Worker Classification and Major Employment Legislation Presentation at 1871

Worker Classification

Employee vs. Independent Contractor

Why is this distinction so critical? If a worker is an employee, the employer must adhere to a number of state and federal requirements that are not applicable if the worker is an independent contractor. Examples:
State and federal wage and hours laws Workers compensation insurance State and federal workplace safety laws Sate and federal equal employment laws Unemployment tax Job benefits Social Security and Medicare taxes Tax withholding and depositing Reporting requirements Other federal and state laws

Improper Classification
Improper classification exposes a company to substantial liability for the payment of back taxes, back pay, penalties and potential violations of employment laws.

Worker Classification Test

There is no single, clear cut test for determining worker classification. Different legal tests are used by various government agencies and courts (IRS, Department of Labor, Department of Revenue etc). Generally, under all of the tests, the determination is based on an analysis of the relationship between the worker and the organization.
How much control does the business have over the worker? Does the worker offer services to the public or just to the one business?

IRS Test
The IRS considers many factors in determining whether a worker is an employee or an independent contractor. The factors can be divided into three main categories: (i) behavioral control, (ii) financial control and (iii) the relationship of the parties. Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. *

Behavioral Control
The IRS considers whether the business has the right to direct and control the worker.
Instructions: Extensive instructions from a business on how the worker should accomplish the task suggest the worker is an employee. Examples include: how, when and where to do the work; what tools or equipment to use; what assistant to hire; and where to purchase supplies. Training: The more training a worker receives on the procedures and policies of a business, the more the worker looks like an employee.

Financial Control
The IRS considers whether the business has a right to control the business aspects of the workers job.
A significant investment in the work helps show that a worker is an independent contractor (no dollar test). A worker who is not reimbursed for expenses is more likely to be considered an independent contractor. Opportunity for profit or loss indicates a worker is an independent contractor. How the worker is paid also helps establish status.

Relationship of Parties
The IRS will analyze the type of relationship that exists between the parties. There are facts that show how the parties view the relationship.
Does the worker receive benefits-insurance, pension, paid vacation? What is the duration of the work relationship? Are the services performed by the worker an integral part of the companys primary business? Is there a written contract? What does the contract say?

Steps to Establish Independent Contractor Status

Tasks should not be central part of business. Allow independent contractor to maintain some control. Make it clear that independent contractor may have other work. Use independent contractors that have their own business offices and/ or equipment if possible. Have a written agreement.

Unpaid Interns
May a business have students work for it as unpaid interns? Why is this determination important? Student interns will not be considered employees under the Fair Labor Standards Act if the training program is designed to further education and the following six criteria are met:
The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school; The training is for the benefit of the trainee; The trainees do not displace regular employees, but work under close observation; The employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion the employers operations may actually be impeded; The trainees are not necessarily entitled to a job at the completion of the training period; and The employer and the trainee understand that the trainee is not entitled to wages for the time spent training.

What is the policy reason for this rule?

Employment Legislation

Title VII of the Civil Rights Act of 1964

All businesses with 15 or more employees are covered by Title VII Title VII protects employees from discrimination based on race, color, religion, sex, or national origin Later expanded coverage of sex discrimination to include discrimination on the basis of pregnancy, childbirth, or related medical conditions, as well as discrimination against married women Of all civil rights legislation, Title VII has had the greatest impact on employment practices of businesses Some states have adopted similar statutes with broader coverage Does not apply to ICs

Damages Under Title VII

Compensation for lost salary and benefits until the date of trial (backpay) Injunctive relief such as reinstatement or pay for a limited time instead of reinstatement (frontpay) Compensatory damages (emotional distress, damages to reputation, or other losses) Punitive damages (subject to caps based on the size of the employee)

Types of Discrimination
Three distinct theories of discrimination Disparate Treatment Disparate Impact Harassment

Age Discrimination in Employment Act

The ADEA applies to all companies that affect interstate commerce and have at least 20 employees. The ADEA prohibits employers from age discriminating employment practcies. The Act covers workers age 40 and over and it applies to applicants for employment as well as current employees ICs are excluded

Americans With Disabilities Act

The ADA covers all employers with 15 or more employees who work at least 20 or more calendar weeks in a year. The ADA prohibits discrimination against qualified individuals with known disabilities. It also requires the employer to provide reasonable accommodations so that the qualified disabled employee can perform the essential functions of his job unless doing so would constitute an undue hardship for the employer.

EEOC
Equal Employment Opportunity Commission The EEOC is the federal administrative agency created for the purpose of enforcing Title VII and other federal antidiscrimination statutes. An individual with a grievance must first exhaust the admin procedures of the EEOC before filing a lawsuit. Theory is that the EEOC may help resolve issues wo having to resort to litigation.

Thank you!
Esther Barron Director, Entrepreneurship Law Center Clinical Associate Professor Northwestern University School of Law 375 East Chicago Avenue Chicago, Illinois 60611 (312) 503-0724 esther-barron@law.northwestern.edu