According to the United States Department of Labor, “Misclassification” occurs when a worker, who is an employee under the law, is incorrectly classified as something other than an employee (usually an independent contractor).
The risks of misclassifying workers could affect the worker, the employer, or both. Workers misclassified as independent contractors are subject to self-employment tax. Employers can be held responsible for back wages and taxes, as well as face monetary penalties and other consequences. For example, as mentioned in a previous post, failure to classify a worker correctly could lead to a ban from performing public contracts for up to three years in Minnesota.
Mapping the Route
How can employers be certain they are properly classifying their workers? In Minnesota, courts consider two factors for worker classification:
- The right to control the means and manner of performance; and
- The right to discharge the worker without incurring liability for damages.
There are other factors in this test, but these are the most important.
Minnesota is not alone in its approach to worker classification: Iowa, North Dakota, and South Dakota also rely on similar factoring tests to determine if worker misclassification has occurred. Each of these states has its own unique set of factors to determine worker classification. But they all confirm that controlling performance is the most crucial factor.
Navigating the Potholes
Last year, the Minnesota Court of Appeals determined that 43 workers were independent contractors rather than employees. In Pemrick v. Department of Employment and Economic Development, workers installed lockers and shelving units on various types of projects with little to no training. These workers also worked on their own schedule. The business (Pemrick) would relay certain information to the workers (such as job location), and the workers would complete the tasks assigned.
When coming to its decision, the court first looked to whether Pemrick had exerted the right to control the means and manner of performance. Specifically, the court examined Pemrick’s “training protocols.” Pemrick demonstrated installation and assembly to at least one inexperienced employee, but the court did not consider this singular occurrence an adequate substitute for formal training.
Next the court looked at the “independent processes” that the workers utilized when completing the work. The court found that Pemrick instructed the workers on completing the work (the ends). Yet the workers utilized their own independent processes (the means), showing that they exerted the requisite amount of control, qualifying them as independent contractors.
Finally, the court examined Pemrick’s ability to exert its “right to discharge” without incurring liability. Examining the discharge practices previously utilized by Pemrick, the court found that “the workers most often completed the jobs for which they were hired, but may not have been hired for another job if they did not do well.” Explaining that this procedure was not equivalent to a discharge, the court determined that these practices also showed that the workers were in fact independent contractors.
Light at the End of the Tunnel
The decision in Pemrick shows how avoiding many of the potential pitfalls that surround worker misclassification can be fact-intensive.
At a minimum, companies who decide to classify their workers as independent contractors should treat these workers the same way they would treat any other business entity. This includes maintaining and keeping all documentation of their relationship, including:
- All invoices received from the independent contractors;
- All contracts or agreements; and
- All relevant tax information.
Companies that utilize independent contractors need to be aware of the role that misclassification could play down the road. Each state has a different approach to determine if misclassification has occurred, but the common thread running between all of state is control. Does the company or the worker control the method and means of the work?
Service. Integrity. Quality.
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