Numerous states announced last week that they will sue FedEx alleging that the carrier has improperly classified its drivers as independent contractors rather than employees. With this classification, FedEx, according to recent letters from attorneys general in the states of New York, New Jersey and Montana, passes along many of its business related costs to the contractors – including fuel, vehicles, maintenance, and uniforms.This issue is widespread and in a struggling economy appears posed to gain momentum. Employers continue to look for means to eliminate expenses. Employers do not offer benefits to independent contractors nor do they pay overtime or withhold taxes from an independent contractor. These can all result in significant savings. Additionally, in a struggling economy, many workers need a job and will not argue about this classification at the time of hire. Employers using independent contractors in significant numbers should be aware that enforcement actions are on the rise from both a state and federal level. States complain that they are losing tax revenue. A misclassification as an independent contractor can have significant overtime implications. If an employee is misclassified as an independent contractor and no overtime has been paid, an employer will liable to an employee for all overtime worked and, in all likelihood, have little records regarding what hours the employee actual worked. Under the FLSA, the test for determining whether someone is an employee is a matter of economic reality – whether the individual is dependent on the business which he or she serves. According to the DOL’s Fact Sheet on this issue, the significant factors on point are:
3) The amount of the alleged contractor’s investment in facilities and equipment.4) The nature and degree of control by the principal.5) The alleged contractor’s opportunities for profit and loss.6) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.7) The degree of independent business organization and operation.States and the IRS use different tests for making this determination. Employers should be aware of all of these issues in making classifying their workers.As last week’s post demonstrated, even a conservative Circuit looks at the economic reality of the relationship and an individual who works 40 plus hours a week steadily for months for a single employer looks like an employee.