This document summarizes an independent contractor and employee classification presentation given by Christina M. Jepson of Parsons Behle & Latimer. It discusses why proper classification is important, different tests used to determine classification including the economic realities test and common law tests, consequences of misclassification, benefits of using independent contractors, best practices, and recent cases and legislation around gig workers. The presentation provides an overview of the complex legal analysis required to properly classify workers as employees or independent contractors.

1. parsonsbehle.com
June 16, 2022 | Marriott City Center Hotel
Independent Contractors and Employees
Christina M. Jepson
801.536.6820
cjepson@parsonsbehle.com

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This presentation is based on available information as of June 16,
2022, but everyone must understand that the information provided is
not a substitute for legal advice. This presentation is not intended and
will not serve as a substitute for legal counsel on these issues.
Legal Disclaimer

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INTRODUCTION
 Why do we care who is an employee?
 Why do we care who is an independent contractor?

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Ad Examples

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Ad Examples

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Ad Examples

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Local News
 2021: Employees sued Utah’s Department of Alcoholic Beverage
Control (DABC) accusing the agency of misclassifying 13
employees as “independent contractors” when they should have
been treated as employees
 The employees worked as package agents used in rural counties to
run stores
 The packet agents were paid a flat fee for operating DABC stores
 The lawsuit alleged that DABC retained control over training, hiring
and sales decision
 The lawsuit seeks $8.6 million in damages

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Local News
 2017: the Utah federal court certified a class action lawsuit against
CR England
 Filed by two independent contractors who claimed that 14,708
drivers nationwide were misclassified as independent contractors

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Local News
 2016: the US Labor Department sued a Utah drywall contractor
alleging it misclassified workers as independent contractors and
owed them for minimum wage and overtime

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National News - Gig Employers
 Uber spent nearly $200 million resolving
misclassification suits; other gig employers
faced similar suits
 Gig employers spent $225 million lobbying for
legislative exemption in California & pursue
similar legislation nationwide
 Worker classification issues decide the viability
of entire business models and industries

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National News - FedEx
 Between 2014-2016, FedEx settled
driver misclassification suits for
nearly $500 million
 Courts examined actual allocation of
control over work, rather than
worker labels, to decide
contractor/employee status
 Courts were unafraid to “unravel[]
FedEx’s business model”

12. Benefits of Using Independent
Contractors

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Benefits of Using Independent Contractors
Because independent contractors are not employees, companies
that use them can avoid certain obligations and expenses, including:
 Tax and insurance obligations
 Unemployment taxes and worker’s comp
 Employment law compliance
 Employee benefits
 Immigration law compliance
 Affordable Care Act (ACA) compliance

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Employee Benefits
Companies often provide benefits to their employees that are
not available to independent contractors including, for
example:
• Health insurance, including
cafeteria plans
• Retirement or pension plans
• Stock options
• Paid vacations
• Sick days
• Life insurance
• Disability insurance
• Fringe benefits, such as tuition
reimbursement

15. Consequences of Misclassification
Consequences of Misclassification

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Consequences of Misclassification
The penalties for misclassification can be serious. If a company
misclassifies an employee as an independent contractor, it must
ensure compliance going forward and may be liable for:
• Back wages and overtime pay
• Employee benefits, including stock
options, retirement benefits, and
health plan coverage (or the value
of those benefits)
• Disability payments and workers'
compensation
• Tax and insurance obligations
• Liquidated damages
• Civil monetary penalties

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Employment Law Compliance
Improperly classifying an employee as an independent contractor
could lead to claims for:
• Unpaid overtime compensation and
reimbursement of work-related
expenses
• Reasonable accommodation and
return to work benefits under the ADA
and its state equivalents
• Leaves of absence under the FMLA
and its state equivalents
• Plant closure and mass layoff notice
and penalties under WARN and its
state equivalents
• Discrimination under Title VII, ADEA,
and other federal, state, and local anti-
discrimination laws

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Tax and Insurance Obligations
The tax and insurance liabilities for misclassification are significant
and can include:
 Years of unpaid federal, state, and local income tax withholdings
 Social security and Medicare contributions
 Workers' compensation and unemployment insurance premiums, including
federal unemployment taxes
 Interest and penalties

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Targets of Enforcement and Litigation
Industries particularly susceptible to regulatory enforcement for
independent contractor misclassification include:
• Construction
• Transportation and trucking
• Cable companies
• Janitorial services
• Landscaping and nurseries
• Security services
• Nursing
• Childcare
• Home health care
• Internet services
• Restaurant and catering services
• Staffing services
• Hotels and motels
• Oil and gas

20. Who Is an Independent Contractor?

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Who Is an Independent Contractor?
What do you think?
What does the public think?
Why does it matter?
Who cares?
Can the employer choose?
Can the employee choose?

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What Is an Independent Contractor?
Generally, an independent contractor is a worker who:
 Offers their services to the public or an industry for a fee
 Is not economically dependent on any single company
 Is not an employee
 This is a legal category—the employer and employee don’t get to
“decide”

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What Is an Independent Contractor? (cont'd)
An independent contractor typically:
 Charges a fee for their services
 Is engaged only for the term required to perform a specified service or task
 Retains control over the method and manner of work
 Retains economic independence and is free to offer their services to more
than one company
 Is responsible for paying their own income taxes, social security, Medicare
taxes, worker’s compensation insurance, and the like
 Is not covered by most federal, state, or local laws designed to protect
employees

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What Is an Independent Contractor?
An independent contractor typically does not:
 Receive company-sponsored benefits, such as paid vacation,
health insurance, or retirement benefits
 Perform the same work as the company’s employees
 Have the “indicia” of an employee, such as company uniforms,
name badges, or business cards

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Independent Contractor vs. Employee
An employee, by comparison, is subject to significant
oversight and control by the company and:
 Is paid wages and receives company-sponsored benefits
 Benefits from worker’s compensation insurance paid for by
the employer
 Is employed for a continuous period and performs whatever
tasks the company requires
 Pays their income, social security, and Medicare taxes
through the amounts their employer is obligated to withhold
from their wages
 Is economically dependent on the employer
 Is protected by applicable federal, state, and local
employment laws

26. Tests for Independent
Contractor Status

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Classification: Overview
 Do not rely on generalizations or labels to determine employee or
independent contractor status
 Simply referring to a worker as an independent contractor, even if
they agree to that designation, is not enough
 Classification depends on:
o The facts of each case
o Application of the appropriate independent contractor tests
o Differences in how courts and government agencies interpret those tests

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Tests for Independent Contractor Status
 There is no single test to determine independent contractor status
for all purposes
 The various tests include:
o The Economic Realities Test
o The Control Test
o Common law and other federal law tests
o State law tests
 Familiarize yourself with the different federal and state tests
that may apply
 Know where the employee is located—look at state law

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Economic Realities Test
 Used to assess independent contractor status under the Fair Labor
Standards Act (FLSA)—minimum wage, overtime, etc.
 Courts look at the totality of the parties’ relationship and use a
balancing test to evaluate various factors, including:
o The degree of control the company has over the worker
o The relative investment in facilities
o The worker's opportunity for profit and loss
o The permanency of the parties' relationship
o The skill required for the work
o Whether the worker's services are integral to the company's business
o The degree of independent business organization and operation

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Economic Realities Test
 On January 6, 2021, the Department of Labor (Department)
announced a final rule clarifying the standard for employee versus
independent contractor under the Fair Labor Standards Act (FLSA).
The effective date of the final rule is March 8, 2021.

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Economic Realities Test
 In the final rule, the Department reaffirms an “economic reality” test to
determine whether an individual is in business for him or
herself (independent contractor) or is economically dependent on a
potential employer for work (FLSA employee)
 Identifies and explains two “core factors” that are most probative to the
question of whether a worker is economically dependent on someone
else’s business or is in business for him or herself:
o The nature and degree of control over the work
o The worker’s opportunity for profit or loss based on initiative and/or investment.

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Economic Realities Test
 Identifies three other factors that may serve as additional
guideposts in the analysis, particularly when the two core factors do
not point to the same classification.
 The factors are:
o The amount of skill required for the work.
o The degree of permanence of the working relationship between the worker
and the potential employer.
o Whether the work is part of an integrated unit of production.

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The Control Test: The IRS Standard
 Used to determine whether a worker is an employee for federal tax
purposes
 Analyzes three aspects of the worker's control or independence:
o Behavioral control
o Financial control
o The type of relationship

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The Common Law Darden Test
 Commonly used in the context of:
o Title VII of the Civil Rights Act (Title VII)
o Americans with Disabilities Act (ADA)
o Age Discrimination in Employment Act (ADEA)
o Affordable Care Act (ACA)
o Employee Retirement Income Security Act (ERISA)

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The Common Law Darden Test
The test considers the following factors:
• Skill required
• Source of supplies and tools
• Location of the work
• Duration of the relationship between
the parties
• The company’s right to assign
additional projects to the worker
• Extent of the worker’s discretion over
when and how long to work
• Method of payment
• The worker’s role in hiring and paying
assistants
• Regular business of the company and
whether the work performed is part of
that business
• The company’s status as "in business"

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The Common Law 20-Factor Test
 Previously used by the IRS, this test is commonly used by state
agencies making independent contractor determinations
 The 20 factors are:
1. Instructions
2. Training
3. Integration with the company's operations
4. Services rendered personally
5. Hiring, supervising, and paying helpers
6. Continuing relationship
7. Set hours of work

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The Common Law 20-Factor Test
8. Full time or exclusive work
9. Location where services are
performed
10. Specifying the order or sequence of
work
11. Oral or written reports
12. Payments
13. Business or travel expenses
14. Tools and materials
15. Investment
16. Profit and loss
17. Number of companies with whom
the independent contractor works
18. Advertising services to the
general public
19. Right to fire
20. Right to quit

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State Law Tests (ABC Test)
 State independent contractor tests can impose a more narrow definition than
the federal equivalent
 The most common state test is the ABC Test (California)
 The ABC Test presumes an employment relationship unless the company
shows that:
A. The worker has been and will continue to be free from control or direction over the
performance of their work
B. The work is either outside of the normal course of business for the company
requesting the work or performed outside of any of that company's places of business
C. The worker is customarily engaged in an independently established trade,
occupation, profession, or business

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Utah Unemployment Test – Right to Control
Utah unemployment statute defines “Independent Contractor” as
(a) The individual is customarily engaged in an independently established
trade, occupation, profession, or business of the same nature as that
involved in the contract of hire for services; and
(b) The individual has been and will continue to be free from control or direction
over the means of performance of those services, both under the individual’s
contract of hire and in fact.

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Utah Unemployment Test – Right to Control
Factors in determining whether an individual is engaged in an
independently established trade, occupation, or business
 Separate place of business
 Tools and equipment
 Other clients
 Profit or loss
 Advertising

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Utah Unemployment Test – Right to Control
Factors in determining whether an individual is engaged in an
independently established trade, occupation, or business
 License
 Business tax forms

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Utah Unemployment Test – Right to Control
Factors in determining whether an individual is under control or
direction
 Instructions
 Training
 Pace or sequence
 Work on employer’s premises
 Personal services (no assignment)
 Continuous relationship

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Utah Unemployment Test – Right to Control
Factors in determining whether an individual is under control or
direction
 Set hours of work
 Method of payment

44. Gig Economy

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Gig Economy
 Then came Uber, Lyft, Grub Hub, Door Dash, Uber Eats
 Disrupted certain sectors of the economy including in how workers
are classified
 Uber and Lyft call their drivers independent contractors
o Why?
o What is the argument for Uber and Lyft and employees who want to be
independent?
o What is the argument for workers and the states who want workers to be
employees?
o What are the stakes?

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Gig Economy
 No set schedule/flexibility
 No tools or equipment provided
 Expenses paid by worker
 Simple payment, no taxes
 Employment laws do not apply

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Gig Economy
 California has gone to war with Uber and Lyft
 ABC test—must meet all three
o Worker is free from control of the employer
o The work is not in the usual course of entity’s business
o The worker is customarily engaged in an independently established trade,
occupation or business of the same nature as the work performed for the
hiring entity
 Dynamex Operations West, v. Superior Court of Los Angeles (Cal.
Sup Ct. 2018)

48. Best Practices

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Best Practices
To ensure that the independent contractor classification requirements
are satisfied:
• Do an analysis before categorizing
• Document your analysis
• Use an independent contractor
agreement to establish the terms
• Avoid using former employees as
independent contractors and having
independent contractors do the same
work as employees
• Avoid using independent contractors
to perform work that is integral to the
business
• Require independent contractors to
complete a Form W-9, Request for
Taxpayer Identification Number and
Certification
• Keep independent contractor files with
vendor files, not employee files

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Best Practices (cont'd)
 Pay contractors by the project or by
an agreed-on flat fee at regular
intervals, not by the hour, week, or
month
 Do not reimburse independent
contractors for business expenses
 Do not provide contractors with
employee-type benefits like paid
vacation, paid holidays, sick leave,
and retirement benefits
 Do not schedule hours or days of
work for contractors or their
employees
 Avoid requiring uniforms, grooming
standards, and similar workplace
requirements typically imposed on
employees
 Issue separate guidelines for
independent contractors, vendors,
and other third parties instead of
providing them with a copy of the
employee handbook

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Best Practices (cont'd)
 Do not invite contractors to
employee-only events or meetings
 Do not provide contractors with
company business cards
 Do not give independent contractors
job titles
 Deal with performance problems as
contract modification or breach
issues, not as disciplinary issues
 Determine if the company's
competitors classify similar workers
as employees instead of independent
contractors
 Regularly audit the company's
independent contractor
arrangements and template
agreements
 Do not control the details of how the
independent contractor performs the
work. Focus on the end result rather
than the details.
 Implement a carefully prepared
arbitration agreement that requires
employees to arbitrate their claims as
individuals and not to bring collective
actions or class actions in court

52. Thank You
To download a PDF handbook of today’s seminar,
including presentations and materials, please visit
parsonsbehle.com/emp-seminar

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For more information, contact:
Christina M. Jepson
801.536.6820
cjepson@parsonsbehle.com