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Incorporation beats the misclassification conundrum

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in Office Management,Payroll Management

The Department of Labor will shortly survey ­workers on their understanding of their status and whether they know that independent contractors aren’t eligible for overtime, benefits, etc. A crackdown on employers that misclassify workers is probably not very far behind.

Nevertheless, there is a way to beat the misclassification dilemma if employees want to moonlight at the same company—have them form businesses and bid on the work. A federal court of appeals recently gave this tactic the thumbs up. (Barlow v. C.R. England, Inc., No. 111465, 10th Cir., 2012)

Form company, get extra work

A part-time security guard asked his employer for more work. His supervisor wasn’t happy with the janitorial services that were being provided to the company, so he asked HR about having the security guard take over the janitorial work. Because the employee would have been eligible for overtime, it was decided that he would form a separate company that would contract for the work.

The guard supplied his own cleaning supplies and occasionally hired an assistant. But he provided no services to other companies. His company was paid $400 a month. The janitorial contract was later terminated, and the guard eventually fired. He sued for unpaid overtime related to this janitorial work. A federal trial court ruled for the employer, finding that the guard provided the janitorial services as an independent contractor. The employee appealed.

Independent contractor status wins out

A federal appeals court upheld the lower court’s decision. Appeals court: The economic realities favor independent contractor status. The guard created a separate company to provide the janitorial services; he kept records for the company; opened a separate bank account; and filed a corporate tax return.

RISKY BUSINESS: This case could have easily gone the other way, since the employee’s company didn’t offer janitorial services to any other customer. Whether an employee should incorporate is a legal decision that you should steer clear of. Instead, encourage the employee to seek legal advice.

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Richard Reibstein June 29, 2013 at 4:26 pm

The entire issue of using Independent Contractors (ICs) is risky business today, in view of the continuing crackdown by the federal and state regulators on IC misclassification and state legislators enacting laws left and right seeking to curtail the legitimate use of ICs. But, if a company is well informed and structures, documents, and implements its IC relationships in a manner that complies with federal and applicable state laws governing ICs, companies can continue to use ICs lawfully in all but one state. Enhancing a company’s level of compliance is something many companies can accomplish using diagnostic tools and best practices, such as IC Diagnostics (TM) and others described in a white paper found at http://independentcontractorcompliance.com/legal-resources/white-paper/.
Richard Reibstein, Pepper Hamilton LLP (reibsteinr@pepperlaw.com)

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