Classifying Employees as Independent Contractors: New Developments from Michigan and Iowa

More News on the Independent Contractor Front

Posted on 05-Feb-08 by The Timekeeper

There’s been a lot of talk lately about employers misclassifying employees as “independent contractors” to get out of paying overtime. Looks as though this could be a “hot button” issue in 2008.

Michigan’s Governor establishes task force

On February 1, 2008, Michigan’s Governor Jennifer M. Granholm signed Executive Order 2008-1, creating a task force to address the issue of employers misclassifying their workers as “independent contractors.”

The task force is charged to come up with ways to prevent employee misclassification and to improve the identification and reporting of misclassification. Significantly, it’s also supposed to identify industries where misclassification is most common, and come up with strategies to investigate misclassification — and to identify specific, significant cases that might warrant joint investigation between the Michigan DOL and the Feds.

This makes Michigan the second state to tackle the issue of employee misclassification; last November, New York Governor Eliot Spitzer signed a similar order.

So if you’re an employer in Michigan or New York, and you have people working for you classified as independent contractors, better make sure they really are independent contractors and not employees. This is a tricky area of employment law and violations can potentially be expensive, so you’d be wise to consult with a qualified professional advisor.

And Iowa’s legislature gets into the act

Meanwhile, in Iowa… Iowa’s house majority leader has introduced House File 2026, a bill covering several aspects of workplace law, including whistleblower protections, penalties for hiring undocumented workers and the classification of independent contractors versus employees.

While the provisions related to undocumented workers are getting the lion’s share of the attention (not surprising in today’s political climate), another section of the measure redefines “independent contractors” in Iowa, creating a presumption that an individual performing services for a contractor is an employee and not an independent contractor, unless certain specific conditions are met.

According to the Iowa Independent:

“The first set of conditions â€¦ are that the individual performs the services free from control and direction of the contractor; the individual performs the services outside the usual range of the contractor’s services; and the individual who performs the services is in an independent trade, business or occupation.

“The second way â€¦ is if the individual is a sole proprietor or a partner in a partnership. In order to determine if a legitimate sole proprietorship or partnership exists, 13 conditions must apply.”

Those conditions include: performing services free from the direction of the contractor; has invested significant capital in the business beyond ordinary tools and a personal vehicle; lists the business on a federal income tax schedule; performs services under the business’ name; obtains and pays for licenses or permits needed to operate the business; furnishes the tools and equipment necessary to run the business; hires employees, if necessary, without reimbursement from the contractor and reports employees’ income to the Internal Revenue Service; is not presented by the contractor as an employee; retains the right to perform similar services to others; and is in compliance with the state contractor registration requirements.

The first violation could net you a civil penalty of up to $1,500. Subsequent violations within a five-year period could cost you up to $2,500 each, get your name posted on an Internet list and prevent you from being awarded any state contracts for a period of four years.

Now, this is just pending legislation, and it’s possible some provisions might change before it’s passed (and it might not pass at all). But if you’re a business in Iowa using outside contractors, you’ll definitely want to keep a close eye on this bill’s progress.