Use of “Contingent” Workers Under Scrutiny: Carefully Classify Your Workers

Many labs use "contingent" workers, such as temporary personnel, freelancers, and other independent contractors to round out their staffing. While not unlawful per se, these arrangements are fraught with compliance risks that labs need to be aware of.

Contingent work on the rise
The contingent workforce has been increasing since the 2007-2008 recession because it provides employers with the flexibility to use workers on a more as-needed basis, and that is often easier than securing full-time, more permanent help. One recent study by supply management company Arden Partners found that nearly 35 percent of today's total workforce is comprised of non-employee workers and that in 2015 the industry has reached a "tipping point."

Employers have also embraced contingent workers because it's cheaper. A Government Accountability Office (GAO) report issued in May 2015 found that while millions of workers are not in a traditional employer-employee relationship, most of them in these non-standard relationships do not have job protections, such as health insurance, retirement benefits and safeguards under laws such as the Family Medical Leave Act, because the employers aren't required to provide them to non-employees. Employers also can avoid paying taxes on these workers, according to attorney Hannesson Murphy with Barnes & Thornburg in Indianapolis.

"It's the same bang for the buck and fewer regulations," he explains.

Marketing pitfalls raise AKS specter
However, labs need to be particularly careful when using workers to market the lab who are independent contractors instead of employees. Marketing services, including any type of promotion or advertising of health care providers, raise special concerns under the Anti- Kickback Statute (AKS), warns attorney Danielle Sloane, with Bass Berry & Simms in Nashville, speaking at the G2 Lab Institute's meeting held in October in Washington, DC. If a marketed product or service may be reimbursed in whole or in part by a federal health care program, then by definition remuneration paid to marketing personnel to promote, arrange for or recommend products and services is intended to induce referrals of items or services covered by the AKS.

The problem arises when a marketer for a lab is not a bona fide employee of the lab, says Sloane. Sales representatives are typically paid on an incentive or commission basis. The AKS provides a safe harbor against AKS liability if a marketer is an employee of the provider he or she is promoting; real employees, which are subject to the employer's control and supervision are less likely to engage in abusive or suspect activities in violation of the AKS and can be paid on an incentive or commission basis, says Sloane. However, marketers who are independent contractors don't qualify for the employment safe harbor.

To complicate matters, marketers who are independent contractors typically also don't meet the conditions of the AKS' personal services and management safe harbor if they're paid at all on a variable basis—whether by commission, bonus, per referral, or other means— since one of the requirements of this safe harbor is that the aggregate compensation is set in advance.

While fitting into a safe harbor is not a guarantee that a lab would avoid AKS scrutiny, it is much less likely that the arrangement would be found in violation of the AKS, which can impose criminal and civil penalties, imprisonment of up to five years, violations of the False Claims Act and exclusion from the federal health care programs.

The Department of Health and Human Services' Office of Inspector General (OIG) has long expressed concern with marketing arrangements involving independent contractors, and has issued several advisory opinions against it. The Department of Justice has also found providers and their independent contractor marketing arrangements violative in a number of cases. Since OIG/DOJ enforcement continues to ramp up, this is an area of increasing concern.

Misclassification of employees as independent contractors
Another compliance issue for employers using contingent workers is the increased challenge by regulators and private individuals against the misclassification of workers as independent contractors who from a legal standpoint should be characterized as employees. Making the wrong decision about classification of an employee can expose an employer to liability on several different fronts.

State law
State law affords various protections to employees, such as workers' compensation, minimum wage, overtime, and unemployment benefits. An employer that inappropriately characterizes an individual as an independent contractor rather than an employee exposes itself to liability under these laws, warns attorney Philip Eschels, with Bingham Greenebaum Doll in Louisville, Kentucky, noting that the problem is "extremely widespread."

"The stakes are enormous for employers that misclassify employees as independent contractors," he explains.

Enforcing these laws has become a higher priority for state governments in recent years because the increased use of people deemed contingent workers rather than employees means that the states are receiving lower tax revenue, since the employer isn't paying payroll tax and making unemployment contributions. As a result, state regulators have become more aggressive in sleuthing whether workers at entities of all types and sizes are actually independent or have been misclassified, according to attorney John Pueschel with Womble Carlyle Sandridge & Rice in Winston Salem, North Carolina.

"This issue is front and center in employment law now," he warns.

Federal law
The federal government is also cracking down on misclassification of employees as independent contractors on the grounds that it lowers federal tax revenues, exploits workers and undermines the economy.

Department of Labor actions
In July, the Department of Labor (DOL)— perhaps in light of the GAO's report—issued new interpretive guidance that clarifies that "most workers are employees" under the Fair Labor Standards Act (see G2 Compliance Advisor, Aug. 2015, p. 5). The guidance says the Act uses a "to suffer or permit to work" standard and that employers should use an "economic realities" test to determine how to classify a worker, applying six factors:

• Is the work being performed integral to the employer's business

• Whether the relationship between the employer and worker is permanent or indefinite

• How does the worker's relative investment compare to the employers' investment

• Whether the worker's managerial skill affects the worker's opportunity for profit or loss

• Does the work performed require special skill and initiative

• The nature and degree of the employer's control over the work being performed.

To bolster enforcement efforts, the DOL also launched a program to collaborate with states and has entered into memoranda of understanding with a number of them to share information about employer misclassification misconduct with each other and coordinate enforcement. To date 27 states have signed such memoranda, most recently Vermont, which signed on in September. (For a link to the full list, see the DOL's website.) That means that an employer not in compliance in those states can expect to be audited by multiple state and federal agencies, warns Pueschel. The website also lists a myriad of state/federal enforcement actions regularly being taken around the country against employers found misclassifying workers.

"The DOL is making misclassification of employees an enforcement priority," says Eschels.

IRS updates its guidance
In August, the Internal Revenue Service (IRS) released a new fact sheet on employee misclassification as independent contractors, pointing out that the determination depends on the degree of control and independence the individual has, focusing on behavioral control, financial control and the type of relationship between the employer and the individual (see Page 10). The updated guidance, with 11 factors, streamlines the IRS' prior misclassification guidance, which used a 20-factor test.

"The government will do as much as it can to change the practice [of using independent contractors] improperly," Eschels says.

Other federal laws impacted
In addition to the Fair Labor Standards Act, employee misclassification can subject employers to penalties under other federal law, such as the Occupational Health and Safety Act and the Family Medical Leave Act. Moreover, as of January 1, 2016, employers who misclassify employees as independent contractors may run afoul of the Affordable Care Act (ACA), since by then a required percentage of workers will need to have health insurance that meets ACA standards, which raises the stakes even higher, warns Eschels. Many employers have re-characterized employees as independent in order to avoid the ACA's health insurance obligations.

Individuals joining the fray
The heightened focus on misclassification has caused a domino effect in the private sector, with more individual workers filing private lawsuits against employers on behalf of themselves or as class action lawsuits to attempt to obtain back pay and other benefits of employee status. These private lawsuits have in recent months involved Uber, Lowes Home Centers and FedEx, among others, which cost time and resources to defend, even if the classification was correct. The current trend in these cases is that judges are requiring them to go to trial on the issue of employee status and not allow summary judgement, says Eschels.

They also garner media attention, which increases awareness about misclassification, and snowballs into more lawsuits and complaints filed with the government, warns Eschels, who has been seeing an increasing number of government investigations spurred by such private actions. "It takes just a phone call to file a complaint," he explains. A private lawsuit can also trigger a government investigation once regulators get wind of the potential violation. In addition, once an employer has been audited by regulators for employee misclassification, the government often returns within six to twelve months to check on that employer because it's now on the government's radar, says Eschels.

"If the government knows an employer is a bad apple, it's more likely to go after lower hanging fruit," he explains.

Liability comes with hefty price tag
The legal and financial exposure if an employer is found misclassifying employees as independent contractors can be significant. Not only would the employer owe back taxes and penalties, but also liability for violating state workers' compensation, unemployment insurance and wage and hour laws, such as overtime and benefits, like 401 K participation, says Pueschel. It can also result in penalties under the federal laws.

Unfortunately, it's not always clear whether a worker should be classified as an employee or independent contractor. "There's [often] no black or white in this. You have to look to the totality of circumstances," says Pueschel. For instance, while a lab's long-term phlebotomist perhaps should be considered an employee, it may be harder to determine how to classify a lab's off and on IT wiz or a short term billing clerk. However, that is not an excuse to avoid addressing the issue. While the two federal tests, as well as factors relied on by state agencies and even courts may vary somewhat, they are all pretty similar, says Murphy. Others agree.

"Employers need to be alert to changes in the law and avoid being overconfident about business practices that have been followed for years," says Eschels. "Be honest and don't take a 'head in the sand' approach. Enforcement is real and it's a major risk," he warns.

Takeaway: Labs should carefully examine their workforce to ensure that any contingent worker who is being treated as an independent contractor properly fits the definition and, if engaged in marketing the lab, is not running afoul of the AKS.