Worker ‘Misclassification’ Could Spell Trouble

“Worker misclassification” is the term commonly used by federal and state agencies who believe certain independent contractors should be classified as employees. It has become a high-profile and costly issue for media companies (and others).

From the government’s perspective, employers have been systematically misclassifying workers to avoid taxes and other obligations created by the employment relationship. The federal government’s estimates suggest that worker misclassification is costing state and federal governments billions in unpaid employment taxes each year. To help address the issue, a law proposed by the Obama administration in 2010, the Employee Misclassification Prevention Act, proposed fines of up to $1,100 to $5,000 per worker.

While the new federal law hasn’t been enacted, a number of states, including New York and California, have initiated their own crackdowns. The increase in enforcing employment laws reflects the intersection of dwindling revenues and increases in unemployment insurance claims that has hit most states.

Meanwhile, the use of independent contractors has become increasingly important to many American businesses. According to one recent report, three of four jobs created during the current economic uncertainty have been in the temporary staffing services industry. For startup enterprises, including emerging media practices at traditional media companies, independent contractors are also a means for keeping costs in line with the limited revenues that are likely to be experienced during the initial phase of operation.

The MFM has been working to help members keep up to speed on changes that can affect their use of independent contractors without running afoul of federal and state employment laws. Recently, we asked Nicole Page, a partner at Reavis Parent Lehrer LLP and Michael Zinser, founding partner of The Zinser Law Firm, to provide updates on the latest developments. 

Page and Zinser work with a number of media companies. While their comments aren’t intended to serve as legal counsel, I thought you would find the information they shared helpful to your understanding of the issues involved.

“The common law definition of independent contractor status focuses on ‘the right to control.’ If your company retains only the right to control the end result, then the individual performing the services is most likely going to be considered to be an independent contractor,” Zinser explained during an MFM Distance Learning Seminar. “But if under the relationship your company retains the right to substantially control the details of how the individual performs the services, that individual will be found to be an employee, regardless of the label placed on the individual.”

Federal Guidelines

In an article appearing in the July-August issue of MFM’s The Financial Manager magazine, Nicole Page summarized a general set of guidelines provided by the Internal Revenue Service to help employers properly classify their workers:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer?

Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue after a particular project is completed, and is the work performed a key aspect of the business?

The “economic realities test” used by the U.S. Department of Labor is slightly different. It focuses on how much the worker depends upon the employer for his/her income. “If a worker is selling his services to a single client, namely his employer, then that person is economically dependent on the employer,” Page says. “In contrast, an independent contractor has multiple clients and is not depending on a single company for his livelihood.”

In addition to the federal guidelines, employers need to comply with individual state laws, which contribute additional factors that must be taken into consideration. 

Page also provided details on employee classification rules in states that have been especially aggressive in their enforcement efforts, including two that are particularly important to the media industry: New York and California.

New York Stipulations

Many of the clients Page represents are media and production companies that regularly engage freelance workers who range from editors to graphic designers to production supervisors. “Not only are those companies accustomed to working with individuals on a freelance, project-by-project basis, the individuals themselves often view themselves in that manner and have no expectation of a long-term employment relationship,” Page says.

However, the real challenge arises when individuals who may have been working as independent contractors file claims for unemployment insurance when a project ends without another in sight. New York law requires persons filing for unemployment to list all of the companies they’ve worked for in the prior 18 months. 

With an eye toward additional revenue for the state, the New York State Department of Labor (NYSDOL) has been aggressively pursuing investigations with respect to any and every company listed on the unemployment insurance claim that has paid the claimant on a 1099 basis during that 18-month period. 

“The result is that whether or not a company has properly classified the individual as an independent contractor, an investigation is commenced solely on the basis of the 1099 payment. The burden is then on the company to respond to the NYDSOL and request a hearing to prove that the claimant was in fact an independent contractor and not an employee,” Page says.

“This process is proving to be an enormous burden, not just on companies but on the individual claimants themselves…. Most independent contractors are unaware that they may be subjecting many of the entities that have provided them with work to an expensive and time-consuming process. The result is that these individuals inadvertently bite the hand that feeds them and potentially poison their relationships with the very entities they would be relying upon to provide them with future work.

“One of the things an employer can do to protect itself in the event NYSDOL comes knocking is to make sure it has written agreements with its independent contractors,” Page recommends. “Those agreements should describe the nature of the relationship with the individual worker and set forth, among other things, that while the individual is expected to provide certain services, he or she is free to seek and obtain other employment; does not have to report to a specific office or manager, and can set his or her own schedule.”

California’s Twists

The Employment Development Department of the State of California (EDD) has also been cracking down on worker misclassification, according to Page. “While the factors considered in New York are also applicable to California-based employers, California has put its own unique twist on this issue,” she reports.

In most other states it’s important for a media business to own the products that freelance workers create on the company’s behalf, stating that the work to be provided is specially commissioned as a “work for hire” for the benefit of the employer. However, the California EDD has determined that the inclusion of such language in an agreement with a worker automatically renders that individual an employee for purposes of workers’ compensation and unemployment insurance.

So what are California employers to do? Page says one solution is to ensure there is no work-for-hire language in the agreement with the independent contractor. “Instead,” she suggests, “where it is necessary for the company to own the work product of the independent contractor, the company should have the freelancer sign a separate document assigning to the company his or her intellectual property rights the work created.”

Page’s complete article, entitled The Worker Identify Crisis, can be viewed on MFM’s website until the end of the month.

Action Plan

In light of the increased likelihood of misclassified worker audits in New York, California and many other states, Michael Zinser strongly encourages businesses to do their own internal audit of independent contractor status. Such an audit would involve a review of all of written agreements with independent contractors to confirm they comply with the federal and state rules governing the local operation. 

In Zinser’s opinion, “Independent contractor status is under assault on a number of fronts and you need to make sure your independent contractor house is in order.”

As the information provided by Page and Zinser illustrates, distinguishing between employees and independent contractors is complex and a critical aspect of company business. I hope their information is helpful to your awareness and understanding of the many factors that need to be considered in your independent contractor relationships. Most important, I hope it encourages you to make consulting with your organization’s legal counsel the next step in your path to ensuring compliance.

Mary M. Collins is president & CEO of the Media Financial Management Association and its BCCA subsidiary. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.