Employee Misclassification

Several New York laws reserve particular benefits for employees. Employers in New York state are required to provide unemployment insurance; workers’ compensation; social security; temporary disability benefits; minimum wage and hour protections, such as overtime pay; and mandatory rest and meal breaks.

Employees in New York are also entitled to various federal labor protections, such as protection of wages and overtime pay by the Fair Labor Standards Act (FLSA). Employers with more than 50 employees are also required to provide up to 12 weeks of unpaid, job-protected leave to eligible employees for the birth or adoption of a child or the serious illness of the employee or a family member. Employees are also entitled to qualifying safety and health conditions by the Occupational Safety and Health Act (OSHA).

Misclassification is a very fact-specific analysis. Courts use a variety of factors to determine if a certain worker is an employee or an independent contractor. These may vary based on which labor or employment law rights are at issue. However, the primary consideration is the degree of behavioral and financial control asserted by the employer over the worker. New York courts analyze the extent to which the hiring party has the right to direct and control the work performed by the worker and the business and compensation aspects of the worker’s job.

Generally, the more control an employer exercises over the worker’s services, the more likely the relationship is classified as between an employer and employee.

An employer-employee relationship is likely if the employer: chooses when, where and how the worker performs the services; provides the facilities, equipment, and supplies; directly supervises the services; sets the hours of work and the rate of pay; reserves the right to review and approve the work product; or has the right to hire or fire the worker’s support staff.

How an individual is compensated is another indicator of employee classification. Workers tend to be classified as employees if they are paid hourly or earn a salary; receive fringe benefits; and can be reimbursed for expenses incurred in the course of doing their job.

The less a worker is supervised, directed, and controlled by the employer, the more likely that worker will be classified as an independent contractor. Independent contractors are just that – they tend to be in business for themselves, and offer their services to the public, rather than specifically to one employer.

Workers are likely independent contractors if they: have established businesses; advertise their services to the public; carry insurance for their work; keep a separate place of business; own their own equipment and supplies; set their own schedule; and are free to refuse work offers. Independent contractors also set or negotiate their own pay rate and often work for a specific contracted amount, whether it is daily, weekly or at the completion of a job. Typically, they assume their own risk for profit or loss and pay their own expenses.

In the past, independent contractors were afforded few protections under the law.   However, in New York State, most laws regarding discrimination and sexual harassment in the workplace have been extended to protect independent contractors as well.

In 2017, New York City passed the Freelance Isn’t Free Act which provides certain protections for freelance workers. These rights include:

• Written contract. Contracts that total $800 in any 120-day period must be in writing and state the work to be performed, the rate and method of compensation, and the payment date or the mechanism by which the payment date will be determined.
• Timely and full payment. Freelancers must be paid for all completed work on or before the date that is in the contract or within 30 days of completion if no payment date is specified.
• Right to file a complaint. Individuals can file a complaint with the Office of Labor Policy & Standards (OLPS). OLPS will notify the hiring party about the complaint and the hiring party must respond to the complaint within 20 days.  Individuals can also bring an action in state court.
• Protection from retaliation. A hiring party may not retaliate against a freelancer who exercises his or her rights under the law. This includes threats, intimidation, harassment, blacklisting, or other actions.

Freelancers cannot waive their rights under the law.  Hiring parties who fail to comply with the law may be subject to penalties, including statutory damages, double damages, injunctive relief, and attorney’s fees.  Where there is evidence of a pattern or practice of violations, the New York City Corporation Counsel can also seek a civil penalty of not more than $25,000 against the hiring party.

While how the parties characterize their relationship may have some relevance to an analysis of classification, it is not determinative. Employee classification cannot be agreed to by contract. Even if both parties sign an agreement stating that the worker is an independent contractor and waives any rights as an employee, the law can look at the nature of the role and determine that there has been a misclassification.

Misclassification of employees is a violation of both federal and state law.  As noted previously, employees are protected under numerous federal, state, and local laws.  Many of these laws require employers to pay employees certain wages or provide other financial benefits.  When employees are misclassified as independent contractors, employers now become liable for paying those back wages and other benefits as well as penalties.

Workers may be able to sue and recover back pay, compensatory damages, punitive damages, attorneys’ fees, and legal costs.  Additional penalties may be assessed against employers for the following:

• Portions of each misclassified employee’s owed wages (including minimum wage, overtime, and paid time off) plus interest;
• Assessments equal to the employer’s matching contributions for employee benefits (e.g., 401(k) contributions, disability insurance, healthcare coverage, unemployment insurance, workers’ compensation, etc.);
• Pro rata shares of Medical and Social Security contributions; and
• Unfiled W-2 forms (payroll taxes and income tax withholdings)

In addition, if the misclassification was intentional in order to avoid disability insurance premiums or payroll taxes, penalties can range up to 20% of all employee wages paid by the employer and 100% of Medicare and Social Security contributions by both employer and employee.  Criminal penalties and prison time are also possible.

The penalties for misclassification, particularly when accompanied by wage and hour violations, can be extremely steep. Therefore, it is crucial for employers to conduct a thorough analysis when determining employee classifications.  When in doubt, consult an employment lawyer for guidance.

Similarly, workers should seek legal advice if they believe they may have been misclassified.

If you are concerned about employee misclassification, contact our experienced attorneys for assistance with your matter.