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Employee or contractor? Failing to check can double damages

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in Compensation and Benefits,Human Resources

Bell Atlantic Corp., now Verizon, hired drivers for its senior executives. While some drivers were considered Bell employees, others were independent contractors paid a flat hourly rate. They had to carry their own insurance, workers' comp and unemployment insurance. Both sets of drivers did essentially the same work.

When Bell Atlantic decided to get all its chauffeurs from one company, the contract drivers were dropped. One of them, Jon Gustafson, sued the company, arguing that he should have been considered an employee all along and been paid overtime.

To determine whether workers are truly employees under the Fair Labor Standards Act (FLSA), courts use an "economic reality" test, which considers:

  • The degree of the company's control over the worker.
  • The worker's opportunity for profit or loss and investment in his business.
  • The extent to which the work is an integral part of the employer's business.
  • The degree of skill and independent initiative required to perform the work.
  • The permanence of the working relationship.

In this case, Gustafson won because Bell Atlantic exercised virtually complete control over his work. It dictated when he worked and supplied everything from the car to a beeper. The company's demand on his time made it virtually impossible for him to work for anyone else.

It got worse: In addition to paying overtime, Bell Atlantic was forced to shell out an equal amount in liquidated damages. The reason: It failed to make a good-faith effort to comply with the FLSA, the court said. There's no evidence that the company sought an outside or expert opinion on whether its contract drivers were actually employees. (Gustafson v. Bell Atlantic Corp., No. 98CV8115, S.D.N.Y., 2001)

Advice: Take the time to determine accurately whether a person qualifies as an independent contractor under both the federal law and the state law, which may have an even tougher standard. Check also whether a worker qualifies as an employee under your benefit plan.

The IRS has long used a 20-factor test to determine whether a worker is an employee or independent contractor. In recent years, the IRS has reorganized those 20 factors and published guidelines to help its auditors focus on the most important factors. For a free, two-page report detailing those factors, Worker Classification: The IRS' New Approach, call us at (800) 543-2055, and we'll fax it to you. If you'd like it sent ?automatically via e-mail, send a request to YATLreport@nibm.net and be sure to put "Worker Classification" in the subject line.

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