Crackdown Highlights Risk of Labeling Fulltime Employees as 'Temps'

-States, feds determined to stop firms from misclassifying employees,
LeClairRyan attorneys warn

NEWARK, N.J., Nov. 9 /PRNewswire/ -- Cornered by both the economic crisis and
the rising cost of healthcare, employers are more tempted than ever to
classify some employees as "independent contractors" or "temps." But the risks
of this practice are growing amid a crackdown by federal and state officials,
said James P. Anelli, a Newark-based shareholder in LeClairRyan's Labor &
Employment Group.

"The need for more state and federal tax revenue, the movement to boost the
ranks of the insured in America and the strong support of organized labor are
driving this trend," Anelli said. "A number of states, including New York, New
Jersey, Massachusetts and Connecticut, have set up task forces or modified
laws seeking to eliminate perceived abuses in this area. On the federal level,
the Taxpayer Responsibility, Accountability and Consistency Act of 2009
specifically targets employee misclassification. It is now under consideration
in the House."

The veteran attorney made those comments to an audience of business leaders,
HR professionals and corporate attorneys during "Key Issues in Labor &
Employment Law," a LeClairRyan seminar held last month in Florham Park, N.J.
His co-presenters at the session on contractors were LeClairRyan attorneys
Elizabeth K. Acee and Antonio Gutierrez.

Hiring independent contractors helps employers tap productive and creative
talent for temporary projects without paying benefits. However, the legal
definition of what constitutes an employee, independent contractor,
subcontractor, consultant, temp or on-call worker can be difficult to assess,
Acee noted. A 2007 study by the U.S. General Accounting Office estimated that
some 15% of all employers misclassify 3.4 million workers as independent
contractors each year.

"Little wonder the federal government is concerned about this," she said. "In
inflation-adjusted figures, employee misclassification costs the government
$2.7 billion in Social Security, unemployment tax and income tax revenues."

During the presentation, Acee outlined the classification and status tests
used at both the federal and state level, and explained the traditional role
of the common-law test of "master and servant" in determining employee status.
The various classification systems tend to hinge upon questions such as the
degree of company control over the worker, whether the equipment the worker
uses is owned by the company, and the permanency of the relationship.

"Employers must be aware of and comply with the applicable federal
classification criteria, such as those spelled out by the Internal Revenue
Service and the Fair Labor Standards Act," said Acee, a partner based in the
firm's New Haven, Conn. office. "But states, too, have a very strong say in
how workers are classified."

For example, New Jersey's regulatory scheme exempts businesses from having to
pay unemployment benefits to contractors who are beyond employer control, work
outside the normal course or place of business and are engaged in an
independently established trade, occupation or business. "Other states,
including Massachusetts and Connecticut, use the same test," Acee noted.
"Still, the onus is on employers to abide by the different classification
schemes in all of the states in which they operate."

Meanwhile, employers and their legal counsel should pay close attention to the
ongoing changes in federal and state approaches to employee classification.
Even if the aforementioned House bill fails to pass, for example, a similar
measure will likely become law in 2010 or 2011, Anelli predicts.

"The House bill proposes to close the so-called 'safe harbor' provision of
Section 530, which has enabled many employers to avoid paying penalties for
misclassifying independent subcontractors," he said. "Numerous state and
federal agencies are also reviewing the construction industry. New Jersey has
started to prosecute companies that 'knowingly' misclassify workers."

Technology, too, means employers' classification practices are more likely to
come under scrutiny. "Both the states and the federal government now have the
technology to track 1099 forms--the tax forms used by independent
contractors," noted Gutierrez, who is based in the Newark office. "They can
now target workers who only have one 1099 report and yet report significant
income from that one source. This, of course, is a sign that the worker has
been at that company long enough to be classified as an employee. This
technology can establish separate search criteria and is highly efficient to
catch companies that are abusing the process."

For employers, misclassification can amount to a costly misstep. FedEx, for
example, came under fire for classifying its drivers as independent
contractors, allegedly as a way to stop them from forming unions. In November
2007, the California Supreme Court affirmed lower court rulings that the
drivers were, in fact, employees under company control. "Massachusetts fined
FedEx $190,000, the IRS hit FedEx with a bill for $139 million in back taxes,
and eight attorneys general have now demanded that FedEx change its business
model," Anelli noted.

The LeClairRyan attorneys recommended specific steps employers can take to
avoid litigation, including:

-- Draft independent contractor agreements that define an independent
contractor relationship
-- Make contracts results-oriented as opposed to setting open-ended terms
-- Provide the contractor with the right to set hours of work and
schedules, and to determine what tools and materials to use
-- Do not restrict the contractor's ability to work on other projects
-- Provide contractual requirements for insurance, indemnification, and
risk of loss
-- When possible, contract with the corporation or company as opposed to
the individual
-- Do not compensate a contractor as an employee, i.e., with weekly or
biweekly payments

-- Provide a provision requiring that the contractor must seek
reimbursement for expenses

About LeClairRyan
Founded in 1988, LeClairRyan provides business counsel and client
representation in corporate law and high-stakes litigation. With offices in
California, Connecticut, Massachusetts, Michigan, New Jersey, New York,
Pennsylvania, Virginia and Washington, D.C., the firm has more than 300
attorneys representing a wide variety of clients throughout the nation. For
more information about LeClairRyan, visit www.leclairryan.com.

SOURCE LeClairRyan

Marty Gitlin, +1-914-528-7702, or Bill Parness, +1-732-290-0121,
parnespr@optonline.net, both of Parness & Associates Public Relations