Recently, several startups I've spoken with have informed me that they use independent contractors instead of traditional employees. However, many startups are not aware that independent contractors can still be deemed employees by the Courts.
So why are the startups hiring independent contractors as opposed to employees? Here are some of the benefits:
Due to these benefits, some businesses abuse the label of 'independent contractor.' For that reason, New York courts have employed two different tests to determine whether a worker is an independent contractor or employee.
The Economic Realities Test is as follows:
This test looks at the totality of the answers to the above questions to determine whether an employee/employer relationship exists.
The Common Law Test is as follows:
The factors of the Common Law Test are not exhaustive, and the Court will explore additional inquiries if it feels necessary. An example of an additional factor that could be considered is whether the worker is required to wear a uniform. In the Common Law Test as well, no single factor itself is dispositive of an employee/employer relationship.
Effectively, this means that workers who are classified by a business as being an independent contractor may not be classified as independent contractors by the Court. Should the Court find that an employee/employer relationship exists, then a business loses all benefits of hiring the independent contractor (with respect to that person only) and is subject to the totality of laws involving employee/employer relations. Therefore, the business incurs increased costs and liability.
If your business decides to use independent contractors, ensure that the written agreement with the worker incorporates the factors the Courts could use in determining whether an employer/employee relationship exists.
Recently, a federal judge in the Southern District of New York granted conditional certification of a nationwide class of former and current unpaid interns for Warner Music Group. The class of roughly 3000 unpaid interns allege that they were actual employees of the company under the Fair Labor Standards Act, and thus entitled to minimum wages and overtime pay. Warner Music Group is among several companies to have recently been sued over their unpaid internship practices. Other companies being sued include NBC Universal, Conde Nast, Hearst Corporation and Fox Searchlight.
Although the recent ruling centered on whether conditional certification of the class would be granted and not whether the claims had merit, this case serves as an important reminder of what standards a company should meet in operating an unpaid internship program. The Department of Labor has previously outlined the following six criteria to determine whether an intern is exempt from the Fair Labor Standards Act, thereby allowing the company not to pay the intern. All of the criteria must be met, and include the following:
Prong 4 of this test is difficult to meet, as it seemingly requires the company to not benefit from the intern's work. The question as to how "immediate advantage" should be defined has caused some confusion and a hesitation towards hiring interns at some companies. What this prong likely entails is that interns can act in support roles, or work on pieces of larger projects, but should not create a final product from start to finish that is then marketed to consumers. In the latter scenario, the intern would be providing an immediate advantage through their activities.
Internships may be appealing to small businesses and startups who operate on tight budgets, but they should be the most careful as lawsuits can quickly derail their path to success. If your business is considering an internship program, or already has a program, make sure that the internship meets the Department of Labor test.
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Attorney Advertising. The information presented in this site should not be construed to be formal legal advice nor is it intended to form any attorney/client relationship. Our attorneys, collectively, are licensed to practice law in the States of New York, New Jersey, and Pennsylvania. Copyright Roger R. Quiles, Esq., 2017. All rights reserved.