A few claims have come across my desk lately that boil down to one issue: misclassified independent contractors. In each case, the employer has classified a worker as an independent contractor but the realities of the relationship show the worker should have actually been classified (and paid) as an employee. The result is a claim of unpaid wages and/or overtime. The issue often arises after a seemingly happy worker leaves the business or otherwise becomes upset about the relationship, contacts a lawyer, and a demand letter or lawsuit arrives claiming unpaid wages for the past three years. The result, however, is always the same: it is costly on the employer either through defending the lawsuit or paying a settlement.
On November 2, 2023, Uber and Lyft settled a wage complaint with the New York Attorney General Labor Bureau (NY OAG) over worker misclassification. The companies agreed to pay workers a combined $328 million in backpay and penalties, including $1 Million in administration fees to the NY OAG to cover the costs with dispersing payments to workers. While the NY OAG’s decision is nuanced insofar that it applies New York law and applies to those particular workers and businesses, the decision is illustrative of the risk involved in worker misclassification. Employers open themselves to substantial risk if they do not classify workers correctly — not only from state and federal administrative agencies tasked with wage enforcement, but also to the workers themselves, who in Maryland, D.C. and many other states have a private right of action to recover unpaid wages (including overtime).
Businesses face substantial costs, including liability for back wages, interest, attorney’s fees, and liquidated damages of up to three times the amount owed. Defending these claims is often very difficult, because businesses that believe they have an independent contractor and treat their worker as such often do not have complete records of hours worked and amounts paid. The result is a $500 claim for unpaid wages can result in tens of thousands of dollars of otherwise avoidable expenses on the employer. If the dispute goes to trial, businesses should expect at least $100,000 in defense costs as well as the risk of double or triple that in damages paid to the employee and her attorneys. The liability for damages is often not dischargeable through bankruptcy, and liability extends to business owners as well as the business (i.e. the members of an LLC are liable for the judgment along with the business).
In the majority of cases I have seen, the worker who claims unpaid wages due to being misclassified is often correct; they were misclassified. That is not to say all independent contractor relationships are misclassifications. The analysis is fact specific and must be reviewed for each worker and employer relationship. The U.S. Department of Labor provides this guidance and factors to consider when determining a worker/business relationship:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
In any case, the degree of control is a good place to start the analysis. While businesses are permitted to set certain expectations around the timeline and completion date of work without fear of misclassification, the business should not be controlling the worker on a day-to-day basis. In effect, a true independent contractor is one that is permitted to determine how, where, when the services are performed. If the worker is clocking in and out at your business, and you are instructing them on daily tasks, it is a good bet that they are not an independent contractor.
Another issue with independent contractors is the standard seems to always be in a state of flux. California, for example, established its Assembly Bill 5 in 2019 (effective January 1, 2020) setting the very stringent ABC Test to determine if a worker is properly classified as an independent contractor. Other states are following similar paths. The Maryland Department of Labor provides this guidance to businesses in order to aid them in the proper classification of worker relationships. Meanwhile, the U.S. Department of Labor and the National Labor Relations Board reset the standard for determining a worker/business relationship every time a new president is elected. Effectively, the analysis often shifts, depends on the individual state one is performing services, and changes in law are difficult to predict. My best advice is for businesses that utilize independent contractors, or are considering an independent contractor’s services, is to have the worker/business relationship reviewed by an attorney or trusted advisor with knowledge of the current law.