Usually when the issue of employee misclassification comes up in the media, it is because there has been a large profile company sued, or a large judgment in the millions of dollars. However, recently a well known (and very well-funded) company has bitten the dust due to misclassification conflicts.
Homejoy, which is an on-demand maid cleaning service, was expanding aggressively into many markets. It had started as part of the Y Combinator program, and quickly graduated the program with millions in funding. Additionally, it kept attracting venture capital and private investments in its various rounds.
Employee and labor costs are certainly a significant challenge for the vast majority of all employers; however, trying to skirt the law could end up being more costly, as this cautionary tale might suggest.
What companies do.
Often, employers will try to use workers who perform critical parts of their business services, and claim that those workers are not actually employees. Instead, they set up a process by which so-called independent contractors can sign up to work for (or with) the company. This is done for the primary benefits of saving on salary costs, forcing the worker to cover their own health insurance, payroll and FICA taxes, as well as other costs (which include overtime, paid vacation, sick leave, holidays, etc.)
Well-informed businesses continue to gamble on this practice, but lawsuit after lawsuit chips away at this macro trend.
This story about Homejoy makes it clear that it is not just large corporations, scrappy start-ups, or family businesses that abuse employee classifications, but also the well-funded start-ups. Recently, the California Labor Commission ruled against Uber, stating that a single driver should have been classified as an employee, and not a contractor. Uber is also facing a class action, which our blog has covered in another article.
What you should do.
While the final measure of what constitutes an employee during a misclassification dispute can vary depending on the venue that the issue is tried in, in general, you can use the IRS’s common law rules which outline three main factors. How much does the company control how the worker does their job, does the company control financial aspects of the arrangement, and the relationship itself (which includes looking at agreements, or how critical the worker’s services are to the company’s services.)
If your company is currently working with independent contractors that you maintain a degree of control over, and who perform business functions that could arguably be considered part of your core services, take the time to talk to competent legal counsel to assess where you stand.