Attorney General Jepsen to create task force
Attorney General Jepsen to create task force to develop guidelines concerning misclassification of employees.
By Hugh W. Cuthbertson
On January 2, 2012, the Connecticut Law Tribune published an article by Connecticut’s Attorney General, George Jepsen, announcing his goals and priorities for 2012.
One of the many goals announced was Attorney General Jepsen’s creation of a task force on labor issues that would, among other things, develop guidelines concerning the misclassification of employees as independent contractors.
The consequences of classifying an individual as an employee or an independent contractor are significant. An employer must withhold state and federal income taxes from the wages of employees, but not from the payments made for the services provided by independent contractors. An employer must pay state and federal unemployment compensation taxes on its employees, but not for independent contractors. An employer must provide its employees with workers’ compensation insurance; independent contractors do not receive this benefit. An employer must pay FICA [1] (or payroll) taxes on each of its employees; no such taxes are paid on independent contractors. Employers must pay their employees who are not exempt from state and federal wage and hour laws minimum wages, as well as overtime wages for all hours worked in excess of 40 hours in a week; independent contractors do not have to be paid either minimum or overtime wages. Finally, independent contractors are typically not covered by an employer’s health benefit or other insurance plans, as opposed to employees who are typically provided these benefits by their employers.
Given the hard economic times, some employers may be tempted to classify certain workers as independent contractors as a way of reducing costs. The misclassification of workers, however, resulting in the failure to pay minimum or overtime wages, or unemployment and FICA taxes can have very serious consequences. Under state and federal law, for example, the failure to pay minimum or overtime wages can subject the employer to an assessment of twice the full amount of unpaid wages and the payment of attorney’s fees to the employee’s attorney, should suit be filed and successfully litigated. In Connecticut, the failure to pay employees the wages they are owed; in fact, constitutes a crime. The failure to pay unemployment compensation taxes, on the other hand, can subject the employer to an assessment of back taxes, plus interest, penalties and even criminal sanctions in cases where a willful violation of the law is found.
Although the consequences of misclassifying individuals as employees or independent contractors can be significant, the criteria for determining a worker’s status are not necessarily the same under each law where an individual’s employment status must be determined. For example, the IRS uses a test arising out of the common law of agency that focuses on the right to control and direct workers in the details and means by which they accomplish their work. The IRS’s test, however, has been found too restrictive to encompass the broader definition of the employment relationship contained in the Fair Labor Standards Act. Courts construing this statute, which is enforced by the United States Department of Labor, apply a so-called “economic realities test” to determine whether a worker is an employee or independent contractor. Under this test, individuals are considered employees if as a matter of economic reality they are dependent for their livelihood upon the business to which they render service.
Some federal courts have also applied the economic realities test to actions arising under federal anti-discrimination statutes, such as Title VII of the Civil Rights Act of 1964 and the federal Age Discrimination in Employment Act (“ADEA”). The United States Court of Appeals for the Second Circuit [2], however, applies, at least with respect to ADEA cases, a common law “right to control” test for determining whether a plaintiff is an employee. This test focuses on the employer’s right to control the manner and means by which the employer’s product is accomplished.
Different criteria used to determine a worker’s proper classification also exist under Connecticut state law. Thus, for example, a common law test is applied for determining whether an individual is an employee for purposes of the Connecticut Workers’ Compensation Act.
A somewhat different test, however, called the “ABC test,” is contained in the Connecticut Unemployment Compensation Act for purposes of determining 1) whether a worker is an employee and, therefore, entitled to unemployment compensation benefits and 2) whether an employer is required to pay unemployment compensation taxes as a result. The ABC test is also used by the Connecticut Department of Labor in determining whether a worker is an employee for purposes of coverage under the minimum wage and overtime provisions of Connecticut’s wage and hour laws. One aspect of the ABC test that is noteworthy for employers is that it is the employer who bears the burden of proving that a worker is not an employee. In other words, a worker is presumed to be an employee, unless the employer can show that the relevant statutory criteria applied to the factual circumstances of the services provided by the worker establish that the worker is an independent contractor, rather than an employee.
Given the various tests relating to the classification of workers as employees or independent contractors applied by federal and state courts, and by administrative agencies, it will be interesting to see whether the guidelines developed by the task force to be created by Attorney General Jepsen will serve to simplify this area of the law or will only increase the number of tests by throwing one more on the pile. Employers who are not certain about whether they have correctly classified the employment status of their workers may wish to contact their employment lawyer for consultation. Employers without an employment lawyer should feel free to contact this firm.
[1]The Federal Insurance Contributions Act (“FICA”) imposes a tax paid by employers on its employees to fund Social Security and Medicare.
[2]The Second Circuit of Appeals hears appeals taken from the United States District of Connecticut.