Employers have long been challenged by a variety of wage and hour litigation such as misclassification cases and off-the-clock overtime cases. One of the latest trends in wage and hour litigation is attacking a company’s classification of its workers as independent contractors instead of employees. Because independent contractors are not entitled to certain aspects of benefits provided to employees, misclassification can result in liability in several forms., including:
- Potential tax exposure from federal and state taxing authorities (i.e., unemployment tax, FICA, FUTA);
- Claims that misclassified contractors should be entitled to participate in employer benefit plans covering employees (e.g., stock option plans, health and benefit plans);
- Claims that misclassified contractors are entitled to overtime compensation.
In Texas, the test for determining independent contractor status is a multifactor analysis that centers around the economic realty of the relationship. The focus is on whether the worker is, as a matter of economic reality, dependent on the alleged employer in business for himself. This inquiry includes whether the employer has the right to control the progress, details, and methods of operations of the work. A nonexclusive list of factors that are usually considered in this analysis include:
- the degree of control exercised by the alleged employer;
- the extent of the relative investments of the work and the alleged employer;
- the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer;
- the skill and initiative required in performing the job;
- the permanency of the relationship.
No one factor is determinative. If a court or taxing authority determines that the independent contractor was misclassified, the employer may be responsible for failing to provide the benefits the employee would have otherwise enjoyed had he been properly classified as an employee (e.g., participation in certain employee benefit plans and unpaid overtime). Depending on the size of the workforce and the work it engages in, these sums can be significant. Consequently, companies making extensive use of independent contractors should review these relationships carefully to ensure that the workers are properly classified and incorporate changes in the relationships that enhance the ability to defend that classification.