Employee or Independent Contractor?

Category Contention

From Staffing Industry Analysts (SIA), Eric Rumbaugh provides an excellent review of the Dynamex decision in California and terrific updates on other changing tests for employee classification. Eric writes:

Benefits. For the most part, the Employee Retirement Income Security Act of 1974, or ERISA — the main federal law governing employee benefit plans — permits businesses to exclude contingent workers and workers classified as independent contractors from participation in employee benefit plans, even if the workers are misclassified. In addition, a company’s interpretation of any language excluding ICs is likely to be accepted by a reviewing court. ERISA permits the very deferential “arbitrary and capricious” standard of review. In other words, a reviewing court does not determine whether the worker was misclassified. Rather, the reviewing court determines whether the plan administrator was “arbitrary and capricious” in interpreting the exclusion language in an ERISA plan, which is much more difficult to prove for a plaintiff than proving misclassification.

Even when workers are excluded from receiving benefits under an ERISA plan, it is usually necessary to confirm that such exclusions do not violate the rules that govern nondiscrimination. Many benefit plans must be tested to ensure that the benefits and coverage do not disproportionately favor highly compensated employees. To further complicate those matters, certain workers known as “leased employees” need to be included in the testing even though they are not common law employees. Employers often miss counting the leased employees in the nondiscrimination numbers, which can have an unexpected and sometimes problematic impact on the nondiscrimination testing. In short, the nondiscrimination testing area is a potential landmine for any employer with a large contingent workforce.

The best course is to simply review benefit plans and assure that proper worker exclusion and standard of review language is present. Most businesses have already done this. In any case, businesses should periodically review their benefit plans. This is the best defense to unanticipated benefits liability for potentially misclassified workers.

Arbitration. Following the United States Supreme Court decision in Epic Systems, businesses can, in most cases, effectively bar class litigation for employees and putative independent contractors. Arbitration has many shortcomings. Businesses that believe they will get a better result in arbitration, or who believe that arbitration will be more predictable or less expensive than court litigation, are usually wrong. With that said, there is a potential significant advantage in avoiding class litigation. Businesses that have not already done so should consider adopting arbitration agreements with class waivers.

Expenses. Perhaps the easiest thing businesses can do to mitigate the risk of independent contractor misclassification is to discipline themselves to stop reimbursing expenses. This is perhaps the most common IC classification mistake businesses make, and one of the easiest to fix. Independent contractors have opportunity for profit and risk of loss. That is one of the main features of IC status under many tests. In many cases, businesses want to insulate highly sought-after talent from the ups and downs of business.

Reimbursing expenses is one way to do this. In doing so, however, the businesses insulate the workers from some of the very facts that make them independent contractors in the first place. If businesses want to make sure they get the talent they really want, they can increase the pay rate for that talent. Businesses should stop reimbursing expenses for anyone they are serious about treating as independent contractors. There are exceptions to this rule, but the exceptions should be exceptions.

Contract forms and insurance. A contract with an independent contractor is a business-to-business contract, and should borrow from vendor contracts, not employee contracts. One of the ways businesses self-create problems is by beginning IC engagements with employment template documents. Businesses engaging an independent contractor should start with vendor template documents, thus avoiding employment-looking language.

At the same time, however, businesses using vendor contracts as templates will very often run into the problem of standardized terms for required insurance. Independent contractors have expenses. Especially for knowledge workers, who in many cases do not need any equipment or resources to perform a job, coming up with expenses for a putative independent contractor can be difficult; in some cases, they do not have many, if any, expenses, whether they would be classified as employees or independent contractors. Insurance is a legitimate business requirement which can show fixed and recurring expenses for independent contractors.

Waiving insurance requirements can be a mistake. Businesses should be careful not to waive insurance requirements for putative independent contractors without thinking through the consequences of this waiver, especially as applied to the underlying independent contractor status of the workers.

Meanwhile, some insurance requirements make no sense and can chase away talent. In many cases, someone, at some time, spent a lot of time deciding what insurance types and what policy limits to require from vendors. Taking these insurance requirements “off the shelf” can make sense in some cases; but, if it makes sense, this is usually just “luck.” The insurance requirements in a standard template document will often not make any sense as applied to an individual contractor/consultant. A good best practice is to periodically have an insurance broker review insurance requirements for vendors to ensure that the engaging entity is actually asking for insurance coverage, and policy limits, that make sense as applied to work the contractor is doing.

Read the full story at Category Contention – Staffing Industry Review

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