This video and article are the second of a two-part series where we provide an overview of the position of the Department of Labor (DoL) on independent contractor classifications. This series presents a mock audit to give you a first-hand perspective of the types of questions that Department of Labor investigators ask with regard to the all too common issue of whether or not your workers are properly classified under the law. We will provide "red flags" that are often key to the final determination of the Department of Labor and how to address them.
This is a continuation from Part 1 of this blog and article.
Did Mr. Smith set his own hours and rates when he performed these services in 2021?
We agreed upon an hourly rate for Mr. Smith, but he pretty much worked the hours our customer prefers. He was allowed flexibility with his days off though.
If Mr. Smith works the same hours as other employees of your company who are performing the same or similar services as required by you or your customer, then this is going to lean more in favor of Mr. Smith being your employee.
Did Mr. Smith provide his own liability insurance?
No.
Do you have a contract or agreement with Mr. Smith?
Yes, we do have a consulting agreement with Mr. Smith.
Does Mr. Smith have his own unemployment account?
I don't know.
State departments of labor are most concerned about this question about whether or not the individual worker has their own unemployment account. This is often how they get involved in looking into these issues because someone like Mr. Smith may end up filing for unemployment or if they're doing an audit of your company, they're going to ask you for a list of all those individuals who are classified as 1099 workers and then they will want to know, well, do these workers have their own unemployment account set up individually? If not, this is also going to lean more in favor of employee status. As far as whether or not you have a contract or agreement, I highly recommend that you do have a 1099 consulting or contractor agreement with anyone who you intend to classify in that manner.
However, having this agreement will not be an end-all be-all for which the federal or state departments of labor will determine the status as a worker or employee. It just may help if some of the other questions that they ask lean more in favor of independent contractor status, but you don't have an agreement, that could end up hurting your chances of winning the argument.
Was Mr. Smith required to take a drug test like your employees are?
Well, yes, as our customer required it.
Was Mr. Smith required to attend any specific training?
Yes, he had to take our annual anti-harassment training as well as our ethics training.
These questions regarding required test and required training are also very important to the federal and state departments of labor. If you do require a so-called independent contractor or 1099 consultant to take the same test and training that you require of your employees, this will lean more in favor of finding them to be your employee.
As you can tell from this mock investigation, the question of whether someone is properly classified as a 1099 contractor or your employee who should receive a W-2 is very complicated. It really needs to be determined on an individual basis for each person who you classify as a consultant or contractor. As I've said, federal agencies such as the Department of Labor as well as the IRS may look at this issue differently than individual state agencies and may not find that each question is treated equally.
We have experienced audits in which the auditor found that the answer to just one or two questions could tip them in favor of classifying the worker as an employee rather than a 1099 contractor. The bottom line is this is a complicated issue, and it is very ripe for scrutiny right now. We advise that you proceed with caution in classifying workers as 1099 contractors and consultants and that if you do so, you document clearly the reasons why they are not your employee.
We remain available to assist you with these classifications as well as evaluating those who have already been classified by you as independent contractors.
Jamie Brabston is a Director & Legal Counsel with Redstone Government Consulting, Inc. (Redstone GCI), specializing in Labor and Employment Law, with an emphasis on government contract law and compliance. Prior to joining Redstone GCI, Jamie was Senior Counsel with Lehr Middlebrooks Vreeland & Thompson, P.C., a boutique labor and employment law firm based in Birmingham, AL. Jamie assists employers with compliance, problem prevention, the analysis of complex employment law and contract related issues, as well as conducting investigations related to all types of employee complaints. In addition, Jamie works with employers in responding to complaints filed with external agencies such as the Equal Employment Opportunity Commission, the United States Department of Labor (Wage & Hour, OSHA and the OFCCP), as well as state Departments of Labor. Jamie also provides litigation support as needed. In addition, Jamie advises federal government contractors with contract specific requirements such as affirmative action compliance, Service Contract Act and Davis Bacon, FAR requirements for ethics policies and awareness programs, the Drug Free Workplace Act and related record keeping. Jamie often assists contractors in performing mock compliance assessments to ensure they are prepared in the event of an audit or investigation. Jamie is a proficient trainer and speaker and is a primary instructor for the Federal Publications Seminars course, “HR for Government Contractors.” Additionally, Jamie regularly conducts training and education for individual employers and their employees on non-discrimination and anti-harassment, as well as training sessions for executive and non-executive management on a wide variety of overall management leadership skills, and government contract specific topics. Jamie also specializes and advises clients on employee benefits issues including ERISA welfare benefit plans, HIPAA, wellness plans, COBRA, the Affordable Care Act, and other federal and state laws, including related reporting requirements. Professional Experience In addition to her experience with Lehr Middlebrooks Vreeland & Thompson, P.C., Jamie was an attorney and shareholder with Huntsville, AL based law firm, Lanier Ford Shaver & Payne from 1994– 2006, where she defended large and small employers, including government contractors, in litigation involving sexual harassment, retaliatory discharge, disability, age, religion, race and sex discrimination, FMLA, ERISA, invasion of privacy, negligent supervision, intentional infliction of emotional distress, fraud and breach of contract. From 2006- 2009, Jamie served as General Counsel, Vice President of Human Resources, and Corporate Secretary for Digital Fusion, Inc., a Huntsville based government contractor. In 2009, Jamie founded her own employment law compliance firm, Practical Employment Solutions, Inc., where she partnered directly with small businesses, including government contractors, to assist them with a full range of human resource and employment law compliance needs specifically targeted to prevent and correct employment law and other compliance issues before governmental audits, investigations or litigation occurred. Jamie has also represented government contractors with restrictive covenant issues, and defended a mid-size, Virginia based contractor in a lawsuit involving allegations of violations of non-competition agreements and misappropriation of trade secrets.