Contractor or Employee?

Misclassifying workers puts companies at risk of penalties, fines and even criminal charges
Matt Johnson
November 21, 2019
COMMERCIAL, RETAIL, FABRICATION : LEGAL

contract worker or employee?

There is a battle in most states these days regarding how to define when an independent contractor is actually an employee. It is a battle that involves politics, legislatures and voters. And for companies misclassifying workers there are real risks of penalties, fines and even criminal charges.

Two perspectives on this battle can be seen in California and Arkansas. In 2019 each state passed legislation designed to modify their labor and employment statutes to define the classification of when independent contractors are actually employees. Each state took a different approach.

California AB 5 was enacted in September of 2019. The legislation overruled a decision from the California Supreme Court and reinstated a flexible standard for general determinations of employee-status and then carved out specific occupations from its application. Perhaps more notably, the new legislation now allows the state itself to sue companies for misclassifying workers and requires hirers to prove that a worker is an independent contractor.

Arkansas enacted HB 1850 in March of 2019. This legislation adopts a set of criteria used by the Internal Revenue Service when evaluating alleged misclassification in connection with Social Security and Medicare taxes. These criteria establish more rigid thresholds to be met and leave less room for interpreting the particulars of job duties. Arkansas also left the burden with the worker to prove misclassification. Over the last few years states like Florida, Indiana, Iowa and Tennessee have taken similar, but not identical, approaches to Arkansas.

The approaches to addressing labor classifications may differ, but the consequences of misclassification are serious regardless of location. When an employee has been improperly defined as an independent contractor, the hirer has avoided withholding taxes and possibly providing for required compensation. This can result in local and federal fines, penalties, and wage and taxation claims. Equally, fines related to I-9, employment eligibility and Homeland Security qualifications can arise. Intentional misclassification can even lead to criminal charges. Class action litigation for affected employees is also a real risk. 

One source of the more recent battle over employment classification is “gig-economy” workers; i.e., individuals providing on-demand labor coordinated by a singular entity such as Uber, Lyft or GrubHub. But the glass industry is not immune. We tend to see these issues arise more in connection with captive subcontractors, jumbo piece movers, and even office overhead, such as janitorial, maintenance and upkeep contractors. So, what can be done?

Learn the standards

Education is a first step. The different approaches taken by California and Arkansas mean that location dictates the legal standards and burdens. California’s more flexible standards and requirements that an employer prove a worker is not an employee needs more documentation and support than the requirements imposed by Arkansas. Learning and understanding the rules is essential to proper risk management. Resources for this information are usually available from state labor boards.

Mitigate the risk

Once the standards are known, take steps to address the risk. A good start might be defining those roles within a company’s expertise and those where others must be brought in. This process can help identify essential work performed by others and allow a review of the arrangements by which that work is provided. Contracting for specific scopes of work and documenting the means by which it is performed can help address uncertainty regarding both employment status and the nature of work to be done by independent contractors.

Get involved

Finally, if necessary, advocate for change. Look at California. Companies like Uber, Lyft and GrubHub have pledged millions of dollars to take the battle over worker classification to the voters and try to repeal the legislation through voter initiatives. And while that kind of commitment might be beyond most companies, stay engaged with industry groups like the National Glass Association to stay educated and active in the issues essential to the industry. 

Matt Johnson is a member of The Gary Law Group, a Portland-based firm specializing in legal and risk issues facing manufacturers of glazing products. He can be reached at matt@prgarylaw.com.