The Dire Financial Consequences of Misclassifying Your Employees

In February of this year, a Florida appeals court upheld a decision by Gov. Rick Scott's administration that Uber drivers are independent contractors and not employees. In terms of the law, the decision was hardly revolutionary. It did, however, highlight the importance of properly classifying workers. Indeed, failure to properly classify workers can have staggering financial consequences for a business that operates on a model that relies heavily on a large number of independent contractors.

By way of example, pretend that the court in McGillis v. Department of Economic Opportunity had ruled against Uber's interests and found that its driver was an employee entitled to reemployment assistance under Florida Statutes Section 443.1216. 210 So.3d 220 (3d DCA 2017). This would, of course, mean also altering the facts of that case a bit. Like most courts analyzing the distinction between independent contractors and employees, the Third District Court of Appeals focused its analysis on the level of “control” exerted by Uber over its driver, i.e., “the right to direct what shall be done and how and when it shall be done.” On that point, the court held that while both independent contractors and employees are both subject to some control, Uber drivers, unlike employees, are free to decide the “means” used to achieve the “results.” If the court had found otherwise, Uber could have been subjected to some very serious financial penalties once everything was said and done.

Background

As part of the cost of operating a business in Florida, employers pay for reemployment assistance through a tax managed by the Florida Department of Revenue. Employer payments go into a fund from which money is paid to eligible, unemployed Floridians who file a claim. The penalties for misclassifying an employee as an independent contractor and failing to pay this tax may not seem that daunting in the context of a few misclassified employees. However, where a business model depends on a large number of workers, like Uber, then the penalties for getting it wrong could be considerable. Under Florida Statutes Section 443.141, an employer who fails to report and contribute is liable for all back contributions due, plus interest of no more than 1% per month, and $25 for each 30-day period the employer failed to file the required reporting.

Uber has thousands of drivers in each state that it operates, including in Florida, and most states have a similar misclassification penalty structure. If even half of those workers successfully made a claim similar to the one in McGillis, the penalties could be significant.

An adverse holding also could have opened Uber up to claims for back wages, overtime and other lost benefits under state and federal law. To emphasize the point, consider the following recent examples where workers have successfully prevailed on misclassification:

• In 2016, a Florida federal judge approved a $1.2 million settlement in a minimum wage class action brought by exotic dancers alleging that they were misclassified as independent contractors;
• In 2015, over 1,000 misclassified construction industry workers in Utah and Arizona received $700,000 in back wages, damages and penalties; and
• In 2012 and 2013, the Department of Labor collected more than $18.2 million in back wages on behalf of 19,000 employees who had been misclassified.

Avoiding the Consequences

How can a business avoid these potentially devastating financial consequences? In Florida, a good place to start is with an employment agreement that specifically identifies the worker as an independent contractor. However, employers should be forewarned. Although this is one of the first factors courts in Florida will look at, the “actual practices” of the parties control. In other words, if the worker is treated like an employee by the employer, the designation in the employment agreement becomes irrelevant. Other helpful hints (and by no means the only ones) are whether the independent contractor has a separate legal entity such as a corporation; hires or employs its own workers; receives payment to the entity rather than the individual; and provides similar services for other entities. Difficult classifications and decisions should be brought to the attention of legal counsel to avoid the potentially ruinous consequences associated with misclassifying workers.

Next up for Uber in Florida? It now waits to find out if Gov. Scott will sign legislation that would prohibit local governments from regulating Uber (and Lyft), and instead, put into place statewide insurance and background check standards. Stay tuned as this issue nears its conclusion.

*****
Kristen D. Perkins is a partner with the national law firm of Hinshaw & Culbertson. Jason J. Oliveri is a senior associate with the firm. This article also appeared in the Daily Business Review, an ALM sibling publication of this newsletter.

In February of this year, a Florida appeals court upheld a decision by Gov. Rick Scott's administration that Uber drivers are independent contractors and not employees. In terms of the law, the decision was hardly revolutionary. It did, however, highlight the importance of properly classifying workers. Indeed, failure to properly classify workers can have staggering financial consequences for a business that operates on a model that relies heavily on a large number of independent contractors.

By way of example, pretend that the court in McGillis v. Department of Economic Opportunity had ruled against Uber's interests and found that its driver was an employee entitled to reemployment assistance under Florida Statutes Section 443.1216. 210 So.3d 220 (3d DCA 2017). This would, of course, mean also altering the facts of that case a bit. Like most courts analyzing the distinction between independent contractors and employees, the Third District Court of Appeals focused its analysis on the level of “control” exerted by Uber over its driver, i.e., “the right to direct what shall be done and how and when it shall be done.” On that point, the court held that while both independent contractors and employees are both subject to some control, Uber drivers, unlike employees, are free to decide the “means” used to achieve the “results.” If the court had found otherwise, Uber could have been subjected to some very serious financial penalties once everything was said and done.

Background

As part of the cost of operating a business in Florida, employers pay for reemployment assistance through a tax managed by the Florida Department of Revenue. Employer payments go into a fund from which money is paid to eligible, unemployed Floridians who file a claim. The penalties for misclassifying an employee as an independent contractor and failing to pay this tax may not seem that daunting in the context of a few misclassified employees. However, where a business model depends on a large number of workers, like Uber, then the penalties for getting it wrong could be considerable. Under Florida Statutes Section 443.141, an employer who fails to report and contribute is liable for all back contributions due, plus interest of no more than 1% per month, and $25 for each 30-day period the employer failed to file the required reporting.

Uber has thousands of drivers in each state that it operates, including in Florida, and most states have a similar misclassification penalty structure. If even half of those workers successfully made a claim similar to the one in McGillis, the penalties could be significant.

An adverse holding also could have opened Uber up to claims for back wages, overtime and other lost benefits under state and federal law. To emphasize the point, consider the following recent examples where workers have successfully prevailed on misclassification:

• In 2016, a Florida federal judge approved a $1.2 million settlement in a minimum wage class action brought by exotic dancers alleging that they were misclassified as independent contractors;
• In 2015, over 1,000 misclassified construction industry workers in Utah and Arizona received $700,000 in back wages, damages and penalties; and
• In 2012 and 2013, the Department of Labor collected more than $18.2 million in back wages on behalf of 19,000 employees who had been misclassified.

Avoiding the Consequences

How can a business avoid these potentially devastating financial consequences? In Florida, a good place to start is with an employment agreement that specifically identifies the worker as an independent contractor. However, employers should be forewarned. Although this is one of the first factors courts in Florida will look at, the “actual practices” of the parties control. In other words, if the worker is treated like an employee by the employer, the designation in the employment agreement becomes irrelevant. Other helpful hints (and by no means the only ones) are whether the independent contractor has a separate legal entity such as a corporation; hires or employs its own workers; receives payment to the entity rather than the individual; and provides similar services for other entities. Difficult classifications and decisions should be brought to the attention of legal counsel to avoid the potentially ruinous consequences associated with misclassifying workers.

Next up for Uber in Florida? It now waits to find out if Gov. Scott will sign legislation that would prohibit local governments from regulating Uber (and Lyft), and instead, put into place statewide insurance and background check standards. Stay tuned as this issue nears its conclusion.

*****
Kristen D. Perkins is a partner with the national law firm of Hinshaw & Culbertson. Jason J. Oliveri is a senior associate with the firm. This article also appeared in the Daily Business Review, an ALM sibling publication of this newsletter.