The Internal Revenue Service (IRS) estimates that American employers intentionally misclassify millions of workers as independent contractors to reduce labor costs and avoid paying state and federal taxes.
Employee misclassification allows large corporations can save on the bottom line, but at the expense of workers. Misclassified employees lose workplace protections, including the right to join a union, face an increased tax burden, receive no overtime pay, and are often ineligible for unemployment insurance and disability compensation.
According to a 2012 study by the National Employment Law Project, there were an estimated 368,685 misclassified workers in Illinois, 704,785 in New York, and up to 459,000 in Ohio.
Joe Lyon is a highly rated Ohio lawyer representing plaintiffs nationwide in a wide variety of labor disputes.
An independent contractor provides a good or service to another individual or business, often under the terms of a contract that dictates the work outcome, but the contractor retains control over how they provide the good or service. The independent contractor is not subject to the employer’s control or guidance except as designated in a mutually binding agreement. Essentially, independent contractors treat their employers more like customers or clients, often have multiple clients, and are self-employed.
A worker’s status is generally determined by whether the individual is economically dependent on the business he or she is working for, or is actually in a business for themselves. Some basic questions can be asked to make a determination as an employment status:
• Does the company control what a worker does or how a worker performs duties?
• Are financial aspects of the work, such method of payment and reimbursement of expenses, controlled by the worker or the company?
• Is there a written contract?
• Does the worker receive employee-type benefits, such as a pension plan, insurance, or vacation pay?
There are several reasons an employer might consider misclassifying workers, the most pertinent of which are outlined below:
• Misclassifying employees as independent contractors can free employers from providing a minimum wage, and abiding by hour laws.
• Tax savings: Employers are not required to pay Social Security and unemployment insurance (UI) taxes for independent contractors. These tax savings, as well as savings from income and Medicare taxes can save employers between 20 to 40 percent on labor costs.
• Employers may avoid laws enforced by the Equal Employment Opportunity Commission (EEOC).
• Employers can avoid union organization. Independent contractors are not covered by the National Labor Relations Act.
• Employers save money on company provided benefits as independent contractors are usually not permitted to enroll in employer-based health and pension plans.
• Employers may avoid having to verify that workers are U.S. citizens or covered by a work visa, and exploit low-wage immigrant workers with few legal repercussions.
In June, 2016, FedEx Ground Package System Inc. agreed to pay drivers in 20 states $240 million to settle lawsuits claiming the company misclassified them as independent contractors. FedEx saved on taxes, fringe benefits, health care costs, and pensions. Estimates suggest that FedEx cuts its labor costs by as much as 40 percent by misclassifying the drivers.
The drivers claimed that as employees they were owed overtime pay and reimbursement for expenses, among other benefits. The settlement is meant to be divided among 12,000 drivers, some of whom are owed tens of thousands of dollars.
Both Lyft and Uber are facing separate employee misclassification lawsuits, brought on behalf of drivers who contend they are entitled to reimbursement for expenses including gas and vehicle maintenance. The drivers currently pay those costs themselves.
In April 2016, Uber decided to settle a class action lawsuit for brought against it by drivers in California and Massachusetts for $100 million. The independent contractor dispute has not been resolved, however, as a judge has ruled that the settlement is significantly lower than the actual value of the case.
Earlier in the year, Lyft agreed to settle a similar class action lawsuit in California by giving drivers additional workplace protections but without classifying them as employees. The settlement agreement provides for Lyft to pay $12.25 million, though is also being reconsidered by the courts.
In April, 2015, the Department of Labor announced that it recovered $700,000 in back wages, damages, and penalties for over 1,000 misclassified construction industry workers in Utah and Arizona.
In September, 2014, a California court ruled that The Sacramento Bee misclassified over 5,000 newspaper carriers as independent contractors.
According to Department of Labor statistics, the most commonly misclassified workers include the following:
• Construction workers
• Stocking vendors
• Maintenance workers
• Food processing plant workers
• Dental assistants
• Nail salon techs
• Pharmaceutical sales reps
Workers who are misclassified are taken advantage of in several ways. Some of the costs of being misclassified as an independent contractor may include the following:
• Missing out on compensation insurance, pensions, and medical benefits
• No meal and rest breaks required by law
• No required medical and pregnancy leave
• No protection by the anti-discrimination and anti-harassment laws. Only employees have “whistleblower” protections against retaliation
• No guarantee of continuing employment on return from a medical leave
• Exclusion from participation in profit sharing or stock options
• No reimbursement of your actual expenses associated with the employment
• You may be liable in a lawsuit for personal liability because you caused injury to a third-party during the performance of your so-called “independent contractor” duties
If you think you may be misclassified as an independent contractor and have questions about the legal options available, contact The Lyon Firm (800) 513-2403. You will speak directly with Mr. Lyon, and he will help you answer these critical questions.