Worker Classification - Employees vs Independent Contractors
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Worker Classification - Employees vs Independent Contractors
There are many benefits to using Independent Contractors (ICs) in your business but if you do it wrong, it can cost you everything.
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What does the future hold for workers in a freelance economy? - PBS NewsHour

More independent contractors put large corporations into a very powerful position.
Sherry Griffin's insight:

I'm not sure I agree with the statement that this is "new."  I'll agree that there are people who have not embraced their role as a freelancer and business owner.  I'll also agree that freelancers have to deal with issues such as obtaining insurance, however, these are the same issues small business owners have always had.  

 

Big corporations will only have the power if it is given to them and freelancers (independent contractors) who are really good at what they do will always be in demand and have the power.  Freelancers who are looking to be picked up by the company they are doing work for should be going through a staffing agency that specializes in that. 

 

The issues raised in this article are part of why we are seeing the Department of Labor's workload increase.  If the compensation becomes too low, contractors start looking at what they are making, the job they are performing, and their relationship with their clients and question if they are contractors or employees.  If they question enough, they file a claim which gets investigated.

 

It is in the best interest of companies that engage freelancers to ensure that they are legitimate contractors and they are paying them fairly.  Happy contractors, after all, don't question their employment status.

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Here Are The On-Demand Companies Using Full-Time Labor — And Why - BuzzFeed News

Even as lawsuits threaten the contract-based employment model of companies like Uber, cheap freelance labor is the norm in the industry. But a few companies argue that paying employees well isn’t j...
Sherry Griffin's insight:
This is a great article and Zirtual, Alfred, Managed by Q and other on-demand labor complained doing it right should be commended. Sarah Leberstein is correct, the current distinctions are adequate (thought it would be great if the agencies were also consistent but that's a different post). Mitch Radcliffe appears to need to some schooling. First, no business is required to provide 40 hours a week to their employees. Uber and Lyft could choose to pay mathematicians, rather than lawyers, to analyze when their requests are coming it and determine quite accurately the workforce needed for the following week and only schedule the workers they need to cover those hours. Also, if you are engaging a legitimate contractor... Let me repeat, if you are engaging a "legitimate" contractor, it is more expensive than an employee if giving them longterm work. Why? Because they have all the same expenses you have (being a business) and pass it to you plus a markup for profit. A contractor is a business in business; who is an expert at what they do. There are definitely times when you should hire a contractor but this isn't it.
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Law Would Clarify Rights In Strip Clubs - Eugene Weekly

Several ideas for new laws to regulate strip clubs are making their way to Oregon’s Capitol in Salem for consideration.
Sherry Griffin's insight:
Couple points to clarify, the author lists a "pro" of being an Independent Contractor(IC) is that ICs don't need to file income tax. The IRS would highly disagree. ICs should be filing estimated tax returns every quarter. Many don't and the IRS doesn't typically get too upset about it as long as you pay them in full at the end of the year. To say that ICs don't need to file is misleading and wrong . I like the Oregon bills as summarized in this article but I have to say, "what the heck?" You need to put a law into place that strip clubs must be free if fire code violations and structural problems? Aren't those just standard requirements for any building that allows people in it? Have to say after reading that, not sure I'm willing to walk into any Oregon building. Who knows what the standard is...
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Missoula lawmaker introduces bill to deregulate Montana's taxi industry - Ravalli Republic

Taxi services in Montana would no longer be regulated by the Public Service Commission if a Missoula lawmaker gets her way, but nothing is certain yet.
Sherry Griffin's insight:
This would allow Uber a clean path in Montana. Reading the craziness that takes place with taxi refs in Montana is much less about public safety than it is about allowing some people with forethought the ability to control this local industry. Wild that these rules were passed initially. Some changes are definitely needed to their rules. That said, not sure how I feel as a potential passenger that drivers wouldn't be regulated at all.
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Freelance becoming the norm - Tribune-Review

Now that he works for himself as a network technician, Robert Wooldridge is sometimes able to bring his 8-year-old daughter to work with him, as ...
Sherry Griffin's insight:
Wooldridge is working like an independent contractor and that makes him a clean contract engagement for the companies that need his services. And here is a key piece of this, the companies that engage him need particular jobs done here and there. They save money by paying for a skilled network technician when, and only when, they need one. If they don't have enough work to keep a technician busy for 40 hours a week, why should they employee one? A frustration for true freelancers are companies that misclassify their workers because when they do, the rules for true freelancers to be engaged become more difficult. I'll take exception to the comment in this article that contractors have less say about what they are paid than employees because the employees can group together. The reality is that as you build your reputation and client base, you can demand a hire rate. It really depends on how good you are at what you do, your ability to build relationships, and how you market yourself.
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Judge rules truckers at ports of Los Angeles, Long Beach are employees, not ... - The Daily Breeze

A Superior Court judge on Thursday ruled that truck drivers in the ports of Los Angeles and Long Beach are employees, not independent contractors, and that seven of them are owed more than $2 million in damages.The ruling, which comes after two...
Sherry Griffin's insight:

How a workers status as an employee or independent contractor is determined depends on the agency whose regulations application is in question.  For example, it is much easier for a worker to be an independent contractor by IRS rules than it is for workers compensation.  In this case, the rules in play are those of the state labor department in California.  

 

This is both good and bad for business owners in other states.  The good news, is that since it was a California specific case, it doesn't necessarily apply in Oklahoma (for example).  The bad news, is that these tend to spread and as these workers were supported (read that as received financial support) from the International Brotherhood of Teamsters means that similar suits should be expected.

 

Why is the union involved? It's a simple case of "follow the money."  Unions have been losing membership.  This shouldn't be surprising as they have been very successful in getting the legislation they want passed.  However, unions are a business like any other and they make their money through their memberships (pretty much the original software monthly subscription service only not nearly as easy to cancel).  You can't unionize business owners (though, wouldn't it be nice to have someone on your side for a change) which is what independent contractors in these situations typically are.  But, if you are able to have them classified as an employee, now they are eligible to be unionized, which means more dues, which means more money.

 

The take away is look at your workers, look at your business model, look at your exposure, and make informed business decisions.  If in doubt, contact me and get clarity.  It is easier (and much less expensive) to make proactive changes before an independent contractor decides to challenge their status.

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Independent Contractor . . . or Not? DOL and Wisconsin DWD Team Up to ... - JD Supra (press release)

On January 20, 2015, the U.S. Department of Labor (DOL) announced that Wisconsin had become the latest state to join the “Misclassification Initiative,” which is designed to protect the...
Sherry Griffin's insight:

If you are in a state that joins the US Department of Labor (DOL) Misclassification Initiative, it is to your benefit to know what that means.  Essentially, it is a collaborative effort to share information regarding cases of misclassification.  For example, if your state finds a worker misclassified for unemployment insurance purposes (meaning, you consider them an independent contractor and the state then says the worker is an employee), the then share that information with the DOL.  

 

It doesn't mean that you will automatically find yourself with an employee for DOL purposes (DOL covers minimum wage, benefits, harassment, etc).  It does mean you are likely to find yourself being questioned or audited on the matter.  Generally speaking, workers comp and unemployment have a much easier threshold for finding a worker to be an employee than the DOL (thankfully).  However, it is important to note that if the DOL finds your worker is misclassifed for their purposes and is really an employee, workers comp and unemployment will, more likely than not, come to the same findings.

 

I know I beat this horse to death but, just a reminder, having the IRS certify your workers as independent contractors for IRS purposes means absolutely nothing to the DOL or your state agencies. The standards and objectives are very different.

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Nevada Supreme Court Finds Class of Strippers Were Employees | Employment Class Action Blog

Given the extensive use of euphemisms in the exotic dancing trade, we’ll apologize in advance for any unintended puns. We’ve written on the issue of the cl
Sherry Griffin's insight:

I've been off the grid for a while and figure this is a good point to reenter the world:)  

 

If you've read my Scoop.It in the past, you'll likely recall me saying that Nevada strip clubs would be hit eventually for misclassified workers (and, eventually, brothels will as well).  Well, it happened.  I wasn't surprised but many people were.  Particularly amusing was the surprise of a CPA and a business lawyer who have been telling me that my understanding of what is and what is not misclassification is incorrect.  

 

The problem isn't me.  The problem is that they are so caught up in their world of the IRS that they have no idea what is happening beyond that.  When utilizing a CPA for classification issues, realize that they are advising you from an IRS point of view - period.  If you are working with a business lawyer, realize you may or may not get a full answer.  The best business lawyers I know, advise their clients to speak with an HR consultant or an employment lawyer when dealing with independent contractors.

 

Worker classification can seem really muddy but. more often than not, it's fairly clear if you really understand the concepts involved and have the facts.

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Should I Hire a Contractor or an Employee? - Entrepreneur (blog)

Should I Hire a Contractor or an Employee?
Sherry Griffin's insight:
Legal compliance should also be kept in mind. What he author neglects to consider is seasonal, part-time, and temporary employees. There is no requirement that employees be guaranteed a specific number of hours. Meaning you can have an employee who only does work as needed. The only items in this article that puts you in a legally defendable position are 3.c potentially item 6. Using anything else in this article as your basis for engaging a contractor leaves your company exposed. As a rule businesses operate with a range of exposures. What is vital to business decisions is knowing where your exposure is and appreciating your exposure level. This article fails to cover the actual facts that should be considered when deciding to hire an employee or contractor.
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NC must get tough with payroll cheats - News & Observer

NC must get tough with payroll cheats News & Observer Under pressure from a deep recession and its aftermath, employers are cutting corners by classifying their workers as independent contractors.
Sherry Griffin's insight:
Misclassification is also an result of confused business lawyers who believe a contract is all that matters (hint: any employment lawyer can tell you a contract is highly recommended but it is only piece of the puzzle), CPAs who are solely focused on the IRS and don't realize that misclassification is defined differently by other agencies (CPAs everywhere are saying "there are other agencies?"), and business consultants whose knowledge is limited. I've met many business owners who firmly believe they are doing it right but for someone who really knows this area, the red flags are obvious and concerning.
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Business, labor groups find shared ground - Fort Worth Star Telegram

Business, labor groups find shared ground Fort Worth Star Telegram The legislation slaps contractors with a $200 fine for every employee improperly classified as an independent contractor.
Sherry Griffin's insight:
This is case and point why independent contractor stats is suspect. Companies that intentionally misclassify are able to underbid their competitors because their overhead is less. It is almost how you show that they are misclassifying. For example, a company utilizing independent contractors legitimately will typically have higher expenses. The reason is that when you hire a legitimate contractor to roof a house, for example, the fee he charges includes what he pays himself, his employees, the cost he has incurred training, insurances, licensing expenses, marking expenses, payroll expenses, etc. The benefit is that he and his staff know what they are doing and will save you money by being able to do a better and faster job because they are experts at roofing. You pay more because the expertise benefits you in the end. If you are saving money up front using a contractor, it's highly likely you really have an employee. Though, not definite because a contractor is allowed to take a loss and may choose to do a job below cost in order to show the value he will bring to future projects or in exchange for a reference he can give to potential clients. If you are undercutting your competition by misclassifying your employees as independent contractors, don't expect them to just take it.
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At the Uber for home cleaning, workers pay a price for convenience - Washington Post

At the Uber for home cleaning, workers pay a price for convenience Washington Post That's the tradeoff in moving toward independent contracting in the service economy, where people order services online just as they would order batteries or a pair...
Sherry Griffin's insight:
I find this really interesting. They appear to be doing a number of things right but a couple of big items jump out at me as significant. Homejoy cleaners arrive in their Homejoy shirt. This gives the appearance that they are Homejoy employees. Now, if the shirt actually says "Homejoy Contractor" or something like that, fine. But you need to be aware of the perception you create. In a real cut and dry example of using a contractor properly, the contractor would be representing their own company. The flat rate to clients also bothers me. If they switched their model up to a Priceline.com type model where the client put in a price and the contractors picked which they wanted, that would be more in line with being a contractor as well. And let's be honest, Homejoy cannot possible expect their contractors to be legit paying them the amount they do in some of the locations they operate. A contractor is supposed to be in business for themselves and that means paperwork. Contractors should also be aware that unless it expressly states otherwise in the contract they sign with Homejoy and that Homejoy signs with the client, the contractor can be sued by Homejoy and the client. If the contractor is operating as a sole proprietor, then the contractor can lose everything they own. It will be interesting to see what details we find out as this company grown. Contractors or employees? At this point, we have just enough information to make us wonder.
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New York, Illinois find success in tackling labor violations - Kansas.com

The State New York, Illinois find success in tackling labor violations Kansas.com Last year, Illinois toughened its employee classification law by increasing potential financial penalties for construction companies that wrongly classified workers...
Sherry Griffin's insight:
Have any doubt that unions are playing a significant part in the crackdown on independent contractors? Read this article and pay attention to "who" is doing the investigating...
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Louisiana finds employers misclassify thousands of workers as independent ... - The New Orleans Advocate

Louisiana finds employers misclassify thousands of workers as independent ... - The New Orleans Advocate | Worker Classification - Employees vs Independent Contractors | Scoop.it
The Louisiana Workforce Commission expects 2015 will yield a second consecutive record number of workers that employers have misclassified as independent contractors. As of Nov. 12, audits
Sherry Griffin's insight:
The bad news, I believe this is going to be an even bigger issue in 2016. The good news is you can mitigate the damages by being proactive and making changes. When hiring someone to review how your workers are classified and advise you on how to proceed, be very clear that you want your potential liability assessed in regards to the U.S. Dept of Labor, State labor commissioner (or equivalent agency), worker compensation, unemployment, and the IRS. CPAs, tax lawyers, and business coaches tend to focus exclusively on the IRS and, frankly, the IRS is likely not where your liability sits. If told that the IRS is all that matters, you need to find someone else. someone more knowledgeable.
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Lepage Bakeries' parent firm faces class-action lawsuit over 'independent ... - Mainebiz Daily

Flower Foods Inc., the nation's second largest bakery and the owner of Lepage Bakeries in Lewiston, faces a potential class-action lawsuit by 200 workers in North Carolina who were granted legal standing as a “class” in a recent decision by a...
Sherry Griffin's insight:
This is interesting and I wish there was more info. I'll take issue that this is a "significant victory" as this is simply a decision that these workers are situated similarly enough that it can be brought to court as one group rather than a bunch of individuals. According to the article Lepage Bakeries agreed they belong in one group. That doesn't mean the workers are employees and not independent contractors. The questions that come to mind immediately are: does the "550 experienced employees" Lepage lists on its website include these workers? Does Lepage employee any who performs similar jobs as these workers? Are these workers all individuals or businesses and do the businesses have employees? If all individuals, why? I'm looking forward to hearing more details as this case moves forward.
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Doing the 'hustle': Hustler strip club skimmed exotic dancers' wages, alleges ... - SILive.com

Larry Flynt's Hustler Club deprived exotic dancers of minimum wages, overtime and dipped into their tips, alleges a lawsuit filed by a former dancer from Staten Island.
Sherry Griffin's insight:
Here we go again... There are a lot of things in the article that point to hustler managing their independent contractors correctly - at least as far as the IRS is concerned. They fall down for the Dept of Labor. First and foremost, the Hustler Club is an exotic dance club. That means the girls are integral to Hustler Club's business. By contrast, if they have a bearded lady who doesn't strip and is there as a circus side show type of thing, she wouldn't be integral to their business.
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The Gig Economy Won't Last Because It's Being Sued To Death - Fast Company

If Uber, Lyft, and others don't stop relying on contract workers, business could crumble. Is it time for a new definition of employee?
Sherry Griffin's insight:

I find this article really interesting because it goes with this assumption that workers can only be traditional full time employees or independent contractors.  In reality, you can have employees that are not guaranteed hours.  While some are looking to implement regulations where you need to tell people how many hours the will be getting, currently in the US you don’t have to guarantee hours.  In fact, you can actually offer someone a position where the hours are as agreed. 

 

The companies in this article don’t want to do this because they would be responsible for employment taxes, mileage, business licenses and taxes, etc.  Meaning they would have a hard time making a profit and while trying to be competitive with local companies following the rules. 

 

The gig economy can work and does work.  The key is that the platform needs to be a true platform and not a business trying to skirt the rules.

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Uber and Lyft may have to treat their drivers as employees, judge says - Los Angeles Times

Drivers of ride-hailing services such as Uber and Lyft may have to be treated as employees rather than independent contractors, a federal judge in San Francisco said Friday.
Sherry Griffin's insight:

Uber, Uber, Uber.  They are all over the news lately.  While we're waiting to hear what the ruling will be in a class-action lawsuit in California, let's look at the impact a determination of misclassification will bring.

 

First, it’s important to take into consideration what the workers are claiming should apply to them.  This suit is specifically directed at the California Labor Code.  The California Labor Code includes the states wage and hour regulations, breaks, benefits, etc.  Very similar to the US Department of Labor but on a state level.  For those not familiar with the HR environment in California, the general mantra among California HR professionals is “who cares about the federal regs because none of them apply in California.”  That isn’t 100% accurate but it is pretty darn close.  As a general rule that applies probably 98% of the time, California regulations are more protective of workers than the Federal regulations are.

 

As I’ve written in the past, the rules vary from state to state and what is determined to be the case in California doesn’t necessarily apply in Texas, Illinois, or anywhere else. BUT, this case could be different and here’s why:

 

Uber is a national company with workers in a multitude of states.  If their drivers are determined to be employees by California Labor Code reasons and Uber decides to continue doing business in California with them as employees, all of their drivers are likely to be determined to be employees for the US Department of Labor (DOL) purposes.  Having employees performing a particular job makes that particular job integral to the business.  While there are ways to do it, it requires that the employees and their jobs look very, very different from those of the contractors.  Generally speaking, business owners tend to go the easiest route and that means they start treating everyone the same (which is why Microsoft got in trouble a number of years ago). 

 

My prediction is that Uber (and then Lyft) drivers will be declared employees in California, they will continue doing business with their drivers as employees in California, and they will be sued by other drivers to be recognized as employees for DOL purposes.  I give it a 65% chance that the DOL case is partially funded by a union…

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The Ins and Outs of Onboarding Employees and Independent Contractors - Entrepreneur

In the early stages of a business, many founders prefer to engage independent contractors to perform services, as it allows the company to avoid implementing costly payroll processes.
Sherry Griffin's insight:

Clean overview of the differences between employees and ICs.  I will go a step further and say that with contractors, you want them to provide a quote or proposal and you want to keep a copy of their marketing materials (brochures, business card, printout of the home page or services page of their website, etc).  For an employee, you want to have some policies that you expect them to follow.

 

The easiest way to keep it clean is to set up 2 very different procedures and courses of action for each.  How you bring on and handle your ICs should look nothing like how you bring on and handle your employees.  If they look too similar, it will make them all appear to be employees.

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What if There Were a New Type of Worker? Dependent Contractor - Wall Street Journal

A handful of legal scholars have said labor policy should include some protections for on-demand workers who find job assignments via apps.
Sherry Griffin's insight:

Definitely an interesting concept, though, I think it would likely make the waters too muddy to navigate.  If you have a worker whose classification isn't as clear as you would like, make it clearer or reduce your exposure.

 

"Duh, but how do I do that?" 

 

It's actually not as hard as you think.  Break it down by agency.  

 

IRS: require them to file their estimated taxes and submit proof that they've filed it.  The IRS only wants their money.  If they get their money, they're happy. They only get in a dither when they don't get paid and they need to find a wallet to pick.

 

Department of Labor (or your state labor agency): They are looking to make sure people are making sure people are being treated fairly.  Start by looking at what you're paying.  If you're really small and don't offer benefits to anyone, then that lowers your risk.  If you're paying a rate that is sufficiently above minimum wage (and think in terms of what you pay for the job minus what you guess their expenses are), that also lowers your risk.  Make sure all of your workers are treated with respect and don't allow harassment.  ICs aren't protected by harassment laws but they can file a claim that they are misclassified and then they are.  

 

Look to see what your exposure may be and then mitigate it into a non-issue. Much easier than adding a new classification.

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What Can Employers Do To Reduce The Cost Of Obamacare? - Forbes | @scoopit http://sco.lt/...

What Can Employers Do To Reduce The Cost Of Obamacare? Forbes Use Non-Employee Labor. Independent contractors by definition are not employees.
Sherry Griffin's insight:
I've always held a healthy respect for Forbes as they typically seem on their game, however, I have no idea how this article made it to print. Overall, the article is correct - if you have less than the equivalent of 50 full time employees, you don't have to comply with the new health care regulations. John Goodman really steps in it when he says "Use Non-Employee Labor. Independent contractors by definition are not employees. As long as they don’t work regular hours, workers can retain their status as contractors even if they work at the employer’s establishment." This type of misinformation is exactly why small business owners are getting into trouble. Goodman's assertion that working irregular hours is all that is necessary for a contractor to be a legitimate independent contractor is flat out wrong. There isn't a single agency in the US that would agree with Goodman's statement. Obamacare is one more reason why misclassification challenges are going to increase and money is being budgeted to increase misclassification audits. The objective of Obamacare is to increase business responsibility for paying health care premiums. Any business with a combined number of W2s and 1099s that hits 50 will be on the radar to be audited. In my opinion, Goodman and Forbes were irresponsible in putting this out and should apologize.
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End 'independent contractor' tax dodge by construction companies - Lexington Herald Leader

Kansas City Star End 'independent contractor' tax dodge by construction companies Lexington Herald Leader The McClatchy study found rampant misclassification of construction workers as "independent contractors." Using this one simple tactic, the...
Sherry Griffin's insight:
Well, slanted writing to say the least. Let's start with the correct information: Yes, misclassification is rampant in the construction industry. Texas does lose a ton of money and honest companies lose projects to cheating companies who underbid them by misclassifying workers. That is why the construction industry itself labored their law makers to pass legislation increasing penalties for misclassifying workers by construction companies. It is very tailored legislation addressing a specific industry issue. Now to the slanted writing . The author makes the assertion that all workers must be employees (don't accept payroll certification from companies that don't withhold taxes for they workers). There are very legitimate reasons to use a true independent contractor. Dissuading companies from utilizing contractors as a whole doesn't make business sense and shows a lack of business sophistication. The bigger (and more annoying) slant is the reference to no problems being found in Illinois in New York with the author's view that it is because they are not right to work states (meaning heavy union presence). Yes and no. First, misclassification definitely does happen in these 2 states. It is lower than in other states because they have been very aggressive in finding misclassification. Unions do okay a part but because of the reason the author would have you believe. I scooped an article this past week that explains how unions are impacting misclassification in NY and IL because they have union representatives staking out jobs, logging who is coming and going, interviewing workers, etc. Essentially, they are acting as misclassification investigators and turning over their findings to state agencies. Before anyone thinks they are doing it out of the kindness of their heart, realize they are financially motivated. Their pocketbook is why they are doing it.
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Rulings Raise Issues for Employers of Independent Contractors - Bloomberg BNA

Rulings Raise Issues for Employers of Independent Contractors Bloomberg BNA Two federal court rulings on package delivery drivers in California and Oregon may have broader state tax implications for employers with independent contractors.
Sherry Griffin's insight:
Acting in a manner contrary to their contract or having a contract that contradicts itself is where many business get messed up in their relationships with independent contractors. I like the insight that Lisa Petkun gives emphasizing "... the importance of the contract language combined with the actual conduct of the business."
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Independent Contractors Lying In Wait… An Employment Law Perspective - JD Supra (press release)

Independent Contractors Lying In Wait… An Employment Law Perspective JD Supra (press release) The Issue: Misclassification of employees as independent contractors is common and it can have “quicksand” impact on employers.
Sherry Griffin's insight:
Great breakdown on how independent contractor status can become an issue - even when the status is initially agreed upon and even desired by both parties. It really has levels of complexity most don't realize.
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Exotic dancers say they are employees, not independent contractors - The State

The State Exotic dancers say they are employees, not independent contractors The State And she developed paralysis on one side.
Sherry Griffin's insight:
There are actually 3 separate issues that should be considered in this article, though, the article lumps them all together as one issue of intentionally misclassified contractors. The 3 issues are: intentional/ignorant classification, businesses that don't file the taxes they are required to pay, and technical misclassification. Most trippers and many hospital worker are employees - even if they are called contractors for purposes of the US Department of Labor and a number of state agencies even if the IRS considers them contractors. Business will call workers contractors to save money without having any idea what constitutes a contractor. Some business simply don't file their taxes with agencies until they get caught and then they file bankruptcy (yes, these are evil companies ran by very bad people). Technical misclassification is when the relationship is correct but the paperwork is missing. There are 3 basic aspects to look at when determining if a contractor really is a contractor: 1) the contractor's business, 2) the relationship between the contractor client, and 3) the documentation of the relationship. Lack of a contract can allow the contractor to be deemed misclassified.
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