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Employee or Contractor? The Answer Matters

By Shaun Patersen
Senior VP of Legal & Government Affairs
NIADA

Several years ago, I was helping a dealer with some litigation in which a former body shop technician claimed he was wrongfully terminated. The tech was seeking back wages and unemployment compensation from the dealer.

As I began to sift through the facts with the dealer principal, I was repeatedly told the tech was not an employee of the dealership – he was an independent contractor whose income was reported to the IRS on a Form 1099.

I filed that statement away and didn't think much about it until I was at the dealership a few weeks later. The dealer principal walked me around the sales lot and then took me behind the office building to an old warehouse he designated as his body and repair shop.
 
While giving me the guided tour of the shop, I asked the dealer principal about oversight of the tech's work. He told me the tech came to the shop every day and generally put in an eight-hour shift. The tech was required to submit a time sheet to dealership management and inform the dealership if he was not going to be in on a given day.
 
The tech furnished his own tools, but the only cars he worked on were those the dealership provided him.
 
Armed with that information, what say you? Was this tech an independent contractor or should he have been classified as an employee?
 
Your ability to properly answer that question, either on your own or with legal assistance, is becoming more critical.
 
According to the Department of Labor, misclassification of employees happens too frequently and leaves workers without key benefits and protections such as overtime and minimum wage.
 
DOL has clearly indicated its intent to investigate companies' misclassification of workers and pursue enforcement.
 
So for you small business owners who must properly designate your workers: How do you answer the question of employee vs. independent contractor?
 
DOL has issued an interpretive document from the Wage and Hour Administrator's
office intended to provide guidance on how you can answer that question correctly.
 
The guidance document starts from the premise that most workers should be classified as employees because the employer is "suffering or permitting" the worker to work. DOL relies on a federal court decision that states an employer "suffers or permits" an individual to work if, as a matter of economic reality, the individual is dependent on the entity.
 
So how does one determine whether something is a matter of economic reality? Have no fear – DOL pulled six factors from the federal court decision and instructed companies to consider them in determining whether that worker is in business for himself/herself (independent contractor) or is economically dependent on the employer (employee) No one factor outweighs another, but all should be carefully considered.
 
Is the work an integral part of the employer's business? If you answer yes, it is more likely than not the worker is an employee.
 
Does the worker's managerial skill affect the worker's opportunity for profit or loss? Independent contractors in business for themselves faces the possibility of not only making a profit, but also experiencing a loss. They are ultimately responsible for determining the jobs worked, contracts negotiated, etc. Employees generally do not have such a burden.
 
How does the worker's relative investment compare to the employer's investment? Independent contractors typically make investments that support their business as a business beyond any particular job.
 
Does the work performed require special skill and initiative? A special skill offered to a variety of entities can be indicative of an independent contractor relationship.
 
Is the relationship between the worker and employee permanent or indefinite? Permanency or indefiniteness in the worker's relationship with the employer suggests the worker is an employee.
 
What is the nature and degree of the employer's control? A worker who controls meaningful aspects of the work performed, such as wage earned for work performed or when the work is performed, is likely to be deemed an independent contractor.
 
Now that you know what factors Uncle Sam will look at in reviewing your workers, should this dealer's tech have been designated an employee or independent contractor?
 
As it turned out, the court never got to make that decision – the case was settled before that. If it had, though, it's a safe bet it would have ruled the tech an employee.
 
Don't be the dealer who cuts corners trying to save a few bucks – the one who replaces two tires instead of all four, ignores the brakes because they're really not squeaking that bad and pays his mechanic as a contractor because he has his own tools. Those decisions can come back and deliver a severe bite.
 

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