EMPLOYEE CLASSIFICATION IN THE GIG ECONOMY
Nonprofits may call upon a variety of individuals to help accomplish their mission, from full- and part-time staff to board members, community volunteers, contractors, and others. If you are paying an individual for their time, it is important that the worker be properly classified as either an employee or an independent contractor. Improperly classifying an employee as an independent contractor creates legal, financial, and reputational risks.
Broadly speaking, independent contractors are paid to complete a task and it is left to their discretion as to how the task will be accomplished. Employees, on the other hand, are directed by their employer to perform their work in a certain way, and their employer may control exactly when and how that work is completed.
State and federal statutes, regulations, guidance, and case law establish detailed rules regarding how to classify a worker. In Massachusetts, for example, a three-part test must be met to classify an individual as an independent contractor:
(1) the individual must be free from control and direction in connection with the performance of the service, both under their contract and in fact;
(2) the service performed is outside the usual course of the business of the employer; and,
(3) the individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
Laws vary from state to state, and federal laws vary as well—the United States Department of Labor, for example, has a different definition of independent contractor than the Internal Revenue Service. To complicate things further, guidance from the federal government may change when new political administrations with new priorities come into office.
With the explosion of the gig economy, employers are facing more pressure to properly classify their workers. Although classifying a worker as an independent contractor may be the simplest and most cost-effective way to pay that worker—and may even be a worker’s preferred classification—employers may end up liable for back pay and hefty fines and penalties if the worker is later found to have been misclassified. Because independent contractors do not benefit from many of the safety and discrimination protections afforded to employees, and they may end up paying a larger share of taxes, employers risk running afoul of their own mission if they are perceived as treating their workers unfairly.
Employers should take care that their workers are properly classified and should consult an attorney if they are uncertain.