RSS SyndicationWe at InnovaCounsel recently asked several software company execs this question: “What are the big issues that are costing you sleep these nights?”
We are getting some very thoughtful responses.
We will, from time to time, post an issue that was raised and provide suggestions for dealing with it. Please note that our suggestions are not intended as legal advice!
Here’s the first CEO issue:
“Use of [independent] contractors and having various taxing agencies dictate that they are employees instead.”
This is a huge issue. As the Federal and state governments seek more and more revenue, they have become more aggressive in their efforts to re-classify every Independent Contractor as a W-2 employee. They are sharing information with each other, which increases each employer’s risk of getting swept up in a wage-and-hour compliance audit.
Employers face liability for such things as uncollected taxes, Social Security contributions, and unpaid overtime. Government agencies impose fines and penalties. Plaintiff’s lawyers file expensive class action lawsuits.
Lack of a bright-line test for determining a worker’s status as either an employee or independent contractor further complicates each CEO’s life.
What’s a CEO to do?
Understand how to choose and apply, from the very start, the right classification for each person that provides goods or services to your company.
Courts and government agencies such as the U.S. Depart of Labor often use an “Economic Realities test.”
| Factors favoring Independent Contractor Classification | Factors favoring Employee Classification |
| 1. Uses a separately incorporated business with its own business name and Employer I.D. number. | 1. Uses his/her own name and Social Security number. |
| 2. Has multiple customers. | 2. Has only one entity paying for his/service. |
| 3. Provides a service (e.g. landscape maintenance) that is not integral to a customer’s business. | 3. Does work that is integral to the entity’s business, such as a software engineer working at a software development company. |
| 4. Owns and uses its own equipment and supplies in performing its work. | 4. Uses equipment and supplies provided by the entity. |
| 5. Has complete control over how to perform the work. | 5. Has a supervisor who has significant control over when and how the work gets done. |
| 6. Customer pays a set price for a completed product. | 6. Gets paid an hourly wage or a fixed salary. |
The more an individual is, in reality, independent of the control of one company, the more appropriate it is to treat that person as an Independent Contractor.
If you are uncertain how to apply this test to one or more people, consult with attorneys who have substantial experience applying it on the inside of the companies where they have worked.
Stuart Blake
Mobile – (949) 842-9379
Michael Oswald
Mobile – 208.914.3086