Employee/Independent Contractor Misclassification under State Laws

December 21, 2007

Most of the Human Resources world looks to federal law when it considering the classification of a worker as an employee or an independent contractor. The IRS and most federal employment statutes use a common law rules which analyze the degree of control and the degree of dependence in the relationship between the business and the worker. The IRS recommends using Form SS-8 for this determination; however, the usefulness of this process is marginal.

To make matters more difficult, state laws also impact worker classification using sometimes differing legal standards. The post –gazette NOW Business reports that FedEx Grounds was fined $190,000 by the Massachusetts Attorney General for misclassifying 13 drivers as independent contractors. The Massachusetts test for an independent contractor differs focusing on three factors: the degree of control; work outside the usual course of business of the company; and the person engaging in a business that is customarily conducted as an independent trade or profession.

Pennsylvania has similar test for independent contractors which requires that the individual be free from control or direction over the performance of the services involved and be customarily engaged in an independent trade, occupation, profession or business. The impact of misclassification frequently appears in unemployment and workers’ compensation cases, but also had important tax and other compliance issues.

The state law employment classification issue may well be fertile ground for multistate litigation and class actions. Employers face real difficulties in complying with 50 states laws on employment classification along with a nebulous federal standard. Likewise, I don’t see how a worker could be classified as an employee for state law purposes and an independent contractor under federal law.