February 2010 Archives

February 19, 2010

Independent Contractors in the (Bad) News

This week, there have been a couple of big stories involving independent contractors -- more specifically, the classification of workers as independent contractors rather than employees (and vice versa). These stories show that worker classification is still a very hot topic, perhaps even more so in the current economic climate.

First, it was reported this week that President Obama's proposed budget includes a $25 million effort to stop the misclassification of employees as independent contractors, with funding for 100 new enforcement positions at the IRS. The Labor Department estimates that up to 30% of businesses misclassify employees as contractors, according to an article in the New York Times. 

This move isn't so surprising when you consider the economy -- and the money a company can save by classifying workers as contractors, who aren't entitled to benefits, overtime, workers' compensation coverage, or unemployment if they are let go. I've even heard stories of employees being laid off, then brought back months later as independent contractors to do essentially the same work. 

According to a study cited in Inc., about half of the jobs that have been created during the current economic recovery are "contingent," which means they are held not by employees but by temps and contractors. Used properly, contingent workers give companies the flexibility to ramp up quickly for a particular project, using professionals with experience and expertise, then pare back down just as quickly (and with very little legal exposure) once the project is done. Used improperly, turning employees into contingent workers exploits the employees, hurts morale and cohesion in the workplace, depletes state and federal tax coffers, and ultimately leaves workers at far greater risk of hitting bottom -- with no unemployment to protect them -- if the work runs out.

And speaking of hitting bottom and tax coffers, there was a second story about contractors this week. Apparently, the man who crashed a plane into an IRS office in Austin, Texas, yesterday was particularly angry about a provision of the Tax Code involving worker classification. The Times reported that the man's suicide note cited a 1986 law that made it more difficult for companies to classify certain workers who provide technical services as independent contractors. (The pilot of the plane was a computer software engineer.) The law ("Section 1706") essentially takes away certain defenses for these companies if they are audited for misclassification: Other companies can point to past industry practice, court rulings, and similar evidence to show that they had a reasonable basis for classifying workers as contractors, but those defenses aren't available for these technical services workers. The Times cites critics of the law, who say that it has prevented technical workers from becoming wealthy entrepeneurs and stymied technological innovation. The Times also reports that the law was passed essentialy as a way to raise tax revenue. 

Taken together, these two stories show the tension underlying worker classification: Workers are supposed to be classified according to the work they do, but the amount of money at stake seems to cloud everyone's judgment. And, the financial interests of private business and the government are decidedly at odds here. Generally speaking, when workers are classified as contractors, companies save money and the government loses money. When workers are classified as employees, companies pay more and the government collects more. 

While the financial incentives on both sides of the equation are therefore strong (and opposing), they are not supposed to be decisive. The law says that workers are to be classified according to what they do: Is their work essential to the employer's business? Does it require special training, skills, tools? Considering a long list of factors, do the workers truly look like independent business people, who can be expected to bargain at arm's length with the employer and cover their own costs of doing business? Or do they look more like employees, who have less bargaining power and may therefore need some protection against discrimination, on-the-job injuries, potentially oppressive working conditionsg, and job loss? With both business and government going broke, however, these fundamental policy considerations seem to have taken a back seat to financial concerns.    


To get the legal lowdown on how to avoid misclassifying a worker, read Working With Independent Contractors, by Stephen Fishman (Nolo).

February 10, 2010

Victorious Supreme Court Plaintiff Wins $1.5 Million Verdict

About a year ago, the Supreme Court found in favor of an employee, Vicky Crawford, who was fired after she participated in an investigation of workplace sexual harassment. (The case was Crawford v. Metropolitan Government of Nashville and Davidson County, Tennessee; you can read my previous post about it here.) The Court held that Crawford could sue for retaliation; Crawford's employer had argued that, because Crawford was only a witness in the investigation and not the person who had originally complained of harassment, she was not protected from retaliation. After the Supreme Court's decision kept Crawford's claim alive, the case went back to the federal district court for a trial on the facts.

A couple of weeks ago, the jury reached a verdict: Crawford was awarded $1.5 million in damages. After losing its legal argument that Crawford couldn't bring a retaliation claim, the employer tried a different tack: It argued that Crawford wasn't fired for participating in the harassment case, but for performance problems. The employer said Crawford was once a good employee, but her performance had been slipping; when an audit revealed problems in the payroll department, including checks that were never deposited, she was ultimately fired.

Of course, we can only know the facts that were recounted in news articles or court decisions about the case. Based on the information I've seen, I think there are a few lessons employers can take from what happened in this case:

  • Timing is everything. Retaliation cases are all about timing, more specifically how much time passed between the employee's protected activity and the employer's alleged retaliation. The shorter the time period, the more it looks like retaliation. Here, the HR person who conducted the harassment investigation reported possible problems in the payroll department on the same day she filed her report in the harassment case. Same day plus same person involved in both issues equals huge mountain for the employer to climb to refute a retaliation claim.
  • Can I get a witness? You don't necessarily need one to decide that harassment took place. It looks like another big problem for the employer in this case was that it fired three employees who participated in the investigation -- in which pretty bad behavior was alleged. Crawford said that the harasser pulled her head into his crotch, asked to see her breasts, and grabbed his own crotch, saying "you know what's up." Two other employees also said that they were harassed, and were also fired. Yet, the employer argued that it couldn't discipline the harasser because there were no witnesses to the behavior. Again, I've got no inside line on what "really" happened, but if three employees all allege that they were harassed, that's ample reason to take action. Often, there are no witnesses to harassment other than the harasser and the harassee. That doesn't relieve employers of their obligation to take action to stop harassment.
  • The work environment affects performance. Here, the employer said Crawford was once a good employee, but her performance declined. We don't know the source of Crawford's performance problems, but in a situation like this, employers should consider whether poor performance might be explained, at least in part, by the harassment. Employees who have been harassed might have higher absentee rates, problems concentrating, and other performance issues. If the problems are attributable to the harassment, the employer should deal with the underlying issue, then work with the employee to help her get back on track.  
February 6, 2010

President's Budget Plan Includes Extension of COBRA Subsidy

We've heard a lot in the past week about President Obama's proposed budget, unveiled in conjunction with his State of the Union speech last week. Topic number one seems to be how the budget plan would affect the national deficit. Apparently of quite a bit less interest, judging by the limited press it's received, is the proposal to extend the COBRA subsidy through 2010.

It's been reported that the budget proposal would make the subsidy available to those who are involuntarily terminated from March 1, 2010, through the end of the year. These folks would be eligible for up to 12 months of subsidized health care continuation (employees who are involuntarily terminated up until the end of February 2010 are eligible for 15 months of the subsidy, based on the first extension, passed by Congress this past December).

Are people taking advantage of the subsidy? The answer is a resounding yes, according to a survey reported in Business Insurance. Large employers reported that more than twice as many laid off employees have opted to continue their health insurance through COBRA since the subsidy first became available.

If the subsidy extension passes, some state legislatures may have to get on the ball in a hurry. A number of states offer "mini-COBRA" laws, which typically provide the right to continue health insurance to those working for smaller employers (COBRA covers only those with at least 20 employees). These laws differ widely in the details, including what counts as a qualifying event and how long continuation coverage can last. But most of them have this in common: As long as former employees meet the other requirements for the subsidy (for example, they were involuntarily terminated and meet certain income restrictions), they are eligible for the COBRA subsidy, even if they are receiving continuation coverage through a state law rather than through COBRA.

To allow employees to take advantage of the subsidy, a number of states amended their laws -- for example, to give employees who originally passed up continuation coverage a second chance to elect coverage once the subsidy was available. However, some states tied their amendments explictly to the original time frame for which the subsidy was available, and so might have to take legislative action to make sure employees of smaller employers are still eligible if the subsidy is extended.

It's interesting to me that, at a time when health care reform has been described as "on life support," unconscious," or in terms of some other unfortunate medical metaphor, the COBRA subsidy -- which is, after all, government-funded health insurance -- enjoys wide popularity, inside and outside of Congress.

UPDATE: After it was blocked temporarily by a Senator, Congress passed -- and the President signed -- a stopgap measure that extends the COBRA subsidy until the end of March 2010. (Congress is currently beginning work on comprehensive jobs legislation which will extend the subsidy to the end of this year.) The stopgap bill also clarifies that employees who initially lost their health insurance because of a reduction in hours are eligible to claim the subsidy if they subsequently lose their jobs. Read about it here.