Proper classification of workers is more important than ever with the implementation of the Affordable Care Act’s (“ACA”) employer mandate now in effect. As of January 1, 2015, the ACA requires that employers with 50 or more employees provide health insurance to all full time employees. Full time is now defined as working 30 or more hours a week under the ACA. Therefore, in light of the ACA, tax specialists warn that this year the IRS is paying particular attention to the distinction between an independent contractor and employee. Improper classification can be costly under the ACA and other statues, including wage and hour laws.
Indeed, the Ninth Circuit Court of Appeals recently reminded companies of the importance of properly classifying workers as employees or independent contractors. In Alexander v. FedEx Ground, a group of full-time FedEx delivery drivers were held to be improperly classified as independent contractors, instead of employees, and were therefore entitled to compensation for unpaid employment expenses and wages under the California Labor Code.
Although the determination of employment status under California law is governed by the multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, the factors considered are similar across jurisdictions, including Arizona which lies within the Ninth Circuit. Borello requires balancing of numerous factors. “The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” Secondary indicia of the nature of the relationship are also considered, including:
- The right to terminate at-will, without cause;
- Whether the one performing services is engaged in a distinct occupation or business;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The skill required in the particular occupation;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
- The length of time for which the services are to be performed;
- The method of payment, whether by the hour or by the job;
- Whether or not the work is part of the regular business of the principal; and
- Whether or not the parties believe they are creating the relationship of employer-employee.
As in all jurisdictions, none of these factors alone is determinative. The seminal factor an Arizona state court will consider is the employer’s ability to exercise direction and control over the worker, regardless of whether the employer actually exercised those rights. Each factor impacts the other and contributes to the overall determination. A contract alone identifying an individual as an independent contract is not enough.
There are numerous state, federal and administrative tests that may be applicable in determining whether an individual is an employee or independent contractor. Please keep in mind that a determination by one court or administrative agency does not guarantee that all other courts or agencies will come to the same conclusion as the standards can be different. If the IRS determines that an employer has improperly classified workers, the employer may be liable for substantial penalties, including unpaid payroll taxes, potential overtime pay, failure to pay workers’ compensation and unemployment taxes, and failure to provide minimum healthcare coverage. Now, with the implementation of the employer mandate under the ACA, the stakes for misclassification of workers has again been raised by increased potential liability and penalties under the ACA. Companies should not delay evaluating the classification of its independent contractors until a complaint or audit has occurred.
Faulkner Law Offices can help you evaluate these issues and avoid an expensive dispute.