Independent Contractor Misclassification and Compliance

LEADERSHIP: Michael J. Crumbock, Lisa B. Petkun and Richard J. Reibstein

We use a proprietary diagnostic process to provide clients with customized and sustainable solutions to enhance compliance with the laws and regulations governing the use of independent contractors and other types of contingent workers, and we have a track record of successfully defending clients in dozens of industries faced with misclassification challenges throughout the country.

Private and governmental employers have substantially increased their use of independent contractors, long-term temporary employees, consultants and other contingent workers — either as part of their business models or to supplement their regular workforces. Many tech start-ups have also resorted to the use of independent contractors as part of the on-demand economy. For those employers that properly classify their 1099ers as independent contractors, state and federal laws permit them to exclude such workers from costly legal payments, such as income tax withholding, FICA and Medicare contributions and unemployment and workers’ compensation premiums. Bona fide independent contractors may also be excluded from participation in employee benefit plans, such as pension and group medical plans, and are not included in the computation of “employees” for purposes of the Affordable Care Act.

The Current Landscape: Regulatory, Legislative and Judicial Crackdown on the Misclassification of Employees as Independent Contractors

Responding to mounting evidence that many employers nationwide have misclassified employees as 1099 contractors as a cost-saving measure, state and federal labor departments, the IRS and plaintiffs’ class action lawyers have taken aim at companies believed to be misclassifying employees. In addition, state and federal legislatures, often at the behest of unions, have been active in seeking to curtail the use of independent contractors by changing the legal standards for determining who is an employee and who is an independent contractor, as well as increasing the penalties for misclassifying employees as independent contractors.

These initiatives, each of which are described in more detail below, have increased the need for companies that use independent contractors to examine closely the structure, documentation and implementation of their business models and to take sophisticated action to legitimately enhance their independent contractor compliance and minimize or eliminate their exposure to misclassification liability.

Meeting Legal Challenges to the Valid Use of Independent Contractors in a Diverse Group of Industries

In 2010, Pepper Hamilton established its Independent Contractor Misclassification and Compliance Practice Group to help employers meet these various legal challenges to the valid use of independent contractors and other types of contingent workers. The practice team has focused, from its inception, on the interrelated legal issues involving independent contractors by using an interdisciplinary approach, along with proprietary tools and techniques, to both diagnose and enhance companies' compliance with independent contractor laws and defend businesses caught in the misclassification crackdown.

Pepper’s Independent Contractor Misclassification and Compliance Practice Group includes more than 30 employment, tax, employee benefits and class action attorneys in 13 Pepper offices coast to coast, who work collectively and collaboratively. Our approach helps organizations in their efforts to legally use independent contractors in compliance with applicable employment, tax and employee benefits laws and to minimize the likelihood of legal challenges to their use of independent contractors. Our team members include litigators who have experience in defending organizations subject to misclassification claims brought in judicial and administrative proceedings and audits throughout the United States by governmental agencies and private class action lawyers.

Few industries are immune from such legal challenges, and our lawyers have represented clients in independent contractor compliance matters in a long list of diverse industries. The breadth of our practice is reflected in the scope of our representative engagements.

Our Proprietary IC Diagnostics™ Process

Our lawyers understand that an audit by an unemployment or workers’ compensation agency of a company’s use of independent contractors also may lead to legal challenges to a company’s tax and employee benefits practices, and vice-versa. When asked by clients to enhance their compliance with independent contractor laws, we examine the issues and propose compliance measures, including alternatives, in all related legal disciplines – labor/employment, tax and employee benefits – using our proprietary “IC Diagnostics™” process, based on continually updated legal research covering federal law and the laws in nearly every state. Our practice is nationwide and, where applicable, we work with lawyers in specific states.

Our Legal Blog, Articles, White Paper and Representative Engagements

Since 2010, our practice group leaders have published a legal blog dedicated solely to this area of the law; it can be found at www.independentcontractorcompliance.com. The blog is noted for its timely, comprehensive and in-depth posts that report and analyze new developments in this area of the law. Included among the more than 150 blog posts published to date is the only regular monthly update of virtually all important judicial, legislative, regulatory and other noteworthy matters on the subject. The blog also offers readers the most complete set of legal resources for companies and lawyers seeking information about independent contractor compliance and misclassification.

Members of our practice group have conducted numerous seminars and presentations and written more than two dozen articles for legal and business publications dedicated to the issue of independent contractor compliance and misclassification, including how to enhance compliance with laws permitting the use of independent contractors, conduct due diligence into companies that use 1099 contractors, minimize independent contractor misclassification liability, and other matters of vital interest to organizations that make use of independent contractors and other types of contingent workers. Our white paper, “How Companies Can Minimize the Risk of Independent Contractor Misclassification,” has been for many years, and remains, one of the most viewed legal resources on the subject of independent contractors available on the internet. We also have been quoted in The New York Times, The Wall Street Journal, The Washington Post, The Los Angeles Times, Forbes, American Bar Association Journal, and numerous Bloomberg, BNA, and Thomson Reuters publications, as well as many other leading business and legal publications on the subject of misclassification of independent contractors.