Employers around the country continue to struggle with the various tests federal and state entities use to determine whether an individual is an employee or an independent contractor.
The gig economy's emergence has led some states, including Tennessee, to enact laws that recognize independent contractor relationships when they comply with certain "marketplace platform" or "marketplace contractor" conditions. Some states, such as California, have adopted the "ABC test," which looks at whether the worker is free from the direction and control of the hiring entity, whether the work performed is outside the normal work performed by the hiring entity, and whether the worker is engaged in an independently established trade or occupation. On the other hand, the U.S. Supreme Court has considered seven factors significant in determining whether a worker is an employee under the Fair Labor Standards Act.
While the tests vary, all governmental entities have a strong interest in ensuring that workers are properly classified; misclassification can result in reduced payroll-related tax revenue as well as lower contributions to state unemployment and worker's compensation funds. Moreover, independent contractors are not protected under most federal and state labor and employment laws. Therefore, regulators closely scrutinize worker classification decisions, and federal and state entities formally collaborate to target misclassification. Misclassifying a worker as an independent contractor can result in unexpected tax liability, interest, and penalties, as well as liability under federal or state law for unpaid overtime and discrimination.
In Tennessee, courts generally have used a six-factor test to determine whether an employer/employee relationship exists.
But, on May 10, Gov. Bill Lee signed HB 539 into law. Among other things, it changes the test employers should use to determine whether an employer/employee relationship exists. Specifically, HB 539 adopts the 20-factor test of the Internal Revenue Service.
HB 539 takes effect Jan. 1, 2020. It redefines the term "employee" to "mean an individual who performs services for an employer for wages under a contract of hire if the services performed by the individual qualify as an employer/employee relationship with the employer based upon consideration of the following 20 factors as described" by the IRS.
The 20 factors to be considered are: (1) Instructions; (2) Training; (3) Integration; (4) Services rendered personally; (5) Hiring, supervising, and paying assistants; (6) Continuing relationship; (7) Set hours of work; (8) Full time required; (9) Doing work on employer's premises; (10) Order or sequence set; (11) Oral or written reports; (12) Payment by hour, week, month; (13) Payment of business or traveling expenses; (14) Furnishing of tools and materials; (15) Significant investment; (16) Realization of profit or loss; (17) Working for more than one firm at a time; (18) Making service available to general public; (19) Right to discharge; and (20) Right to terminate.
The adoption of the IRS' 20-factor test arguably provides Tennessee employers with improved guidance in structuring relationships with their workers. However, employers must still comply with various federal standards (and those of other states) that could lead to misclassification determinations. Before classifying a worker as an independent contractor, employers should always exercise caution and seek counsel from an experienced labor and employment attorney.
Originally published by Memphis Business Journal.
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