More Pitfalls for Misclassifying Employees

More Pitfalls for Misclassifying Employees

The National Labor Relations Board (“Board”) recently created another potential pitfall for employers who misclassify employees as independent contractors.  Most employers know that, if they misclassify an employee as an independent contractor, they may be subjected to fines, penalties and other types of liability.  Such employers also can be sued by the misclassified employee and potentially liable for unpaid overtime wages (among other things).  Additionally, taxing authorities may seek from the employer withholdings that should have been, but were not, applied.

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Previously it was not so clear that such misclassifications might also subject employers to exposure under the National Labor Relations Act (“Act”).  However, on August 26, 2016, the Board’s General Counsel issued an advice memorandum directing that such misclassifications also could be treated as a violation of the Act.  In so doing, the Board’s General Counsel has taken the position that misinforming employees they are independent contractors may amount to an interference with the rights of employees to organize a union and engage in concerted activities under the Act.  At the same time, the advice memorandum acknowledges that the Board “has never held that an employer’s misclassification of statutory employees as independent contractors in itself” is a violation of the Act, yet it cites “several lines of Board decisions that support such a finding.”

There are many legitimate reasons why employers may prefer to engage independent contractors to perform various tasks instead of hiring employees to carry out such functions.  But the motivation for such a decision is not the key in determining whether a misclassification has occurred.  Instead, there are various tests that are used to determine whether someone who provides labor or services to an employer for compensation is an employee or an independent contractor.  If those tests indicate that the employer exerted a sufficient level of control over the individual in question in the performance of tasks, that individual may be considered an employee rather than an independent contractor under the law.

The Board’s recent advice memorandum involves a trucking company that employed drivers and also used independent contractors to provide comparable services.  The memorandum focuses on the following circumstances:  The employer entered agreements that gave the would-be independent-contractor drivers a measure of independence.  For example, unlike employees, the independent-contractor drivers used their own vehicles or rented vehicles from the employer to carry out the deliveries.  Those drivers were required to maintain insurance on the vehicles.  Those would-be independent contractors also could accept or reject any load, and they were compensated by the load and not by the hour.

However, the employer did not entirely abide by those terms; instead, the employer directed the manner of performance of the drivers.  For instance, the independent-contractor drivers who were offered and rejected a load were subsequently passed over by the employer for other loads.  At the same time, the employer’s schedule practically prevented those drivers from hauling loads for other carriers.  Additionally, even though the contract required those drivers to maintain the insurance on the vehicles that they provided or rented, the employer maintained the insurance on the trucks it rented to the drivers.

Making matters worse, the employer distributed to the drivers an employee handbook that outlined performance expectations and the types of discipline that could result if they failed to meet expectations.  In view of those circumstances, and in light of the actual day-to-day control the employer exercised over the drivers, and because the employer exerted more control over those putative independent contractors than what was spelled out in the agreement between them, the Board’s General Counsel concluded the drivers in question were in fact employees under the Act.

Perhaps most critically, the employer insisted that the drivers in question were independent contractors even after the Board had determined they were not.  The Board’s General Counsel seemed especially troubled by the fact that the employer sent a memo to drivers stating that “only ‘employees (not owner operators or independent contractors) have the right to form a union.’”  According to the advice memorandum, this was “tantamount to the Employer telling its employees that they engage in … [union] activities at the risk of losing their jobs.”  Ultimately, the advice memorandum found that the “Employer’s misclassification of its employees as independent contractors acts to interfere and restrain its employees in the exercise of their … rights” under the Act.

This new advice memorandum provides even more incentive for employers to exercise caution when deciding whether to classify individuals who provide labor or services to them as employees or independent contractors.  Indeed, the probability of persuading a government agency that the individual in question functioned as an actual independent contractor is often quite low, while the potential adverse consequences that may result from a misclassification are substantial.

The takeaway from this development is that it is vital for employers to have an agreement like the one described in the advice memorandum, but such agreements are not bullet-proof.  Beyond having such an agreement, employers need to be vigilant in ensuring that the terms of such agreements are not violated.  Likewise, it is critical for employers to take steps to ensure that managers and supervisors avoid exerting an undue amount of control over the independent-contractor’s tasks.  When it is necessary to exercise any significant control over the day-to-day tasks of would-be independent contractors, it is wise to consult with legal counsel to determine whether it would be advisable to classify such individuals as employees and thereby reduce potential risk of exposure to substantial liability.

Contributor: Brendan J. Begley, Attorney at Law | Weintraub Tobin