Terminating a class of employees and offering them to return as independent contractors can save you thousands. But it may raise eyebrows. That's why, to avoid lawsuits under the Age Discrimination in Employment Act (ADEA) and ERISA, you must design such programs carefully.
First, make sure employees who you want to convert will do work that's appropriate for independent contractors. Let them set their own hours, provide their own equipment and work from home or another location.
Be able to show legitimate business reasons to back up the move other than saving money on benefits. Finally, offer everyone the same options for converting from employee to independent contractor. As the following case illustrates, conversion is possible and legal when done correctly.
Recent case: Based on studies showing agents who were independent contractors are more productive, Allstate Insurance abolished its employee-agent positions and converted them into independent contractors.
Employees had four options; each involved either agreeing to become an independent agent or being terminated with a severance payment ranging from 13 weeks' to one year's pay. Those who received a full-year's severance agreed to waive their rights to sue for age discrimination. Those who took the lower payment did not.
Agent Doris Isbell chose the lower payout. She sued for age bias, claiming Allstate aimed solely to get rid of older employees. The court disagreed and ruled that, because it treated every employee alike (that is, offering everyone the same severance options), Allstate did not discriminate. (Isbell, et al., v. Allstate, No. 04-2310 7th Cir., 2005)
Final tip: For more advice, order our book, Using Independent Contractors, at www.nibm.net/independent.