Independent Contractor Misclassification and Compliance

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

How Do We Enhance IC Compliance and Defend IC Misclassification Claims?

Pepper uses IC Diagnostics™, a proprietary process that examines whether a group of workers not being treated as employees would pass the applicable tests for independent contractor (IC) status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. Unfortunately, there is no one standard IC test under all federal laws, and most states have IC tests that not only vary from the federal laws but also differ from the laws in other states – even though some IC tests appear to be similarly worded. This creates a greater challenge for companies operating nationwide or in a number of different states, but IC Diagnostics™ is designed to assist both local and multi-state businesses.

Step 1 – Assessment, Measurement, Alternatives:  The IC Diagnostics™ process – developed, refined, and improved over a period of seven years – assesses well over 48 relevant factors indicating IC or employee status.  It then measures the company’s compliance with each of the applicable federal and state laws on an IC Compliance Scale™, which offers a range of alternative ways to enhance IC compliance, including restructuring, re-distribution, reclassification, or variations thereof. The use of IC Diagnostics™ thereby offers businesses and other organizations (such as non-profits and governmental units) that currently use ICs a thorough understanding of the extent to which each alternative can minimize or eliminate future misclassification liability.

Step 2 – Restructuring and Re-documentation:  If IC Diagnostics™ indicates that the restructuring alternative is a sound choice, most companies tend to elect this alternative. For some, restructuring may be modest; for others, it may need to be more substantial – but in either case the objective is not to change the business model but rather to retain its essential components.

Restructuring may can be accomplished in tandem with re-documenting the IC relationship. This is a comprehensive undertaking whereby the entire restructured relationship between the ICs and the organization is memorialized in a set of documents. The starting point for this part of the IC Diagnostics™ process is the use of a proprietary 48 Factors-Plus™ list (which has mushroomed to more than 70 factors) that assures two key business and legal objectives are met: (1) that the restructuring and re-documentation of the IC relationship maintains the key components of the business model and is thorough, practical, and sustainable; and (2) that the restructured IC relationship is articulated within an agreement containing state-of-the-art provisions that are designed expressly for the particular business – without any empty recitals or misstatements of how the relationship will be implemented.

Step 3 – Re-implementation. The next step in the IC Diagnostics™ process is actually implementing the restructured IC relationship. Companies must ensure that what is set forth in the re-documented IC agreement is implemented in practice on a short-term and long-term basis. Otherwise, businesses are needlessly providing arguments to class action lawyers and government regulators that the IC agreement is nothing more than a piece of paper that is belied by the actual facts and should be disregarded – or worse, can be used to demonstrate that the IC relationship is a little more than a thinly disguised sham indicative of willful misclassification.

The full IC Diagnostics™ process includes a number of other key implementation steps designed to ensure lasting conformity with the restructured IC relationship and re-documentation.

The Need for Customized and Sustainable Solutions

There are no “quick and dirty” ways to enhance IC compliance, and “one size fits all” solutions are likely to be ill-fitting and disserve the objective of meaningfully minimizing or eliminating IC misclassification liability. The use of model, standard, or “form” IC agreements tends to cause businesses to overlook the need to structure, document, and implement a sustainable IC model that is likely to withstand legal scrutiny under applicable legal tests. Solutions should facilitate the business objectives and be user-friendly, long lasting, and capable of being defended for years to come.

Bona fide restructuring, re-documentation, and re-implementation need not be an prohibitively expensive or daunting task and, once undertaken and completed in a reasonably short period of time, can place a business in an enviable place: namely, an enhanced state of IC compliance that can minimize the likelihood that a governmental agency, class action lawyer, union, or employee seeking unemployment or workers compensation will seek to challenge the IC relationship – and if a challenge is mounted, maximize the likelihood that the IC relationship will prevail.

Some businesses ask, is there a quick way to measure the potential amount of misclassification liability to which my company may be exposed? IC Diagnostics™ uses an IC Misclassification Metrics™ tool allowing businesses to determine individual and aggregate amounts of exposure to IC misclassification liability that can be minimized or eliminated using IC Diagnostics.™

The Reclassification and Redistribution Alternatives

Even where IC Diagnostics™ confirms that IC compliance can be enhanced by restructuring, some businesses may wish to consider other alternatives (including reclassification or redistribution), as more fully discussed in our White Paper.

IC Diagnostics™ Is Particularly Effective in Defending Claims of IC Misclassification

Finally, many of the same proprietary tools for enhancing IC compliance are invaluable in defending administrative and court challenges to a company’s IC classifications. For example, the 48 Factors-Plus™ tool is used routinely in formulating comprehensive and more effective defenses to such legal challenges.