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.