The issue of Independent Contractor misclassification remains front-and-center in the business news cycle. A central challenge for companies is determining whether a worker should be classified as an employee or an independent contractor. Making a defensible determination is extremely complicated as each state has its own patchwork of federal, state, and local laws and standards that govern worker classification.
For a great example of just how complicated this can be, let’s look at the state of Hawaii.
With a population of just 1.4 million Hawaii is one of the smallest states. When we think of Hawaii we often picture sunny beaches, tropical breezes, and easy living. One could reasonably imagine that this might also translate to simplicity in employment law related to worker classification. Unfortunately, much like every other state, this is not the case in Hawaii.
Worker misclassification occurs when a worker is improperly classified as an independent contractor when they should actually have been classified as an employee of the business. In instances where a worker is found to be misclassified they can be reclassified as an employee, resulting in back pay and benefits for the worker, and fines and penalties for the business.
In Hawaii, there are several tests used depending on which state agency is involved:
Unemployment Compensation – The Hawaii Employment Security Act uses the “ABC” test, which provides that:
- The individual is free from control or direction over the performance of such service, both under the individual’s contract of hire and in fact
- The service is either outside the usual course of the business for which the service is performed or that the service is performed outside of all the places of business of the enterprise for which the service is performed; and
- The individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the contract of service.
Workers’ Compensation – The state workers’ compensation statutes use the “control” and “relative nature of the work” tests. The control test provides that “an employment relationship is established when the person in whose behalf the work is done has the power, express or implied, to dictate the means and methods by which the work is to be accomplished.”
Tax Revenue – For tax purposes, Hawaii uses the Internal Revenue Service standard for classifying workers. What was historically referred to as the “20 factors” have been simplified to three primary categories of evidence which must be considered to evaluate the degree of control and independence of the worker:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Under the IRS guidelines a business must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
This is easy and clear, right?!
Pending State Legislation – Like many other states Hawaii is contemplating legislation that would better define independent contractor status. There is also similar legislation being proposed at the federal level.
Proposed bill HB1213 was introduced in the Hawaii House of Representatives that would allow the state Department of Labor and Industrial Relations (DLIR) to set out the criteria when an individual will be considered an independent contractor and when independent contractor status is presumed. On March 2, 2015, an amendment was introduced and the committee with jurisdiction recommended the measure be deferred. A similar bill was introduced in the Senate, SB1219, and passed with amendments on March 27, 2015. The bill would clarify Hawaii’s employment security law for independent contractors and includes 20 factors to be used as guidelines when determining whether a worker is an independent contractor.
DOL Memorandum of Understanding – The U.S. Department of Labor (DOL) has initiated a Misclassification Initiative in which it has entered into memorandums of understanding (MOU) with 26 states from coast to coast to coordinate enforcement efforts and share information between the state and federal agencies about non-compliant companies. On July 20, 2011, the DOL’s Wage and Hour Division entered into a Memorandum of Understanding with the Hawaii Department of Labor and Industrial Relations. This agreement was renewed last week.
As we can see from this example, the issue of proper worker classification can be challenging and fraught with risk for employers, even in a small state like Hawaii. When it comes to mitigating the risks of independent contractor reclassification, it is always smart to engage the services of a specialized service provider who can make sure you’ve done things right and who will indemnify your company of the risk. Independent contractor compliance and engagement experts, like TalentWave, are valuable partners for managing your flexible workforce.