An employee by any other name...

Many employers utilize independent contractors to meet short-term business needs or to carry out non-core functions. Some employers, however, adopt the independent contractor distinction for more unsavory reasons, such as evading payroll tax obligations, employee benefit costs and union organizing campaigns, or to avoid wage-hour suits or other employment claims. In either case, and regardless of an employer’s intentions, merely calling a worker an independent contractor does not make it so.

This truism is hardly new, nor are the murky and varied criteria that go into determining how to classify individual workers. What has changed, though, is the heightened liability that can befall unwary employers that get it wrong. Employers that improperly classify their workers have been targeted from all angles of late.

Consider FedEx. Perhaps no employer has been more under siege due to its use of independent contractors. In a closely watched case, a California appellate court found the company’s driver-operators were indeed “employees,” notwithstanding the terms of their Delivery Contractor Operating Agreement, and thus were entitled to reimbursement for work-related expenses under the California Labor Code (Estrada v FedEx Ground Package System, CalAppCt 2007, 154 LC ¶60,485). Soon thereafter, a plaintiff’s firm sent out more than 27,000 notices to past and current FedEx Ground/Home Delivery drivers across the country in multi-district litigation challenging the company’s independent contractor model. In all, more than 45 class-action suits have been filed against FedEx in state and federal courts over its classification practices. In addition, the IRS tentatively determined FedEx Ground drivers should be reclassified as employees—and that the company owed more than $319 million in back taxes and penalties for 2002 alone. Most recently, in June, eight state attorneys general announced they were teaming up to ensure the FedEx Ground division adheres to state employee classification laws.

FedEx won one key skirmish, however: earlier this year, a federal appeals court reversed a NLRB finding that FedEx delivery drivers were employees, concluding instead that they were indeed independent contactors and therefore did not fall within the Board’s jurisdiction (FedEx Home Delivery v NLRB, DCCir 2009, 157 LC ¶11,217). The ruling foiled a Teamsters effort to gain recognition as FedEx drivers’ bargaining rep.

Independent contractor misclassification isn’t just an employee rights issue, though. It’s estimated that more than $4.7 billion in federal income is lost due to misclassification. And for every 1 percent of workers misclassified, states lose an average of $198 million each year in unemployment insurance funds.

It’s no surprise, then, that cash-strapped states are pursuing the cause. To cite just two examples from last month alone: Colorado passed a bill allowing any individual to file a state agency complaint alleging an employer is misclassifying an employee as an independent contractor. The statute imposes a fine of up to $5,000 per misclassified employee for the first instance of misclassification made with willful disregard of the law; subsequent violations carry fines of up to $25,000 per misclassified employee. And Maryland enacted the “Workplace Fraud Act of 2009,” specifically targeting construction and landscaping employers that misclassify workers as independent contractors. State governors have also entered the fray, issuing executive orders that create state commissions or task forces expressly geared to addressing worker misclassification, and state agencies are beefing up their audit and enforcement activities in this area.

In some instances, states have created a private right of action for workers improperly deemed independent contractors. Here’s where it gets even pricklier: Some statutes allow any “interested party” to sue. In June, a federal district court in Illinois denied an employer’s motion to strike a union as a party plaintiff in a suit filed under the Illinois Employee Classification Act (Chicago Reg'l Council of Carpenters v Sciamanna, NDIll 2009, 157 LC ¶60,814). The court concluded the union was an “interested party” under the state law, enacted in 2008, which provides a cause of action for the improper classification of construction workers as independent contractors. The statute broadly defines an interested party as “a person with an interest in compliance with the Act.” The union has an economic interest in requiring employers to comply: it represents workers who perform construction work for the defendant employer and in the industry generally, and there is more than a “speculative possibility” that the union itself is entitled to relief under the statute, the court reasoned. The strategic value of such legislation to labor unions is clear.

At the federal level, the “Employee Misclassification Prevention Act” (H.R. 6111) was introduced in the 110th Congress. It would have amended the Fair Labor Standards Act to provide a penalty for employers who misclassify employees as non-employees. The bill has not yet been introduced in the current Congress. Give it time.