In the Trenches: Employees or independent contractors - Can Acme's HR department tell the difference?

Jan. 6, 2014
In this edition of In the Trenches, Acme wonders if its plan to turn its workforce into independent contractors is foolhardy or foolproof.

Ronda Show, Acme’s plant operations manager, wanted to add a third shift on the line in order to boost production of Acme’s Widget Supreme. The product is in high demand during the fall months, and she knew that the more product she can push off the line, the more orders the reps would get. But she doubted the higher-ups would sign off on the increased headcount, particularly while they were in a rising panic over benefits costs with Obamacare around the corner.

Ronda was lamenting her plight one day at lunch with Ted Techie, who works in IT. “Why not just hire independent contractors?” Ted suggested. “We use contractors all the time when we’re testing software upgrades. You don’t have to worry about payroll taxes, healthcare benefits, or figuring out how to unload them when they’ve worn out their welcome. Plus, it’s a heck of a lot easier to get a labor service requisition cleared through purchasing than a new employee request approved by HR.”

“Why hadn’t I thought of that?” Ronda asked herself, certain that she had solved her problem. She rushed back to her office and started the process of requisitioning eight independent contractors to staff the late shift. It was an easy task to fill the positions; they weren’t high-skilled jobs. Although there are typically 10 workers on the line, since the night shift crew comprised independent contractors and not “employees,” Ronda could have them work overtime without having to worry about paying them time-and-a-half. Plus, she didn’t have to factor vacations and sick days into her labor budget either. And she’d have them sign the form Ted gave her to use, confirming they agree to be independent contractors.

Is Ronda’s plan foolproof?

A labor and employment analyst's response:

Hardly. Ronda’s late shift workers are probably not “independent contractors,” no matter what she calls them. And signing a form saying you’re an independent contractor doesn’t make it so.

Ted’s IT professionals may well be bona fide contractors; they likely work on a discrete project, at their own direction, perhaps even off-site. They don’t build Acme’s end product; rather, they service an administrative function of the company. They are in business for themselves, with the full opportunity for profit and loss that such a business entails, and they’re off to the next client once they’ve finished the job. By contrast, Ronda’s late-shift crew is presumably working under close direction, with little independent discretion over how the job gets done, and no doubt tied to a specific production schedule. Moreover, they are producing Acme’s end product — performing work that is the essence of Acme’s business. These aren’t the kind of skilled professionals who extend their services to various clients, working autonomously and independently for a short duration. Rather, they are likely economically independent on Acme as their sole employer. Given these characteristics, a court would almost certainly conclude that Ronda’s workers were Acme employees, entitled to overtime and whatever benefits Acme typically provides its regular workforce.

Ronda is putting Acme on dangerous turf. It’s tough to define independent contractors, and legal liability for getting it wrong can be steep. In May 2013, for example, one company had to fork over nearly $1.1 million to the U.S. Department of Labor for back wages and liquidated damages after misclassifying 77 employees as independent contractors and thereby violating the Fair Labor Standards Act for failing to pay overtime. Given the potential cost of getting it wrong, Acme should have centralized policies in place to ensure that HR — not the purchasing or procurement department — carefully vets any labor requisitions and hiring of contingent staff of any sort. HR should do so in close consultation with Acme’s legal department.

Lisa Milam-Perez, J.D. labor and employment analyst
Wolters Kluwer Law and Business, (773) 866-3908

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