Independent contractor or full-time employee?

Failing to understanding how to properly classify an employee and failing to keep the right records to show your wage and hour practices could spell big trouble with the IRS and Equal Employment Opportunity Commission.

Now, the National Labor Relations Board has made it harder to classify employees as independent contractors.

Treating workers as independent contractors can save companies as much as 30 percent of payroll costs, including payroll tax, unemployment insurance, workers’ compensation, and state taxes.

Using independent contractors offers companies another big advantage: flexibility with respect to scaling up and scaling down.

Because independent contractors aren’t covered by wage and hour rules, they don’t have to be paid overtime. Contractors also don’t have the right to unionize and aren’t covered by employment protections in the Civil Rights Act, so they can’t use those provisions to sue over sexual harassment or discrimination.

The NLRB, acting in a case involving FedEx drivers, added a new standard to determine whether a worker is an independent contractor or not – the entrepreneurial opportunity standard.

Under this new test, individuals can’t be considered an independent contractor unless they have the autonomy to do business with others of their choosing. In other words, they can’t be tied down to one employer.

That would make things easy, right? But it’s not that simple. Merely telling workers they have the ability to go out and do business with others doesn’t necessarily mean it’s something they can reasonably do. After all, the organization they’re contracted with could make doing so very difficult.

And one way to tell if the organization is making the act of exercising their “entrepreneurial opportunity” difficult is to see how many independent contractors are actually doing so — and if not, finding out why.

In the case of FedEx, its independent contractor delivery drivers were told they could:

  • hire another driver to work their route for them, though FedEx retained the right to approve that person;
  • sell their routes to another driver, though FedEx had to deem the buyers qualified, and the driver had to essentially enter the same contract with FedEx as the original driver, and,
  • obtain a route from another FedEx driver, though this would often require the person obtaining an additional route to hire another driver under the terms stipulated above.

So, at least in the NLRB’s eyes, there appeared to be some fairly strict restrictions on the independent contractors who worked for FedEx to go into business for themselves.

After reviewing the facts, the NLRB said FedEx independent contractors weren’t exercising their entrepreneurial opportunity and therefore were misclassified.

The bottom line? Employers best take heed.

About the Author

Larry Hannappel

Larry spent 16 years with Century Casino’s and was instrumental in the start-up and growth of the company through expansions in Canada, South Africa, the Czech Republic, Poland and on several cruise ships as well as in Colorado. He was most recently the SVP, Principal Finance Officer and COO of North American operations for Century Casinos Inc., a multinational, Nasdaq-traded gaming company. Earlier in his career, Larry worked at the Johns Manville Corp. Larry spent 13 years in various accounting and finance functions in the company’s fiberglass manufacturing division and was key in the start-up of a molding plant in Indiana. Larry and his wife Kathy and three children live in Colorado. He enjoys four-wheeling, motorcycling, golfing, skiing and brewing beer.

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