October 2013

By: Nancy E. Joerg, Esq.

The employer-employee relationship used to be seen as a kind of “marriage.” It was viewed as a lifetime relationship. The partners stuck together through thick and thin. There were good years and bad years, and the relationship continued. But, a careful look at the American workplace of recent decades shows the decline of work as marriage.

Workers today often complain about the company’s lack of long-term commitment to employees. They look back on seemingly sunnier days when many employers operated as “father figures,” fostering loyalty (and offering an unspoken contract for lifetime employment to the faithful).

The traditional employer and its traditional employee were in close physical proximity to each other. Much, if not all, of the work occurred right at the physical workspace. “Off-site jobs” were rare. Therefore, the employer had an opportunity to observe and closely supervise employees.

But the rise of mobile technology and the increasing competitive pressures on American businesses has resulted in a shift away from the traditional workplace and a growing emphasis on flexibility.

These fundamental changes have created pressure on both employer and employee to create and negotiate new non-traditional employment relationships. Many of these relationships are grouped together under the popular banner of the “Contingent Workforce.”

NON-TRADITIONAL CATEGORIES: Although many workers today are still in a full-time, relatively stable job environment, the number of non-traditional jobs is growing. Some of those non-traditional jobs include such categories as:

• Outsourcing. The trend in businesses to look outside the core group of employees for services.
• Independent Contractor. A self-employed worker who controls the manner and means of the services performed and runs his or her own business in the way he or she sees fit. Independent contractors handle their own taxes. They have their own business reputation and their own place of business. They can make a profit or take a loss.
• Leased Employee. A worker who is the legal employee of an employee leasing company/Professional Employer Organization (PEO). Such a worker performs services for a client company of the employee leasing company/PEO. There is frequently an “on-site” supervisor of the employee leasing company/PEO who supervises the work of the leased employee at the client company location. Normally, the employee leasing company/PEO actually issues the paycheck to the leased employee, withholds taxes on the leased employee, etc.
• Part-Time Employee. An employee who works fewer hours than full time. (Full time is defined differently at various companies.)
• Temporary Worker. A worker who accepts employment on a short-term, often fill-in basis. Typically, this worker is the employee of a temporary employment service and has been placed by that service at a client company on a less than permanent basis.

The use of contingent workers is on the rise within corporations around the United States. These corporations want to avoid hiring large numbers of long-term employees. Outsourcing permits the corporations to have a relatively small core of employees, with the option of specialized workers and services on an as-needed basis.

In the contingent workplace, companies can hire workers for specific, temporary assignments and projects, rather than committing to long-term traditional employment relationships.

An advantage of using independent contractors, rather than employees, is that employees often need to be trained and managed, but independent contractors are expected to be fully trained for the jobs they accept.

DIFFERENT VIEWS: The subject of contingent workers arouses strong passions in people. Union leaders, some politicians, and others tend to view independent contractors and other contingent workers as people who have been expelled from the traditional employer-employee world to fend for themselves without benefits, with low wages, with no job security, etc.

Many workers, and almost all employers, see the contingent workforce as a positive development.

The confusing reality is that some contingent workers greatly prefer the freedom of the status, where others want to find a traditional, stable long-term position.

WHY PEOPLE JOIN THE CONTINGENT WORKFORCE: There are certain workers who see the traditional employer-employee relationship as producing unacceptable control over their lives. These workers want to be liberated from a nine-to-five job schedule and the rules, regulations, and policies that a company might enforce on them. In effect, they like being their own boss. They feel their contingent status is empowering.

But, other workers find themselves in the contingent workforce involuntarily. They may have been fired or laid off from a traditional job and have become bitter and unwilling members of the contingent workforce. They think the lack of security inherent in the contingent workforce is frightening.

However, some of these involuntary contingent workers discover, through the forced experience of working on a new basis, that they are 1) making more money than they ever had before as a traditional employee; and 2) enjoying the flexibility and freedom of being, for example, an independent contractor.

Also, workers who become independent contractors are able to deduct business-related expenses without the tax limitations that apply only to employees.

TODAY’S BUSINESSES ARE INCREASINGLY COST CONSCIOUS BY NECESSITY: Budgets have been slashed. Creative cost-cutting ideas are emerging. Companies are consolidating office space. Businesses are permitting and, in some cases, encouraging employers to work from their homes. Companies are increasing their efforts to cut down overhead and fixed payroll costs.

A company may become more interested in using workers from the contingent workforce when it realizes that it can reduce its overhead costs. Such a change may potentially provide it with a competitive cost advantage over other companies.

Many companies wish to use independent contractors, especially in view of the legal burdens placed upon companies due to Obamacare.

Using the contingent workforce can relieve administrative costs of complying with state and federal employment tax obligations, reduce unemployment insurance tax contributions, reduce costs associated with federal and state regulations that apply to employees, cut Social Security and Medicare taxes and more.

Downsizing is increasingly seen as an effective strategy for managing businesses. Many companies that have downsized maintain just a small core group of traditional, full-time employees. When business increases, leased employees, temporary employees, or independent contractors are brought in. Sometimes these contingent workers are former employees (some retirees) who now operate as independent consultants.

COMPANIES SHOULD SEEK ADVICE ON PROPER USAGE OF CONTINGENT WORKERS:Companies using misclassified workers may be hit with hefty tax assessments, penalties and fines. They may find themselves subject to all kinds of laws and regulations of which they may not have been aware. Therefore, companies and their advisors must become very knowledgeable about the proper use and classification of workers.

A company cannot transform an employee into an independent contractor, and thereby eliminate the liabilities associated with employees, by simply relabeling the worker.Even if the company and the worker sign a valid written agreement designating the worker as an independent contractor, the agreement will not be legally effective unless the relationship between the company and the worker satisfies the legal criteria for independent contractor status of the worker. If the legal criteria are not met, a government agency, or even the worker, may seek to impose legal liability on the company (despite the written agreement that the worker is an independent contractor).

INDEPENDENT CONTRACTOR TESTS VARY: To make matters worse, the legal ‘test” for determining whether a worker is an employee or an independent contractor varies from law to law. In some instances, the differences between the “tests” are so great that the same worker is an employee for purposes of one law and an independent contractor for purposes of another law.

Even where laws use the same tests for determining independent contractor status, in some instances the courts and government agencies that enforce the laws will interpret or apply the same test differently. Therefore, the same worker, under the same test for determining independent contractor status, can be an employee for the purposes of one law and an independent contractor for purposes of another law.

Take all possible steps now to evaluate and lower your risk. Happily, there are many relatively simple measures a company can take to dramatically protect itself in its use of independent contractors.

A prudent company who uses independent contractors should carefully review all aspects of their independent contractor relationships (and take all necessary steps at once to strengthen these relationships).

Questions? Contact Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: 630-377-1554.