If your organization uses the services of independent contractors, here’s something to think about: Lowe’s Home Centers is on the hook to the tune of $6.5 million — plus legal fees — to settle a lawsuit filed by ICs who claimed they legally qualified as employees.
Here’s a look at the case, courtesy of Pepper Hamilton attorneys Richard Reibstein, Lisa Petkun and Andrew Rudolph, writing on Mondaq.com:
The plaintiffs in the case acted as contractors for the home improvement chain, installing kitchens, appliances, bath and plumbing fixtures, windows and doors — pretty much the whole spectrum of renovation services.
They alleged that Lowe’s misclassified them as contractors, saying they were actually employees because the chain not only controlled all the aspect of the installation work, but required them to:
- identify themselves by calling themselves “installers for Lowe’s” or telling customers “I work for Lowe’s”;
- wear Lowe’s hats and shirts at work sites;
- use signs reading “Lowe’s Installation”;
- attend training by Lowe’s, and
- comply with Lowe’s production requirements.
And that wasn’t all. The ICs claimed they’d been improperly denied all the benefits — health, paid leave, 401(k), among others — that regular Lowe’s employees were entitled to.
After a prolonged legal battle, Lowe’s agreed to the $6.5 million settlement in lieu of taking the case all the way through the courts. In June, a federal district court judge in California will rule on whether the proposed settlement meets applicable standards of fairness.
What companies should do
A quick review of the three factors the IRS says companies should evaluate to determine whether someone is an independent contractor or an employee:
- Behavioral control. If the business has the right to control or direct not only what work needs to be done, but how it gets done, then the worker is most likely an employee.
- Financial control. If the person has a significant investment in the work being performed, he or she may likely be an independent contractor. Also, if the person can earn a profit or incur a loss, that’s an indication the person’s in business for him or herself and is an independent contractor.
- Type of relationship. The IRS will also look at how the worker and the business owner perceive the relationship. If the person receives benefits — like insurance, a pension or paid leave — that’s usually a giveaway that the person’s an employee.
And here are here are 15 practical pointers from Richard Brann of the Baker Botts law firm, who spoke at last year’s Labor & Employment Law Advanced Practices (LEAP) symposium in Las Vegas.
1. Train your managers
This is why most companies lose their cases. Their managers get too involved and start supervising the contractors as if they were employees.
2. Establish a written contract
The mere existence of a contract doesn’t always definitively decide a case, but it sure helps.
3. What to call the contractor
Be sure to call the contract worker a contractor, consultant or agent in the contract – never an employee.
4. List services to be provided
Specificity always helps – vagueness or omissions can be held against you.
5. Limit ‘control’ provisions
Resist the urge to write in lots of controls over manner and means of performance.
6. Stress contractor’s authority
Stipulate that he/she is in charge of how work is to be performed.
7. Describe method of payment
Never provide payment through the payroll process; always keep it separate through accounts payable.
8. Make contractor pay taxes
Always specify the contractor is responsible for paying his/her own taxes.
9. Describe terms of contract
List circumstances for early termination; it helps if the term is on a project basis.
10. Contractor has no benefits
Don’t provide benefits reserved for staff, and don’t provide equipment – they’re supposed bring their own tools.
11. No exclusivity
Make sure the contractor is allowed to work for others.
12. Licenses and insurance
Require contractors to have needed licenses for the type of work and carry their own workers’ comp insurance.
13. Keep good records
Don’t keep payroll records, but note when contractor refused an assignment or performed work for others to bolster your case.
14. Don’t discipline contractors
Any discipline your managers mete out makes them look more and more like employees.
Also, limit any training provided. They’re supposed to be highly trained individuals who know what they’re doing; only train on specific hazards they may encounter at your worksite.
15. Treat ’em as entrepreneurs
Train your managers to treat them as independent businesspeople, not as employees; you wouldn’t treat the plumber coming to fix your leaking toilet as a domestic employee, either.