfortunately, determinations of whether a worker is an independent contractor or an employee, are often murky and involve fact-specific inquiries. That being said, Minnesota uses a five factor test to determine whether a worker is an employee or an independent contractor:

1. The right to control the means and manner of performance.

2. The mode of payment.

3. The furnishing of material or tools.

4. The control of the premises where the work is done.

5. The right of the employer to discharge.

Of these five factors, the two most important are the right, or the lack of the right, to control the means and manner of performance, and the right or the lack of the right, to discharge the worker without incurring liability.

There are a number of factors the courts look at to make determinations under each of these prongs, but they are too numerous to list here. Certain statues can also have an impact on whether an employee is considered an independent contractor or an employee, such as the statute relating to commercial and residential building contractors. It is also important to realize that different states and federal agencies can have different variations of these factors. For example, the factors the Internal Revenue Service (IRS) looks at might be different from the factors the Equal Employment Opportunity Commission (EEOC) considers. The FLSA has used what has been deemed the economic realities test, which is different that the common law control test, of which many states, including Minnesota use a variation. This patchwork of tests for determining whether to classify a worker as an employee or an independent contractor can be daunting. In light of the increased scrutiny these issues are receiving in recent years, it would be wise for any employer tempted to classify workers as independent contractors to seek legal advice before making such a classification.


Christopher J. Haugen is a trial attorney with Anthony Ostlund Baer & Louwagie P.A., a business litigation boutique in Minneapolis. Chris litigates a wide variety of business disputes including shareholder disputes, intellectual property, employment, contract, and other business torts. He has experience in all phases of litigation and has obtained favorable results on behalf of clients in state and federal court. Visit www.anthonyostlund.com/christopher-j-haugen or email chaugen@anthonyostlund.com for more information.