Can you name the president pictured on a twenty dollar bill? If that same $20 is spent by a service company to pay an individual house cleaner, would it be considered wages? What if a paralegal works a night shift at home writing a marketing brochure? Can she bill her employer $20 an hour as an independent contractor?

The currency answer to this quiz is the easiest: Andrew Jackson graces the $20 dollar bill.

The harder question is one which businesses will increasingly face in the future: whether an individual is properly classified as an independent contractor or an employee.

Recently, both houses of Congress re-introduced the Employee Misclassification Prevention Act (EMPA), which would amend the Fair Labor Standards Act (FLSA) and permit penalties for improperly labeling workers as contractors. If enacted, employers will be required to keep records relative to their independent contractors, specifically reflecting their status as such. Employers will also be required to provide written notice to all workers of their status as either an employee or as an independent contractor.

More Enforcement Teeth in Proposed EMPA

  • The proposed EMPA also contains additional enforcement provisions, as follows:
  • Increasing penalties on employers who misclassify their employees and are found to have violated employees’ overtime or minimum wage rights.
  • Mandating that states conduct audits to identify employers who misclassify workers and by requiring that DOL monitor states’ efforts to identify misclassification.
  • Directing states to strengthen their own penalties for worker misclassification.

Back to the Number 20

The quizzical component of classification currently depends on the number 20. That’s because the Internal Revenue Service uses a 20-Factor Test to determine whether a worker is properly classified as a matter of law. Both federal and state courts apply these 20 factors when faced with the issue of independent contractor versus employee.

There is no magic formula for determining how many of the factors must weigh in favor of an employee relationship.

However, here’s a summary of the analysis. A person who is required to comply with instructions about when, where and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the RIGHT to require compliance with instructions. Another factor includes making service available to the general public. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship. If a company ordinarily pays an individual’s business and/or traveling expense, the worker is ordinarily an employee. The establishment of set hours of work by a business is a factor indicating control.

Other 20 Factors include: training, right to fire, right to quit, profit or loss, investment, tools and materials, payment method, reports, work done on premises, full time required, continuing relationship, works for more than one person at a time, and reimbursement of expenses.

Decisions, Decisions

Some courts and federal agencies have come up with the “Economic Realities Test.” This test looks at the dependence of the worker on the business for which he or she works. If a person gains a large portion of their compensation from that business, chances are that person qualifies as an employee. The test also factors in such things as level of skill, integral nature of the work, intent of the parties and payment of Social Security taxes and benefits.

The house cleaner part of this quiz is derived from a Missouri case in which a residential house cleaning service engaged individuals to work as house cleaners. The Missouri Division of Employment Security determined that the money paid to these workers were wages. On appeal, the company asserted that the individuals were not employees because the employer did not control their work performance, but instead only inspected the results of the work.

Ultimately, the Missouri Supreme Court found that the company trained the individual cleaners, provided company T-shirts and cleaning supplies, and the cleaners’ services were integrated into the business operations. Thus, the Court concluded these individuals were employees and not independent contractors.

The final quiz answer comes from a Missouri case involving an individual who worked full-time as a paralegal. During the evenings and weekends, the same person did other office work and document preparation at home. Ultimately, the Missouri Court of Appeals found that the individual’s after-hours services were distinguished from her employee duties as a paralegal, and she could properly be classified as an independent contractor for her night shift duties.

Illinois Employee Classification Act

While employee classification under federal law has long been a noteworthy issue in employment law, state legislation has increased in this area. The new Illinois Employee Classification Act establishes specific criteria to determine if an individual performing services for a construction contractor is an employee or an independent contractor.

Under the law, an individual performing services for a contractor is presumed to be an employee unless (1) the individual is free from control or direction over the performance of the service for the contractor; (2) the service performed is outside the usual course of services performed by the contractor and (3) the individual is engaged in an independently established trade, occupation, profession or business.