The issue of misclassifying employees as independent contractors has been simmering for a while now. Startups and established companies alike have had to take a hard look at their employment structures in light of recent high-profile litigation (*cough* Uber *cough*) and the U.S. Department of Labor’s reiteration of its stance on such misclassification (i.e., it happens far too often and is unacceptable).
The business world is slowly coming around to the reality that employment law experts have been gnashing their teeth about for a long time: that most workers are employees. That may sound a little reductive, and it is, but for good reason. Certainly, there are many skilled service providers who are truly independent contractors because they work without restriction for numerous clients and are able to accomplish the tasks they’re hired to accomplish with more or less total freedom.
The risk to companies lies in their relationships with so-called independent contractors who start to look and act more like employees, often in subtle ways. Too much direction from the company, non-specific reimbursement of the contractors’ expenses, too many hours spent on the company’s work, use of company space and equipment to accomplish the contractor’s tasks – all of these can turn an apparent independent contractor into an employee in fact. Unfortunately, determining what “too much” and “too many” is a constant exercise in trying to hit moving targets.
The U.S. Department of Labor’s Administrator’s Interpretation No. 2015-1 (July 15, 2015) emphasized the federal government’s increasingly narrow definition of independent contractors, and it is virtually certain that the Internal Revenue Service and state governmental bodies that oversee labor (in Wisconsin, the Departments of Revenue and Workforce Development) will continue to crack down on misclassification of employees in the near future.
For startups, the risk of misclassifying employees can mean the difference between gaining a foothold in the industry and imploding before the first round of money comes in. As usual, the best practice for entrepreneurs is to work closely with an employment law expert to help navigate the ins and outs of employee management, and to craft precise language in their agreements that clearly defines the parameters of the relationship between company and worker. Caution is key, as failing to withhold unemployment insurance taxes, file the proper paperwork or maintain workers’ compensation insurance can be devastating to a company, even one with only a handful of employees.