New Hires: Are They Employees Or Independent Contractors?

A recent California Supreme Court decision is causing a stir among gig-economy employers. Changes in the way that state draws the line between employees and independent contractors may affect the bottom line of companies that rely on the lower overhead that comes with contracted workers. Will those changes affect Michigan-based businesses? What are the rules for whether new hires count as employees or independent contractors?

Are Delivery Drivers Employees Or Independent Contractors?

The distinction between employees and independent contractors is a fine line. Workers want to be classified as employees to gain tax benefits and the protection of federal and state employment laws. Employers prefer independent contractors, which minimize their tax burden, and avoid state and federal regulations.

In 2004, a California delivery company restructured its business. Delivery drivers were reclassified as independent contractors instead of employees. Certain responsibilities were shifted to the drivers, while the company maintained significant control over the operation of the business. The drivers sued, claiming they should still be considered employees for California wage and hour laws to apply.

California Court Makes Big Changes In Employment Law

The court held that the appropriate rule defined “employ” as:

• “To exercise control over the wages, hours, or working conditions, or
• To suffer or permit to work, or
• To engage, thereby creating a common law employment relationship.”

The “suffer or permit to work” definition was broad enough to apply to all workers brought on to do the work of the company. Determining this depended on the ABC test:

1. That the worker controls the performance of the work, both according to the contract and in fact,
2. That the work done is outside the company’s normal course of business, and
3. That the worker works in an independently established trade, occupation, or business doing the work provided to the company.

The California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court does not apply in Michigan. However, for companies doing business nationwide, including gig-economy giants like Uber, the decision has far-reaching implications. As more workers fall into the employee category it could affect the bottom line of companies that rely on an independent contract model to keep employee costs down.

Michigan Workers: Are They Employees Or Independent Contractors?

Michigan employment law follows much the same standard. For state law purposes, independent contractors should:

• Work on their own time
• Decide how the work is performed
• Use their own materials or facilities
• Work with multiple companies
• Work for a defined period of time

If a company has control over how people do their work, provides the equipment and supplies, and requires full-time or exclusive commitment to the project, that worker is probably an employee.

IRS 20-Factor Test For Employer-Paid Taxes

One of the main benefits of independent contractors is that the employer is not responsible for workers’ compensation insurance and certain other taxes. Knowing ahead of time whether an employer will be responsible for those costs is important to avoid fines, penalties, and interest in the future. The IRS has a three-part test, including a total of 20 factors to determine if workers are employees or independent contractors:

• Behavior control: evaluating who controls what the worker does and how, by considering
  • Type of instruction
  • Degree of instruction
  • Evaluation systems
  • Training
• Financial control: evaluating who controls the business aspects of the work, by considering
  • Significant investment
  • Unreimbursed expenses
  • Profit and loss opportunities
  • Services within the market
  • Payment method
• Relationship of the parties: evaluating how the parties perceive their relationship, by considering
  • Presence of written contracts
  • Employee benefits
  • Permanency of the relationship
  • Whether the services provided are a key activity of the business.

All three tests: the ABC test, the Michigan test, and the IRS test, focus on similar conduct. However, subtle differences between the standards could mean that a 1099 independent contractor is still treated as an employee when it comes to employment laws or even vicarious liability of a business over its employees.  If your business relies on contract workers to make your business run, be certain you speak to an employment attorney who can help structure their work and keep you away from the thin line between employees and independent contractors.

Contact Experienced Bloomfield Hills Business Attorneys Today

The Cronin Law Firm has experienced attorneys to aid with whatever legal issue you’re facing. If you are an employer hiring independent contractors, contact The Cronin Law Firm today to schedule a consultation.