Independent Contractor: The Devil In Disguise

by Michael Haberman on October 21, 2008 · 5 comments

In the daily news briefings today was a small article with big news. FedEx succumbed to the same problem that has plagued many a business, both small and large. They classified drivers as independent contractors. Fed Ex was sued for this misclassification and lost a $14.4 million settlement for 200 drivers. $720,000 per driver! Pretty hefty fine.

I don’t know the particulars of this case, but I see this happen frequently in smaller businesses. They think they can have someone come in as an independent contractor, thus avoiding taxes. Unfortunately this arrangement is not quite as cut and dry as that and businesses get in trouble. The “contractor” negotiates a deal that includes some benefits, for example health benefits. Well that starts messing the relationship up. And when that relationship gets messed up taxes and penalities have to be paid.

There are definite rules to who is and who is not an independent contractor. Here are the rules according to the IRS. And here is another set according to the Fair Labor Standards Act. Lastly, here is another set from the perspective of the independent contractor from Nolo on Preserving your status as an Independent Contractor.

If you are an employer read these rules very carefully and make sure you comply if you are hiring someone as a contractor. A mistake can be very expensive. Remember $720,000 per person for Fed Ex, and that was on appeal.
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{ 3 comments… read them below or add one }

Anonymous October 22, 2008 at 7:33 am

Very interesting in these times when businesses are sure to be trying to ‘cut corners’ any way they can. Good advise!

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RutgersFan October 29, 2008 at 10:51 am

Thanks for the post.

I have been trying to do some research on the risk involved in having your “Temporary” staff treated too much like regular employees – thereby risking a classification error. (translation – using a temp service and treating those employees just like your regular folks)

Do you have any suggestions? I am trying to make sure that my business partners understanding the risk of taking a seemingly honorable path of treating everyone the same.

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Michael D. Haberman, SPHR October 29, 2008 at 9:54 pm

Rutgersfan, when you are using a Temp firm to bring in workers you are participating in a business to business transaction. The “temp” is not your employee but an employee of the temp firm. You are just “renting” their labor. The temp firm is the one that classifies them as an employee, typically a nonexempt employee. So from your company standpoint the transaction is clean as far as the FLSA is concerned. There have been some issues with long term temps identifying with the company they are temping for as opposed to their actual employer. And there have been some labor/union issues as well. But it is to your advantage to occasionally break that relationship to remind everyone of the relationship. Using a long term temp just to hide the labor cost under another column is not really productive.

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