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Crowdstaffing featured as Rising Star and Premium Usability HR platform in 2019

Crowdstaffing has earned the prestigious 2019 Rising Star & Premium Usability Awards from FinancesOnline, a popular B2B software review platform. This recognition is given out annually to products[...]

May 13, 2019

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Classifying Independent Contractors Is Now More About Control than Contracts

The issue of misclassifying employees as independent contractors is nothing new. And yet, government agencies keep finding new ways to enforce legislation against companies that attempt to circumvent rules that deny the IRS its due. Microsoft, FedEx, and Uber have all provided our industry cautionary tales. But the California Supreme Court’s precedent-shattering ruling on IC classification just upped the ante. So I think it’s time we explored the issue and discussed how MSPs could be leveraged to prevent future problems.

A New Focus on Independence and Freedom in Independent Contracting and Freelancing

A recent post from Contingent Workforce Strategies delves into this latest wrinkle of the ongoing independent contractor debate.

In the case, Anthony E. Simpkins v. Dupage Housing Authority, et al., the plaintiff signed an independent contractor agreement in 2009 to work as a handyman at a vacant property managed by DHA. The nature and location of the work evolved over time, with a subsequent IC agreement signed in 2012 later being altered to an open-ended status. Simpkins, who worked primarily for DHA, sued for unpaid overtime and disability benefits after he was injured in a car accident.
The Seventh Circuit considered several factors in the case, first among them was the nature and degree of control the DHA exerted over the plaintiff. The court noted DHA assigned Simpkins specific projects and dictated the order in which he was to complete them. Despite several points of contention between the parties, the court noted “a reasonable trier of fact could find that DHA’s control over Simpkins weighs in favor of a typical employer‐employee relationship.”
The court’s method of determination diverges from prior Department of Labor precedent, attorney Hans Murphy said in a blog post. “While the court utilized the same test adopted by the DOL for wage claims like this one, it paid no attention to the DOL’s 2015 pronouncement or the DOL’s deliberate effort to downplay the importance of control.” Instead, control was the “leading factor in the determination of the parties’ relationship,” he noted.

The idea of which party controls the work has always been part of the criteria in properly classifying independent contractors. After all, independence and freedom are the essential tenets of being an independent contractor or freelancer. Says so right in the names. But now, more than the paper agreements and executed terms, the nature of the relationship has risen to greater level of legal prominence.

Control issues

Thoughtful and well-orchestrated evaluations of independent contractors seek to assess business history and structure, main control factors (Financial, Behavioral and Relationship of Parties), and the IC’s ability to carry the required business insurance. The assessment process covers a wide berth of factors.

  • ABC Tests: The most common state-driven evaluations for measuring worker classification by criteria that establish control over the worker, where the work is performed and proof of the contractor’s independent business operations.
  • IRS Common Law Tests: The IRS uses this test to measure whether an independent contractor controls the manner and means by which the contracted services, products or results are achieved. The factors cover behavioral control of the worker, financial control and the relationship of each party in the engagement.
  • Fair Labor Standards Act (FLSA) Economic Realities Test: As with the preceding assessments, this test seeks to understand the extent to which the services in question are part of the company’s business; the amount of the individual’s investment in the company’s facilities and equipment; the nature and degree of control retained by management; the individual’s opportunity for profit or loss; the amount of initiative, skill or judgment required; and the permanency and duration of relationship.

Despite the complex and often subjective nature of the qualification criteria, the simple reality is that all inherent risk boils down to the issue of control. Which party is controlling the contractor’s work? The client, the MSP, the staffing firm, or the independent talent? The other considerations -- financial, work location, supplies furnished, etc. -- are all directly related to the primary factor of control.

The recent ruling in California only bolsters this. But four years ago, during the newsworthy FedEx-IRS showdown, control remained an undeniable factor in the decision: “As a central part of its business, FedEx contracts with drivers to deliver packages to its customers. The drivers must wear FedEx uniforms, drive FedEx-approved vehicles, and groom themselves according to FedEx’s appearance standards. FedEx tells its drivers what packages to deliver, on what days, and at what times. Although drivers may operate multiple delivery routes and hire third parties to help perform their work, they may do so only with FedEx’s consent.”

The courts have again emphasized the core principle of the common-law rule: any worker who performs a service for a client will be considered a statutory employee if that client controls how, what, and where the work will be done.

How MSPs Can Help

It often seems that the assessment process is where things begin and end. Whether the MSP’s team is conducting the evaluations or the client has self-identified and (hopefully) vetted ICs, this undertaking alone tends to emphasize conformity and indemnification over compliance. The prevailing concern is control. So after taking every precaution to deflect risks in qualifying ICs, how can an MSP help manage the issues of control? Primarily by treating ICs as the service providers they truly are; by approaching the relationship in the same way they deal with staffing supplier partners.

Independent service providers should receive the same dedicated representation as suppliers through an MSP’s supplier management group. Independent service providers should have access to communications and all necessary materials they have requested in order to perform their services. They should not, however, have access to company uniforms, equipment, vehicles or regular facilities at a client site.

The MSP can design and oversee the engagement, onboarding and ongoing administration processes of independent service providers in the program, and identify red-flags along the way that could lead to risk exposure. Performance issues should be discussed only as they relate to agreed upon contractual obligations between the IC and the client -- the same as they would with any outsourced service provider.

  • Designing an environment for independent contracting should focus on standardization, consistency and compliance.
  • The MSP should build a document management portal, which is maintained in a controlled environment.
  • The MSP should limit any perceived managerial roles with the contractor:
    • Administration and on-boarding procedures are performed by the MSP
    • Regular communication occurs between the independent service providers and the MSP, only in relation to contractually bound and scheduled milestones, deliverables and Statement of Work (SOW) commitments -- not employee related issues such as attendance, timekeeping, hourly productivity checks, etc.
  • The MSP can act as a payment processing agent between the IC and the client, yet those terms should be clearly outlined upfront in the Professional Services Agreement (PSA) and SOW. The billing structure should be negotiated to ensure that financial control factors are adhered to.
  • The MSP should restrict the inclusion of ICs in company functions unless absolutely necessary to the performance of the work as contractually stated.
  • All HR related information must be directed to the IC.
  • As a best practice, the MSP can reassess ICs who stay on projects longer than a predetermined amount of time, addressing red flags.
  • The MSP can ensure that the utilization of ICs occurs for specific, specialized work only, such as projects with established start and end dates that full service employees are not performing.

It’s a Hangover, Not a Headache

Clients caught in the crossfire of an employment classification battle between government regulators and ICs are miserable. Many who wish to use ICs end up passing because they “don’t want the headache.” The reality for companies that run afoul of the law, however, is that it’s really more like a hangover. They had too much fun the night before, felt on top of the world, and then paid for it the next day. The point is, the throbbing pain these organizations are now feeling could have been avoided through a bit of restraint, moderation, and control.

The use of ICs and freelancers doesn’t need to be prevented, and there’s no reason to think they’re going the way of the dodo because of the Dupage Housing Authority ruling. The government is merely reiterating the foundation of existing case law.

The first step is to restructure the relationship with ICs in a manner consistent with legislation and corporate objectives. The second step is revising professional services agreements to enforce the independence of the contractor, treating the individual as any other company that provides services -- not as full-time or even temporary talent. The third step in managing an IC population is not to manage them at all.

We don’t oversee the way in which mechanics repair our vehicles. We don’t control their schedules, provide them tools, dictate their workspaces or request time sheets. We sign a contract at the start of the work. If the contract is breached, we are owed restitution. If the work is unsatisfactory, we discontinue service. The relationship with independent contractors should be viewed as no different.

The value of MSPs would be akin to having a personal assistant, who is utterly familiar with the process of car repair, to intermediate the relationship and payment processes on our behalf -- to provide additional input, offer administrative support to expedite the work, ensure contractual compliance for deliverables and report on the quality of the output from a position of expertise.

Casey Enstrom
Casey Enstrom
I am passionate about helping business leaders adopt crowd-based hiring solutions to hire the best talent. Through a comprehensive workforce and staffing programs assessment, I help identify areas of opportunity where having a hiring marketplace with a curated network of staffing agencies & independent recruiters​ could dramatically impact results.
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