Employee vs Independent Contractor: A Legal Case Study

1 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? Case Study: Employee or Independent Contractor? Tyler M. Jones HRMN 408 6380: Employment Law for Business Dr. Chris Cavanaugh January 30, 2023

2 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? SUMMARY a. The lawsuit concerning Capital International Security, Inc. (CIS) is intricate. This security group was established due to the disbandment of the previous security team responsible for protecting Prince Faisal bin Turki bin Nasser Al-Saud. CIS offers Prince Faisal security services and additional personal assistance at his private estate in Virginia. The employees received a daily pay rate instead of an hourly or salary wage. The personnel were not eligible to receive overtime compensation for their efforts due to this daily pay rate. Upon the assumption of operations by CIS, the personnel were instructed to acquire a license for a private security firm. The Virginia Department of Criminal Justice Services (VDCJS) acquired the permit. Acquiring this license resulted in the personnel transitioning from regular employees to independent contractors. CIS informed the employees that they must purchase this license and liability insurance; failure to do so will result in termination by a specific date. The motivation for CIS's desire for employees to transition into independent contractors was primarily driven by employee remuneration and insurance coverage considerations. The organization would be obligated to provide employees with hourly and overtime pay. The termination order was not enforced, and for fourteen months, the employees failed to comply with the demand of CIS, thereby remaining as employees of the organization (FindLaw, n.d.). b. The CIS maintained its activities but was scheduled to undergo an audit by the VDCJS. This audit alerted the corporation to the employees' need for a valid private security business license. Consequently, the firm decided to downgrade the employees who still needed to obtain the licenses. The downgrade resulted in a reduction in the employee's salary, while their responsibilities remained unchanged. This implies that the employees

3 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? exerted the same effort but received a reduced salary. A lawsuit was ultimately initiated but ultimately decided in favor of CIS (FindLaw, n.d.). c. The ruling in this case was erroneous as the employees were not classified as independent contractors for at least fourteen months. Consequently, the employees were entitled to receive overtime compensation but were not remunerated with the appropriate hourly salary. "The defendants' sole argument during the trial was that the agents were not protected by the Fair Labor Standards Act (FLSA) because they were independent contractors, not employees as defined by the law" (FindLaw, n.d.). CLASSIFICATION TEST a. Determining employee categorization is challenging yet essential to selecting the appropriate withholding of employee taxes. Each paycheck earned by an employee of an organization is subject to federal, state, Social Security, and Medicare tax deductions. The employer deducts these payments during payroll procedures and remits them to the respective agency. An independent contractor is classified differently from workers within organizations. Consequently, the business needs to be accountable for deducting these taxes from the payroll checks of independent contractors. Independent contractors are subject to self-employment taxes. Therefore, they must bear the financial burden of these taxes independently (IRS, 2019). b. A worker is considered an "independent contractor" if the party providing payment can dictate solely the task outcome without specifying the methods or procedures to achieve that outcome (Carlson, 2018, p. 128). When categorizing employees, it is imperative to consider several other criteria. The topics encompass interpersonal dynamics, fiscal management, and behavioral regulation. The relationship pertains to

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4 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? the perception of the interaction between the organization and the employee. The relationship can be established by a contract or written agreement that specifies the manner of interaction and the nature of the relationship being formed. The financial control of an organization is determined by its capacity to effectively manage and regulate its finances and the operational activities that directly impact its employees. An individual is considered an employee when the company possesses the power to exercise control and guide the individual's work responsibilities (Carlson, 2018, p. 132). VIRGINIA STATE LAW a. According to Virginia state law, "Domestic service" refers to services involving the care of an individual in a private home or the upkeep of a private home or its surroundings. These services can be provided permanently or temporarily, including tasks performed by companions, cooks, waiters, butlers, maids, valets, and chauffeurs (Virginia et al., 2020). The verdict favored CIS as they determined that the employees were classified as independent contractors. According to Virginia state labor statutes, the ruling would favor CIS. As mentioned above, the legislation would classify CIS employees as exempt from minimum wage regulations. b. Virginia legislation mandates that every work conducted or subcontracted within Virginia must have workers' compensation coverage, regardless of its temporary nature. Regarding workers' compensation, taxicab drivers and real estate brokers/salespersons who receive most of their remuneration through commissions are exempt. Similarly, real estate salespersons and brokers who solely provide services for compensation in the form of commission or fee are exempt from unemployment insurance. Additionally, workers on

5 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? certain fishing vessels are also exempt. In this specific scenario, the only exception for employee classification that would apply is any of the twenty elements established by the IRS to determine the employer-employee connection (IRS 20 Factors and Virginia Exemptions for Employee Classification, n.d.). The agents would only be considered independent contractors if they received payment in the form of a 1099. All the variables were specified in Ruling 87-4. The courts enumerated all the factors that enabled them to ascertain the classification. Despite considering all the reasons, the agents would still be classified as employees (Employee or Independent Contractor? 2023). Out of the twenty elements listed by the IRS as exceptions, specific agents may be categorized as independent contractors. However, the general agreement is that they are employees. Classifying Workers a. Worker's compensation coverage is not mandatory for independent contractors under Virginia law. Suppose, however, that the state judges that the job performed by the employer/contractor is considered an employer/employee relationship. Under those circumstances, the organization may encounter legal infractions and would be obligated to offer insurance coverage. Assume a business engages a subcontractor to carry out the same trade, business, or vocation or fulfill a commercial contract. Under those circumstances, the subcontractor's employees determine the total number of employees (Commonwealth of Virginia, n.d.). The court will evaluate the criteria determining an individual's status as an employee to assess the nature of the connection. The nature of their working relationship determines the consequence of an employee's injury. b. Under Virginia state law, companies must provide workers' compensation insurance to ensure employee coverage in the event of work-related injuries. Employers must have a

6 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? clear understanding of their definition of an employee. Temporary workers, undocumented laborers, and minors are all categorized as employees. The HR department is vital in ensuring organizational compliance with coverage standards. Virginia organizations that incorrectly identify an employee as an independent contractor face the possibility of incurring substantial penalties and losing eligibility for benefits. Misclassification is a matter that the courts treat with great seriousness, and employers should anticipate legal actions resulting from it. Companies that classify their employees as independent contractors will face a penalty of up to $1,000 per person for the initial violation (Genti, 2020). The second infraction incurs a maximum penalty of $2,500 per misclassified individual, with the penalty amount increasing significantly over time. c. Employers who deliberately misclassify workers do so to obtain certain advantages. Initially, employers would be exempted from remitting specific taxes, such as Social Security and unemployment insurance. Employers can significantly reduce labor expenses. Furthermore, the misclassification of employees grants companies the freedom to evade legal obligations, including the provision of minimum wage and adherence to legislation regarding working hours. Moreover, companies can evade the regulations enforced by the Equal Employment Opportunity Commission, an organization established to safeguard the rights of employees. Employers employ the strategy of classifying people as independent contractors to evade responsibility and reduce costs. According to a report by the Treasury Inspector General for Tax Administration (Department for Professional Employees, 2020), employers can save an average of $3,710 per employee, resulting in an annual income of $43,007. The purpose of many laws is to guarantee that companies fulfill their obligations to employees. However, some

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7 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? employers evade these obligations by deliberately misclassifying people, saving substantial money. Three Preventable Steps a. In order to prevent situations like the one experienced by the Schultz family, it is advisable to choose an HR specialist who can guarantee that the firm adheres to all the laws and regulations established by the state and federal government. Failure to assign a designated individual to review the numerous laws might expose a company to significant risks. As an HR professional, I can provide three pieces of advice to prevent similar situations from occurring in the future. Initially, it is necessary to conduct an internal audit to comprehensively comprehend the existing categorization within the workplace and ascertain its compliance. The audit involves monitoring the tasks performed by employees, checking the existence of physical copies of contracts for freelance agreements, and verifying the workers' possession of Federal Tax ID numbers. The internal audit demonstrates that the organization can provide credible evidence that the workers are categorized as independent contractors. Investigating present processes can help identify deficiencies and areas that need improvement before an external audit (Fleischer, 2017). The next stage entails creating a software application designed for engaging independent contractors. The platform will enable the HR department to devise methods to surmount obstacles for a seamless procedure. The classification process incorporates guidelines for how to involve self-employed individuals. b. Furthermore, it demonstrates the organization's transparency regarding its stance on activities involving independent contractors. The program is specifically intended to ensure efficient resource acquisition while prioritizing adherence to regulations. The third

8 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? stage ensures accurate classification of employees and independent contractors. It is necessary to mandate that the HR department implement written agreements delineating the professional association, emphasizing the duties, and explicitly establishing the contact channels. All members of the HR department must participate in training sessions or seminars that provide them with up-to-date information on existing and emerging practices related to regulations governing classifications. HR must be cognizant of the rules and regulations set by both the federal and state governments while establishing employment connections. c. A comprehensive assessment of worker categorizations for individuals operating under a 1099 tax agreement is essential for multiple reasons. Tax laws and regulations are subject to change, similar to the new law. Regularly conducting evaluations and revising worker categories guarantees the company's adherence to current tax regulations, thus reducing the potential for legal and financial repercussions. Misclassifying people as independent contractors instead of employees can lead to the imposition of penalties and fines. The HR department can detect misclassifications and implement necessary measures to prevent potential legal liabilities by implementing regular evaluations. Consistently updating worker classifications is a preemptive action to reduce legal and financial risks linked to misclassification. Through early identification and resolution, HR may proactively mitigate prospective difficulties, thus averting more consequential problems in the future. Regularly updating worker categories for individuals under a 1099 tax arrangement is crucial for ensuring legal compliance, minimizing risk, and efficiently managing the workforce. HR should perceive this process as a component of continuous

9 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? due diligence to adjust to modifications in laws, rules, and the dynamics of the organization's workforce. d. Genti, J. (2020, October 13). Virginia law targets worker misclassification. DiMuroGinsberg:. e. https:// www.dimuro.com/ virginia-law-targets- worker-misclassifica

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10 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR?

11 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? References Carlson, R. R. (2018, January). Employment by Design: Employees, Independent Contractors And the Theory of the Firm . 71 Ark. L. Rev. 127. https://scholarworks.uark.edu/cgi/viewcontent.cgi?article=1042&context=alr Commonwealth of Virginia. (n.d.). Workers’ Compensation Insurance Information for Employers. Virginia Workers' Compensation Commission. https:// workcomp.virginia.gov/ sites/default/files/ documents/Workers- Compensation-

12 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? Information-Sheet-for %20-Employers.pdf Commonwealth of Virginia. (n.d.). Workers’ Compensation Insurance Information for Employers. Virginia Workers' Compensation Commission. https:// workcomp.virginia.gov/ sites/default/files/ documents/Workers- Compensation-

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13 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? Information-Sheet-for %20-Employers.pdf Commonwealth of Virginia. (n.d.). Workers’ Compensation Insurance Information for Employers. Virginia Workers' Compensation Commission. https:// workcomp.virginia.gov/ sites/default/files/ documents/Workers- Compensation-

14 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? Information-Sheet-for %20-Employers.pdf Commonwealth of Virginia. (n.d.). Workers’ Compensation Insurance Information for Employers. Virginia Workers' Compensation Commission. https:// workcomp.virginia.gov/ sites/default/files/ documents/Workers- Compensation-

15 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? Information-Sheet-for %20-Employers.pdf Commonwealth of Virginia. (n.d.). Workers’ Compensation Insurance Information for Employers. Virginia Workers' Compensation Commission. https://workcomp.virginia.gov/sites/default/files/documents/Workers-Compensation- Information-Sheet-for%20-Employers.pdf Employee or Independent Contractor? Understanding the Classification Tests . SCORE. (2023, July 23). https://www.score.org/resource/article/employee-or-independent-contractor- understanding-classification-tests FindLaw. (n.d.). SCHULTZ v. CAPITAL INTERNATIONAL SECURITY INCORPORATED. https://caselaw.findlaw.com/us-4th-circuit/1053551.html Genti, J. (2020, October 13). Virginia law targets worker misclassification. DiMuroGinsberg:. https:// www.dimuro.com/ virginia-law-targets-

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16 CASE STUDY: EMPLOYEE OR INDEPENDENT CONTRACTOR? worker-misclassification- 2 Fleischer, C. H. (2017). The SHRM Essential Guide to Employment Law: A Handbook For HR Professionals, Managers, Businesses, and Organizations . Society For Human Resource Management. Genti, J. (2020, October 13). Virginia Law Targets Worker Misclassification . DiMuroGinsberg:. https://www.dimuro.com/virginia-law-targets-worker-misclassification-2 IRS 20 Factors and Virginia Exemptions for Employee Classification. (n.d.). http://www.vec.virginia.gov/irs-20-factors-and-exemptions Virginia Executive Summary: Report on Domestic Service Workers . RD10 (published 2021) – Report on Domestic Service Workers. (n.d.). https://rga.lis.virginia.gov/Published/2021/RD10

TJones HRMN 408 6380 Assignment 1.edited1

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