There is a common mistake employers across the U.S. are making that could cost them a lot of money: Mis-classifying their employees as independent contractors. It’s easy to do, but the cost of doing so could be drastic.
It is not a secret that Uber is fighting several lawsuits filed by its drivers, who assert they are employees, instead of independent contractors as Uber classifies them. While Uber attempted to settle the largest of the suits with a settlement of $100 million, the court denied it because the settlement represented roughly 10 percent of what could be owed to the plaintiffs under state and federal laws.
Did you catch that? $100 million was only about 10 percent of what was potentially owed.
So, how do you avoid your own version of the Uber dilemma? Remember your ABCs. The ABC Test is the most common way to determine if an individual is an employee or an independent contractor. The A, B, and C come from the statute commonly used to determine employment status.
Under the ABC Test, an individual must meet all three of the following criteria to be considered an independent contractor:
- The worker must be free from direction and control in the performance of the service, both under the contract of hire and in fact. (Essentially, this is the common law definition.); and
- The worker’s services must be performed either outside the usual course of the employer’s business or outside all of the employer’s places of business; and
- The worker must be “customarily engaged” in an “independently established” trade, occupation, profession or business of the same nature as the service being provided.
Keep in mind, some of the factors may not apply to your situation. The ABC Test is just one method used to determine an individual’s employment status. Almost all tests for determining employee classification ask the question: “Who has control?” If the employer maintains a large portion of control, the individual is most likely an employee. To properly classify your employees, you should check your state’s Department of Labor website to determine if it uses the ABC Test and if any other factors apply to the classification.