E14: 1099 Contractors

In this episode of the premier labor and employment law podcast, host Thom Jennings and his sister, Attorney Kathleen Jennings discuss employee misclassification and the potential legal ramifications.

Podcast Episode Transcript

Narrator (00:03):
You are listening to Cover Your Assets, a podcast that discusses the timely and significant legal issues faced by employers. Kathleen Jennings is an attorney who has over 30 years of experience in advising employers as to their legal responsibilities and has written extensively about employment law. Our popular Cover Your Assets blog, if your business has employees you cannot afford not to have your assets covered.

Thomas Jennings (00:31):
All right, hello everyone, and welcome to Cover Your Assets, the Labor and Employment Law Podcast. I am your host, Thom Jennings, and we are here with, as always, I can't even say our special guest because I think this is like episode 14 or 15. So this is Old Hat right now, our resident expert, ladies and gentlemen, attorney extraordinary. Kathleen Jennings. How are you today, sis?

Kathleen Jennings (01:00):
I'm doing great, bro. How are you doing? And I appreciate that wonderful introduction as always,

Thomas Jennings (01:06):
Merely filling up time. You know, we try to give these episodes in about 25 minutes, so I figure if we can just do about, you know, an extra 30 seconds here, just some extra like elongated introduction. But of course I mean it as well.

Kathleen Jennings (01:19):
I was going to ask you whether you actually meant it or whether you were just filling up time. So I'm, I'm glad you clarified

Thomas Jennings (01:25):
That. My attorney has always advised me, never answer a question directly. Always have your attorney do that. So let me ask you, did I mean that when I said that?

Kathleen Jennings (01:39):
I don't know

Thomas Jennings (01:40):
<Laugh>. All right, well there's plenty of things that you do know about and today's topic is one of those that you do know a lot about and one that I think employers can get themselves into a little bit of trouble with, if not a lot of trouble. We've got a couple, I'm gonna go

Kathleen Jennings (01:57):
With a lot of

Thomas Jennings (01:57):
Trouble. This is a lot of trouble and we're talking about federal, state laws, all kinds of things there. But the, the term that I always use, and I know sometimes I use the, the street people slang and sometimes there's some different legal terminology involved, but I always called independent contractors, 10 99 ERs. Cuz you know, at the end of the tax year, instead of getting a typical W two, you'd get a 10 99. And with that, when you file it, you have to pay your own taxes and all that kind of good stuff. Now, the advantage of having an independent contractor or a 10 99 employee is, I mean, it's fairly obvious. You really don't, you don't have to pay a lot of the costs associated with having an employee that could be workman's comp. In some states they require disability insurance. Then of course there's a portion of the social security taxes that you're on the hooks hook for if you have a regular employee. So there are advantages to the employer, and also I believe, you know, you get, you get yourself in a position when you have a contractor. Is that, that you, you don't have to pay unemployment, at least I think that that is the case. But we'll definitely follow up on that. If you, you no longer contract with that particular individual, are those all accurate statements?

Kathleen Jennings (03:11):
Those are accurate and, and in addition to, I mean, those are really the, the tax benefits we could call it to the employer for having the independent contractor employee. But whether someone is considered an independent contractor or an employee goes beyond just the tax loss. It affects the discrimination laws if someone is covered as an employee versus an independent contractor. It covers national Labor Relations Act. If someone is an independent contractor versus an employee, the independent contractor's not counted toward people in a bargaining unit. So, and then for wage and hour law, which is probably the biggest issue in the one where employers get themselves into most trouble an employee is covered by the Fair Labor Standards Act, which means an employer has to pay minimum wage and also applicable overtime. Independent contractors are not subject to that. So if an employer mischaracterizes or mises is actually the, really, the, the term of art, you misclassify an employee as an independent contractor and the wage in our people find out the Department of Labor, you could be on the hook for a lot of back pay unpaid overtime and those kinds of things.

Thomas Jennings (04:50):
So let's, let's start with when it does make sense to have a 10 99 employee, because I think, I think it's safe to say that, I mean, there are, there are times when it makes sense to, to have a 10 99 employee, but, but there are employers that will go out of their way to look for a reason to have a 10 99 or rather than pay a regular employee. And those reasons may be not the, the most benevolent, I guess is the nicest way that I can put it. But again, this is a system that exists for a reason, and there are situations that can not only benefit the, the, the employer or I guess the, the, the contractee or whatever, I mean, I should say, just benefits both individuals where somebody as an independent contractor can choose the work that they want to do. They're not, they don't have to deal with all kinds of different regulations and everything related to the company or whatever. And it helps the company because they don't have to have somebody that's on long-term when maybe they have short-term projects. So we'll start there, there. What's when does it make sense for an employer to have a 10 90 niner?

Kathleen Jennings (06:04):
Well, I, I guess what we look at from the legal perspective, when we look at whether someone is an independent contractor versus an employee, there are various tests that go along with the various laws, but a lot of them boiled down to the element of control. How much control does the company have over the ways and means that the alleged contractor is doing the job? So if you want to hire somebody that has perhaps a specialized that can do something without a lot of control, without a lot of guidance other than kind of basic this is the project, then that may be the kind of project that is appropriate for an independent contractor. But if you are hiring somebody that you want to give a lot of direction day-to-day in terms of doing a job, if they don't have independence, if they don't have the ability to determine their own ways and means of doing the job, maybe even, you know, no control over their hours, the more control that the company has, the more likely it is that the person is going to be classified as an employee.

Thomas Jennings (07:33):
So what I, I mean, I guess when I think of indu major industries where we're looking at 10 99 ERs or independent contractors, the, you know, the major driving services, Uber, Lyft, I believe some of the, the grocery store shoppers, you know, things like that. Those are all independent contractors. And in order to meet that test, if I'm hearing you correctly, basically they say, we have work and if you choose to work and, and pick up, you know, a, a rider or whatever, you could do it on the hours that you choose and that will always be there. But in the case of those companies, they can't say, all right, you gotta work on Friday night, for example, when there's a concert in town. Is is that how it works?

Kathleen Jennings (08:15):
Well, it's, yeah, it's, it's definitely the element of control. They have to give, they have to allow the contractors a certain amount of independence, and so they can give them basic direction. You know, you have to use our app and you have to go by this fee structure, but how you go about performing the services where you pick people up when you pick people up will be up to you. This is, this is a big fight in a lot of states, including California, where it's not clear whether the drivers, Uber drivers, Lyft drivers are independent contractors or employees. They're, they're fighting over that because it has some value to the drivers in terms of possible unionization and benefits and things like that. So it's, it's a big issue in a lot of areas. And as I said before, it's an area where employers, when they make a mistake, it can be a very expensive mistake. Because if you say, well, I'm just gonna pay you with a 10 99 and that makes you an independent contractor, that's not how it works. The, in, in order to be an independent contractor, the person has to meet the test as an independent contractor and go, you have to go through the different factors. You don't just ma wave a magic wand and say you are an independent contractor. It just doesn't work that way.

Thomas Jennings (09:54):
Yeah, and I guess I, I, I know that in some of the, the different businesses that I've worked at, I mean, a lot I see a lot of the independent contractors utilized for, you know, graphic design is a big area where, you know, you may not need somebody on staff that is a graphic designer, but you have a semi-regular need for it. So in that case, it makes sense to have a 10 99 person available for you. I mean, in my case, I've written a newspaper column now for 13 years and I submit an invoice and I'm paid. And I know that in the case of the newspaper, they've always said, you know, you, you cover the stories that you want to cover. And sometimes they'll call me up and say, Hey, look, you know, we have an opportunity for this, and if you want it, you can have it. And if not, you know, I can't tell you that you have to do it. So I've had that freedom and it kind of fallen under that sort of 10 99 thing for, for many years, and it works for both of us.

Kathleen Jennings (10:52):
Yeah, I think for creatives, especially if you, you can give them a project, they have a special skill, and as long as they have the freedom to maybe work for other companies as well, or work for themselves or do other things on the side then yeah, that's appropriately an independent contractor, just like your, your situation, we know, well, I know that everyone should know that you do specialize in writing about music.

Thomas Jennings (11:27):
This is true. I'm I rock, especially you rock music,

Kathleen Jennings (11:31):
<Laugh>, you rock and you know, you've written about a lot of great acts. You've met a lot of great people and talk to a lot of great people. That's my plug for my favorite brother and one of his side hustles. So, but you have, they give you the freedom, as you said, to, to write about what you want, when you want to, they give you a deadline and, and that's it. And so that is truly, you are truly an independent contractor in that situation.

Thomas Jennings (12:00):
Yeah. And, and again, it, it's you know, it's worked out. So, and in a situation for the newspaper, especially smaller newspapers, they can't necessarily afford to put somebody on staff full-time. And I know a lot of web companies will do the same thing if they need content that's written or whatnot, they'll pay people to do those types of things. Now, what has been your experience in terms of really op, because I, I mean, I feel like, at least at this is my perception, that these 10 99 cases, the co the companies that get into trouble fall into two categories. One, they just kind of messed up. They, they didn't really, they weren't trying to to to, to, you know, beat the system per se. And then the other ones are like, oh yeah, they were definitely trying to beat the system. I mean, is that a fair assessment that some are just overtly, like, yeah, they know that this 10 99 thing is just garbage, but I still feel like that there's gotta be, because of the fact, like you said, there's all these different tests and, and there's some nuances and misunderstandings that there are companies that can get themselves into trouble and they don't realize what they're doing is necessarily illegal.

Kathleen Jennings (13:14):
I, I agree. I think wage in our law in particular, I mean we're, we're talking about wage in our law, we're talking about tax law, and those things are complicated. And there's a lot of sort of urban myths out there about some of these things. You know, one of our, our favorite wage in hour urban myths is if you pay someone a salary, they are exempt from overtime. Well, it's not that simple. In order to be exempt from overtime, you have to meet certain tests. And I think it's the same way that some employers see these, these 10 99 contractors or independent contractors, well, if I just pay you with a 10 95, 10 99, you'll be an independent contractor. And again, it's, it's not that simple, but some people, maybe they've heard that from their brother-in-law's sister or something, and so they think, well, that must be the way it is. And then one day they get a letter from Wage an Hour or a Wage an hour investigator shows up at their doorstep and they're gonna find out that they probably should have consulted with a lawyer before they did that.

Thomas Jennings (14:33):
Do you, I mean, do you have any cases that come to mind where there was a gross abuse of the 10 99 system?

Kathleen Jennings (14:42):
I can't think of any off the top of my head, but you'll see them reported. You'll, I mean, you'll see large settlements and verdicts reported fairly regularly where employees are misclassified as independent contractors. It's, it's the kind of thing, especially if you do it with a whole group of employees and misclassify them as independent contractors rather than employees, and you haven't paid them overtime or some, it's, it's usually unpaid overtime. But you also, you have to pay the minimum wage as well. And then you have the federal government, if they're misclassified and you haven't done the proper withholding, you're gonna have the i r s coming after you. So it's, it's a whole world of trouble if you misclassify folks.

Thomas Jennings (15:33):
And I would think that there's there's probably some things that could trigger maybe an investigation. So for instance well, I'll tell you, you know, I know we discussed this one offer, but I'll tell you the story. My story in, in, when I was a 10 99 employee, or I guess, you know, called employee a contractor,

Kathleen Jennings (15:51):
You can't, yeah, you can't be an employee if you're getting 10 I Wealth, yeah, it's a contractor. You can be an employee, they're just not paying you as one.

Thomas Jennings (15:58):
So you know, one of the things that, that, I mean, I was laid off from my, my employer and so I was getting unemployment. And the way unemployment works is that, you know, if you work even as an independent contractor, even if you don't get paid, if you do any kind of work, then you are ineligible for unemployment for that day. It's considered a date's worked. So I, I'd worked for a, I had contracted with a DJ company for many years, and during the time that I was on unemployment, I said, you know, I, I can't, it's not worth it to me because from what I'm gonna make doing the DJ shows I, I'll make more on unemployment, so I'll, I'll put the DJing thing on hold until I get a full-time job. Well, I dunno, seven, eight months later, I get a letter in the mail from the unemployment insurance division of the state of New York that says that I owe them, you know, $1,200 in, in back unemployment that they overpaid me because I'd been working as a inde, as an independent dj.

Thomas Jennings (17:00):
And so I called the guy up and I says, Hey, I, well, like, what is this crap? Like, I, I didn't work for you during this period, I didn't do any work for you. And he's like, oh, I don't know what it's about. And, and he's like, but I can't afford to have anybody coming through here and, and snoop it through my book, so I'll just, you know, I'll just give you the money. I'll just pay it off. And, you know, we'll forget about it, but I remember the time thinking that, man, you know, this is because even, even as a 10 99 or you still are required to report that payment to the irs, I mean, you may not be paying taxes on it like you would a typical payroll, but it's still being reported.

Kathleen Jennings (17:36):
So, well, you're paying taxes, your taxes just aren't withheld so that, you know, you have to make sure you set aside enough to pay taxes on that money when the tax man comes.

Thomas Jennings (17:49):
But in terms of, of the disc jockey company, I mean, he wasn't, he wasn't paying any taxes on it. So he, I don't know, I don't know how he, he must have reported at the end of the year that I had worked and maybe put that in as a business expense when he filed his taxes. But obviously he was living in a certain degree of fear. And I mean, this was a guy who was I mean, he was, he was very controlling and he always used to make sure to say, you know, oh, you're not employee, you're not employed, but you gotta do this, you gotta do this, you gotta do this. So it really did come down to, I mean, there was a large degree of control that he had in terms of, you know, what, what shows we were assigned and the equipment that we had to use, you know, things like that.

Thomas Jennings (18:30):
So again, I don't know that if, if he ever got in trouble for it, but to me he, he obviously could have if they decided to in, to investigate. And I would think that those would be the types of situations that could trigger potentially an audit. And I also wonder like with, if you were a 10 99 contractor, I mean, you can't file for unemployment if they end the contract, but I would imagine, I know I've heard of situations of friends who've like, you know, been a 10 99 or they've done work for a company, the company stops paying them, and that was their sole source of income, and then they would go file an unemployment claim. And I think that also could potentially trigger someone going, well, does this pass the test as an employee relationship or contractor relationship? Because at that point, again, if it turns out that the employee meets the standards of being an employee, then now you're looking at having to pay that unemployment insurance and the pack unemployment insurance and, and you could probably get yourself in a whole pile of trouble if you do that

Kathleen Jennings (19:34):
Well, and then is the state gonna report it to the federal government? And yeah, so it's, you know, it's, it's taken a big risk if you decide to classify someone as an independent contractor without doing your due diligence.

Thomas Jennings (19:53):
So I, I guess, you know to kind of, to kind of wrap it up, I mean, it it, in the case of obviously companies that have the resources and that retain a firm like yours or, you know, maybe just work with a firm like yours, wouldn't you say that it would probably be best practice to, if before you agree to enter into like a 10 99 relationship with an potential contractor for any period of time that you should present this to an attorney to make sure that they review it, to make sure that you're in compliance? Because I think that,

Kathleen Jennings (20:28):
You know, I'm going to say yes, Thom,

Thomas Jennings (20:31):
Well, I, and, and I wanna qualify that a little bit because it really isn't a, a shameless plug for, for an attorney, but you know, I, I do find that a lot,

Kathleen Jennings (20:40):
But we appreciate them anyway, <laugh>,

Thomas Jennings (20:42):
But they but don't you, I mean, I think with, with HR specialists, they have so much on their plate in terms of just things that they have to deal with in terms of benefits and other wage an hour and things like that, that if they're not dealing with something like 10 99 contracts or, or whatever you want to call 'em, that it would be very easy for them to, to make a mistake. And, and not, because these are people that aren't qualified professionals, it's because it's an area that, again, like you said, is so complex that you're almost better off being proactive, getting the relationship reviewed by the attorney. And at least in, in on some level, you know, as we say in this business, covering your assets.

Kathleen Jennings (21:27):
Well, in my business we always say get it in writing. So if you are going to enter into any kind of contractor relationship with a person or what we see a lot now is contract labor companies, you contract with a company that'll provide labor because good labor or any labor is hard to find in, in some places the United States. So make sure that you get the relationship memorialized in writing and have your council review that contract because there's certain magic language you wanna have in there that will be evidence that the relationship is one of contractor, independent contractor and Contractee versus employer employee.

Thomas Jennings (22:18):
All right. Well, not one of the most exciting topics today, but an important one, <laugh>,

Kathleen Jennings (22:26):
Not exciting, but it's, it's exciting. It's, it, well, it's not exciting if the wage and hour police show up at your door, but they're not as exciting as the sex police.

Thomas Jennings (22:38):
The sex police are definitely better than the wage and hour police. And but e either way, you don't want any police at your

Kathleen Jennings (22:44):
Door. No, no.

Thomas Jennings (22:46):
It's something bad is happening. The only the only police you want at your door might be Sting. I think it'd be pretty cool if Sting just showed up at your door, cuz he wouldn't be coming with a warrant. He'd be coming with a bass guitar.

Kathleen Jennings (22:58):
What about the Dream Police?

Thomas Jennings (23:00):
Well, they live inside of my head.

Kathleen Jennings (23:02):
Okay.

Thomas Jennings (23:03):
Yeah, they're not real.

Kathleen Jennings (23:05):
Okay.

Thomas Jennings (23:05):
Anyhow contact information quick takeaways. I mean, I think the, the clear takeaway is, is before you enter into an agreement and you think that somebody should be classified as 10 99, have it reviewed by an attorney very quickly

Kathleen Jennings (23:19):
Get it in writing, have it reviewed by an attorney. Yes.

Thomas Jennings (23:23):
And your contact information,

Kathleen Jennings (23:26):
My contact information is always, you can shoot me an email at kj j wim law.com

Thomas Jennings (23:33):
And of course if you have any topic suggestions or anything like that we would be happy to do that. But, but I would like to say that we are still the number one rated podcast in the world that is named Cover Your Assets, the Labor and Employment Law Podcast.

Kathleen Jennings (23:50):
That is, that's an honor, Thom, it is an honor. I'm, I'm, I'm honored to be a part of that with you.

Thomas Jennings (23:56):
Yeah. And when we go to our first annual Best Cover Your Assets, labor and Employment Law Podcast award Ceremony, we'll accept that award together. But anyhow, I've

Kathleen Jennings (24:08):
Already got my dress.

Thomas Jennings (24:09):
As always, thank you for myself from the Sex Police, from the Wage and Hour police, from any police. We're trying to keep the The Dream Police. The Dream Police. Yeah. We will see you next time on Cover Your Assets. Thanks again for listening.

Podcast Disclaimer

The Cover Your Assets-The Labor and Employment Law Podcast is produced by Thom Jennings of the Caronia Media Group. For more details, you can contact him at thom@caroniamediagroup.com.

The information provided in this podcast is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this podcast or any of the e-mail links contained within the site do not create an attorney-client relationship between Kathleen J. Jennings. The opinions expressed at or through this site are the opinions of the individual hosts and guests.