As the Uber Employee-Contractor debate reaches a fever pitch, it's becoming clear that it's pretty common for startups to misclassify workers. When you’re investing sweat equity, nobody is overly concerned about compliance. When your team is small and you’re worried about making it, you don’t have time to dot your i’s and cross your t’s.
But, fast forward for a moment and imagine you’ve secured venture funding and you’re starting to scale your operations and team. When recruiting key talent, you typically bring those folks on as employees with all the attendant perks (e.g. stock options, health care benefits, paying taxes, providing PTO).
Let’s say you also starting adding people to fuel the engine and you add positions ranging from customer service, reception, administrative, and/or “service providers,” if you’re an on-demand platform like Homejoy, Handy, or Instacart. Also imagine that to accelerate your momentum, you classify these people as independent contractors to get an automatic 30% discount, streamline your cap table, and make it easier to make quick staffing changes.
The Dangers of Mischaracterizing Employees
The consequences for mischaracterizing an employee as an independent contractor can be significant, if not downright crippling for a company. The direct consequences include the payment of wages (minimum wages and overtime) that the employee would have otherwise been entitled to had they been classified correctly. Payroll tax liability can also be incurred as a result of the misclassification, which can also carry with it interest and penalties at best, and criminal penalties for the founders at worst.
If you’re wondering how courts and administrative agencies determine hours worked for people who have not tracked their time, it generally ends up being whatever the worker claims unless the company has undisputed evidence that shows otherwise. As a result, companies are generally not in a good position to successfully dispute a claim for wages after losing the misclassification battle.
Beyond losing a wage claim, the more significant threat is becoming a target for plaintiffs’ wage and hour class action lawyers. These folks are the HR equivalent of patent trolls in that their lawsuits are all about leveraging the costs of defense, which often approach (or exceed) seven figures, which leaves the company the choice of either paying defense lawyers or paying plaintiffs’ lawyers. Either way, the company ends of paying big money to lawyers.
Criteria Used to Classify Workers
Courts and regulators look at several criteria to determine worker status such as:
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whether the worker is involved in the primary business of the company
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whether the worker maintained the right to control the manner and means of accomplishing the desired business result
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is free to provide services for others
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has the ability to set his/her own schedule and hours
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is paid by the job or project
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is responsible for his/her own business expenses
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whether there is a written contract governing the relationship.
If you can answer “yes” to these questions, you’re in a strong position to show an independent contractor relationship and ward off misclassification threats. To save yourself a whole lot of headaches and cost down the road, here are three best practices to follow to avoid misclassification risks.
3 Best Practices To Avoid Misclassification Claims
1. Draft job descriptions for all positions, including roles filled by independent contractors.
The best way to ensure you are classifying workers correctly is to create an accurate job description. Creating a good job description provides multiple benefits: it outlines the essential functions of that position and the purpose of the position in relation to the overall business, which is your starting point for recruitment. Additionally:
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It can be used to evaluate candidates’ different strengths/skills in comparison to the essential job functions to help with hiring decisions
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It can be used as a benchmark to evaluate a worker’s performance for talent management
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It can help the employer (and their counsel) audit the position and properly classify it as one requiring an employee or one that can be filled by an independent contractor.
2. Distinguish the work of independent contractors from your primary business.
As it stands right now, you can’t show an independent contractor relationship unless you clearly and persuasively distinguish your primary business or service from the work performed by your independent contractors.
This is where on-demand businesses such as Uber, Lyft, Homejoy and many others have run into trouble because the distinction wasn’t clearly mapped out early on. But, with a little proactive, strategic effort, you can and should outline the primary purpose or value of your business and then map out how independent contractors associated with your business provide a secondary service or function that is related to, but not reflecting the core value that your business brings to the market.
Here’s an example: let’s say you’ve created an on-demand platform to facilitate some personal service. You want to outline that the value of your platform is as a hub or virtual meeting place that allows consumers and service providers a centralized place to connect online and instantly negotiate/facilitate a service relationship. The more you can clearly and consistently message that your business is a “facilitation hub” that connects people, the more you’re distinguishing your primary business from the work performed by independent contractors working for your business.
3. Document all independent contractor relationships with a written agreement.
One of the easiest but essential best practices is to document all independent contractor working relationships with a written independent contractor agreement. The written agreement should include language referencing that the contractor has the right to determine his/her manner of work:
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Ability to set his/her own schedule ability to work for other clients
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Sets an established fee or payment schedule
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Responsible for his/her own taxes and business expenses, etc.
Conclusion
In startups, it’s hard enough to propel the business forward without also worrying about worker misclassification risks. While you’re still small (less than 50 people), you probably don’t need to sweat the details yet, as the chances of a plaintiff’s lawyer noticing you are probably slim to none.
But as soon as you pass that 50 person threshold and start gaining momentum and brand awareness, investing an hour or two in strategizing about worker classification will pay dividends as it allows you to easily navigate around and avoid potentially crippling misclassification claims. For guidance, Emtrain can offer expert advice on wage & hour calculations, as well as some general guidance.