Independent contractor lessons from New York State

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Posted by Matt Rivera

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June 24, 2010

Recently, the New York State Department of Labor fined several contractors for misclassification of employees. In a sweep of 21contractors, more than half (12 in all) were found to have misclassified employees (over 200 workers). This amounted to thousands of dollars in fines, fees, and back taxes.

This is a direct result of the efforts of a Joint Task Force that the state of New York created to address this issue. Connecticut and many other states have or are considering similar task forces.

A couple quick lessons learned from these violations:

Contractors were doing the same work as employees and getting paid LESS.
We often think that independent contractors always get paid more than employees. In this case, the state found that some contractors had "off the books" employees who were paid a flat $100 a day -- up to $5.50 less per hour than employees. In some cases, the independent contractors were paid up to $10 per hour less than a small, core group of employees doing the same job.

This is a crucial area. In this case, it was blatant, and the employer was obviously paying some workers much less to increase profits. But in many cases, if you simply have an independent contractor performing the same work as an employee (same location, computer, desk, phone, etc.), that's enough to bring increased scrutiny.

One of the worst things you can do is supervise an independent contractor like you would an employee, or along with employees doing the same job. If you feel it's necessary to provide this oversight and management, an independent contractor might not be the best choice for the job.

Overtime rules were not followed.
In almost all cases, there were fines related to violations of overtime rules. Those getting paid a daily rate were working 48 hours a week with no overtime, while the core employees got overtime (again, for doing the same job). Many were working Saturdays after already working a full week at their low wage, so in essence, the employees were ripped off twice.

The contractors probably assumed that since they were categorized as independent contractors, they weren't eligible for overtime. But coupled with the fact that they were doing the same work as employees, and the employer had obviously manipulated their wages, the state went after them. While it might seem cheaper to try to skirt overtime, in the long run, it could be costly. In this case, the employers were forced to pay the workers overtime plus liquidated damages.

Another important take-away is the idea of subcontracting. That is, in effect, what these contractors were trying to do. They took the job, and then probably tried to say they were hiring independent contractors to do some of the work for them -- they were subcontracting it out. However, they controlled and managed the workers, along with the other pay and overtime violations above.

Adding insult to injury, according to the state, these were out-of-state contractors who probably severely undercut local contractors. That goes back to that old adage: If the deal seems too good to be true, it probably is.

This also raises some standard questions to ask anyone providing labor to your organization: Do you subcontract any of the recruiting services you provide? Are the temporary employees you provide always W-2 employees of your firm? If not, under what conditions would you provide an independent contract or a subcontracted worker?

If they can't readily answer these questions and understand the associated risk, you might be putting your company at risk by doing business with them.

Close scrutiny of contracts, supervision, and processes is required for proper management of a contingent workforce today. States like New York are leading the charge with a double-edged sword: to protect employees' rights and to make sure employers are paying their fair share.

Oh yes, and don't forget the federal government. It has an additional $25 million in the 2011 budget to keep pace with the states on this issue. What do you want to bet that number goes up when they start having some success? Even the government knows there's likely a good return on that investment.

Topics: HR Strategies

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