Misclassification of Workers By: Sarah R. Johnson, Esq. Holifield & Associates, PLLC Kingston Pike Suite 201 Knoxville, TN Phone: (865) Fax: (865)

 Federal standards: Nationwide Mutual Insurance Company v. Darden 503 U.S. 318, 112 S.Ct (1992) Who is an Employee? 2

20 Factor Test 1.Actual instruction or direction of worker 2.Training 3.Integration of services 4.Personal nature of services 5.Similar workers 6.Continuing relationship 7.Full-time worker 8.Work on premises 9.Order of performance 10. Hours of work 3

20 Factor Test 11. Submitting reports 12.Method of payment 13. Payment of expenses 14. Tools and materials 15. Investment 16. Profit or loss 17. Exclusivity of work 18. Available to general work 19. Right of discharge 20. Right to quit 4

The factors are not to be “applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.” DOL: Economic Realities Test 5

 Is the work performed an integral part of the employer’s business?  Does the worker have opportunity for profit and loss?  Does the worker have overhead?  Is there a significant personal investment that the worker brings to the job?  Does the work require special skills or initiative?  What is the length of engagement?  How much control does the employer have over the job? DOL: Economic Realities Test 6

“Looks like an Employee, Talks Like an Employee … Must be an Employee” DOL: Economic Realities Test 7

 Questionable independent contractors should work through employee leasing agencies  Outstanding risk: employer and staffing agency may be determined to be “joint employers”  Audit current workforce  Independent contractors in the same status for an extended period of time  Ensure independent contractors have their own business  Corporation, liability insurance, work location Minimizing Risk of Misclassification 8

 Avoid rebranding employees into independent contractors  Manage the result, not the process to prevent favoring independent contractor status  Independent contractors in the same status for an extended period of time  Check ERISA plan language  Ensure a misclassification issue does not result in application of benefits if the worker is later determined to be an employee Minimizing Risk of Misclassification 9

 Tennessee standards for purposes of employment security taxes:  Employment. -- (a) Definition of Employment. For purposes of this chapter and subject to the special rules contained in section (e), and the definitions contained in subsection (f), “employment” means service that meets all of the following conditions: (1)it is within any category of “included service” as listed in subsection (c).” Section (a)(1). Who is an Employee? 10

 The term “included service” is defined in Section (b)(2)(B) as “any individual who, under the usual common- law rules applicable in determining the employer/employee relationship, has the status of an employee.” Who is an Employee? 11

 The “special rules” referred to in subsection (a) are found in Section (e)(1) and are commonly referred to as the “ABC test” of employment: 1.Service performed by an individual shall be deemed to be included service for purposes of this section irrespective of whether the common law relationship of master and servant exists, unless and until it is shown to the satisfaction of the commissioner that: A.Such individual has been and will continue to be free from control and direction in connection with the performance of such service, both under any contract for the performance of service and in fact; and B.Such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and C.Such individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed. Who is an Employee? 12

 The Tennessee Supreme Court has stated that a taxpayer must satisfy each of the three parts in the “ABC test” above to establish that a worker is not an employee. The Beare Co. v. State, 814 S.W.2d 715, 719 (Tenn. 1991). Who is an Employee? 13

 The “common law rules applicable in determining the employer/employee relationship” referred to in § (b)(2)(B) were stated in Masters v. Arrow Transfer & Storage Co., 639 S.W.2d 654 (Tenn. 1982) as follows:  “There are a number of indicia to be considered by a trier of fact in determining the existence or nonexistence of an independent contractor relationship, such as (1) the right to control the conduct of the work, (2) the right of termination, (3) the method of payment, (4) the freedom to select and hire helpers, (5) the furnishing of tools and equipment, (6) self-scheduling of work hours, and (7) being free to render services to other entities.” Id., at 656. Who is an Employee? 14

Anyone who is not an Employee. Who is an Independent Contractor? 15