Courts and Regulators Scrutinizing Independent Contractor Relationships

Because of the potential for significant liability if an independent contractor is ruled to be an employee (e.g., unpaid wages, penalties, interest, attorneys’ fees), proper classification is very important for companies. Federal and state lawmakers, as well as regulators, have declared their intention to bring their resources to bear against companies that use the independent contractor label to skirt compliance with wage and hour laws and saddle workers with costs they maintain should be borne by their employers.

Closely examine all independent contractor relationships, and consider using an arbitration agreement governed by the Federal Arbitration Act. Although there are numerous tests for determining whether someone is an independent contractor or employee, the determinative factor often comes down to how much control a company exercises over the manner and method by which services are provided.

Companies should avoid retaining any right to discipline the independent contractor, retaining only the right to terminate the agreement. The contract should not impose a duty to comply with company policies. Company management should keep its distance from independent contractors and should not manage, supervise or direct them, or assign work other than a general description of duties. Company management should not be involved in the manner or method by which the work is done. Controls should be limited to ensuring standardized products and services and compliance with legal requirements. Examine the written materials provided to independent contractors and scrub them of indicia of control.