Increased attention in Michigan is being given to the classification of workers as independent contractors or employees. As recently as August 29, 2019, Michigan legislators were in the process of creating proposals designed to limit payroll fraud. These proposals come on the heels of the creation of a Special Payroll Fraud Enforcement Unit within the Department of Attorney General earlier this year (April 2019) to investigate cases of payroll fraud, including the misclassification of workers as independent contractors when, in fact, these workers should have been considered employees.
Misclassification has resulted in a substantial loss of revenue. The Economic Policy Institute estimates that $429 million in wages and overtime pay from Michigan workers between 2013 and 2015 was not paid, which impacts more than 2.8 million workers. In addition, a Michigan State University study found that payroll fraud costs Michigan taxpayers $107 million per year in lost tax revenue when businesses misclassify workers as self-employed independent contractors or paying them off the books.
When appropriate, it is a common practice for businesses to utilize independent contractors. If a worker performs a task according to his or her own methods without being subject to the control of the business as to the means by which a result is to happen, there may be nothing wrong with this relationship. The problem is when a worker is misclassified as an independent contractor when the worker is, under law, an employee. Misclassification of workers may result in potentially severe civil and criminal penalties and adverse legal consequences for those businesses who employed them. Workers, when misclassified, may be ineligible for or simply less aware of statutory rights, including rights to benefits afforded under workers’ compensation laws and other labor and employment protections, and at risk for adverse social security and other violations. Simply, the consequences for misclassification for all parties can be substantial.
To help achieve compliance and lessen the risk of misclassification, it is often good practice for a business to have a signed independent contractor agreement, tailored to each engagement. The old saying that a rose by another name is still a rose applies to the independent contractor relationship, and simply providing that a worker is an independent contractor will not, absent supporting facts based on the actual activities performed, pass legal review. Rather, these types of “standard” provisions, especially those that are often used but rarely reviewed, may create a false sense of security for businesses and lessen the attention businesses should otherwise be placing on each classification.
The law generally requires a business to weigh a variety of factors to determine whether a worker is an independent contractor or an employee. A worker will more likely be deemed an independent contractor if the business engaging the worker has the right to control or direct only the result of the work, not what will be done and not how the work will be performed. In determining the level of control and how to properly classify a worker, the focus will often be on the extent of behavioral and financial control, and the overall relationship of the parties. For example, potential considerations may include whether there have been instructions about how, when, or where to work, whether training is provided, how and when a worker is paid, who is to provide tools and other equipment, how the worker holds himself or herself out to the public, and whether the service is a substantial component of the business, among other considerations. This type of analysis and weighing of these considerations often entails a greater review than a blanket acknowledgment.
Simply, the distinction between employees and independent contractors is an important one, and the attention this topic is receiving can serve as an important reminder and opportunity for businesses to review (and improve) existing practices, procedures, and documentation to help ensure legal compliance. Truly, as has been stated, an ounce of prevention is worth a pound of cure.
Smith Haughey’s labor and employment law attorneys are available to assist you in reviewing current or potential contracts and assure that your business is compliant. Should you have questions or concerns, please contact the firm at [email protected].
The contents of this article are intended to convey general information only and not to provide legal advice or opinions.