Earlier today, U.S. Secretary of Labor Alexander Acosta announced the withdrawal of the U.S. Department of Labor’s informal guidance on joint employment and independent contractors issued during the Obama administration. The announcement states that the withdrawal does not “change the legal responsibilities of employers under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act” and that the DOL “will continue to fully and fairly enforce all laws within its jurisdiction.” We will keep you updated on any additional word from the DOL on these issues, but it appears that by withdrawing these guidelines, the new administration is taking a first step away from attempts of the Obama administration and the NLRB to expand concepts of joint employment.
Two recent developments are a good reminder that companies who have independent contractors are under increased scrutiny and face a high bar in establishing that independent contractors are properly classified as such — and not employees.
On July 15th, the Department of Labor issued a guidance saying that most workers qualify as employees under the Fair Labor Standards Act (FLSA) regardless of what the worker and the company may have agreed to. The guidance doesn’t announce a new test for independent contractor status. Instead, it starts with the “economic realities” test for independent contrator status that courts regularly use and a reads it together with a broad view of the FLSA’s definition of employ to reach a conclusion that most independent contractors are misclassified and should, instead, be treated as employees.
The DOL’s guidance was close on the heels of a decision by the Seventh Circuit Court of Appeals, which reversed the lower court and ruled that FedEx delivery drivers are employees under Kansas state law, not independent contractors. In making its decision, the 7th Circuit certified the question of whether the drivers were employees under the Kansas Wage Payment Act to the Kansas Supreme Court. The Kansas Supreme Court, applying a 20-factor test, found that the drivers were employees because FedEx, among other things, assigns drivers their routes; requires them to check in with FedEx managers at the start of their day; regulates their appearance; and decides whether to hire a driver after the driver submits resumes and references like any other employee.
So what are the consequences of misclassification? Companies that misclassify employees as independent contractors face penalties for failing to pay employment taxes, for failing to withhold taxes from pay, for failing to comply with wage and hour requirements (such as overtime), for failing to contribute to unemployment compensation, and for failing to comply with other employment-related laws. In addition, the Affordable Care Act opens companies that misclassify workers to significant penalties — both based on failure to offer coverage to the required portion of the workforce and where a misclassified worker obtains coverage on an exchange.
In light of these developments, we strongly recommend that any company that has independent contractors work with counsel to determine if these workers are properly classified. A thorough review now could save you lots of money, time, and aggravation later.
From time to time, other attorneys with our firm will contribute blog posts on items that may be of interest to members of the labor and employment law community. Today, we are fortunate to have a post contributed by Marc Fineman, a partner in Levenfeld Pearlstein’s Intellectual Property Group. Marc’s post discusses an issue that frequently comes up when companies retain independent contractors. As Marc explains, if you don’t document the relationship correctly you may not own what you think you own when the project is complete . . .
It is a widely held belief that if you retain an independent contractor to create something (a logo, software, a website, marketing collateral, etc.), and you pay the outside contractor, then you “own” what the independent contractor creates. However, this is a common misconception that can lead to disastrous results. For most works created by an independent contractor, the independent contractor owns the copyrights to the works, even if the independent contractor is paid, unless the independent contractor signs a written copyright assignment.
The phrase “work made for hire” is a term of art under the U.S. Copyright Act and refers to two categories of works. The first category is relatively straightforward—the copyright to any work prepared by an employee within the scope of his or her employment is owned by the employer. However, the second category of works made for hire, which covers works created by independent contractors, applies only to nine somewhat unusual types of works (and requires a signed agreement with the independent contractor in which the parties agree that the work is a “work for hire”). For works created by independent contractors that fall outside of those nine specific types of works (as many works commonly created for businesses do), the independent contractor owns the copyright to the work unless the independent contractor signs a written copyright assignment.
Think about the situations in which you have retained, or in the future may retain, an independent contractor to create something for you or your business. Then, think about what would happen if you found out that your independent contractor owns the copyright to what he or she created for you. Could you still stop somebody else from infringing the work? Could the independent contractor sue you for infringement? Would a potential buyer of your business be concerned?
The bottom line—if you use an independent contractor, be sure to obtain a written copyright assignment.