Practice Areas

As work force changes, many misclassified workers miss out on benefits

Nancy Joerge is a managing shareholder of Wessels Sherman in St. Charles who specializes in worker

classification and employment law. "Employers have to be on their guard," she said. (Stacey Wescott,

Chicago Tribune/October 20, 2010)

By: Ann Meyer

Minding Your Business

Chicago Tribune

October 25, 2010

As a cable installer, Joe Marte of Carol Stream was simultaneously classified as an independent contractor and an employee for Baker Installations, for doing the same work.

As a result, Marte did not get overtime pay, though he often worked more than 40 hours a week, he said. He also didn't get other benefits granted to full-time employees.

"They had said we're supposed to be employees, but they still wanted to pay us as independent contractors," Marte said. Independent contractors, who are considered sole proprietors, get 1099 tax forms instead of W-2s.

Marte, who got two forms of payment for the work he did, is now unemployed and suing the company for misclassifying him and not paying overtime, said Maureen Bantz, an associate attorney at Werman Law Office in Chicago, which is handling his case.

"We're alleging they're a single employer for the purposes of overtime even though they are separate entities on paper," Bantz said.

In practice, Marte said, "There was one set of supervisors, same office, same people, but two different checks." The companies named in the suit, SMC Communications and James H. Peno Installation Brokerage, do business as Baker Installations based in Pittsburgh.

A spokesman for Baker Installations said the company had no comment.

Marte said he agreed to be classified as an independent contractor because he needed the work and had no aspirations of being his own boss. Marte supplied his own truck, but the company provided other supplies necessary to doing the cable installation.

"I definitely felt like an employee," he said. "They told you what time you had to be there and what mandatory meetings you had to be at, just like I was an employee."

Marte's case goes to show the confusion over worker classification, which has been in the spotlight since the Obama administration pledged this year to crack down on employer violations, with hopes of collecting an additional $7 billion over 10 years.

Meanwhile, the state has made it harder to classify Illinois workers as independent contractors in many industries, said attorney Nancy Joerg, managing shareholder of Wessels Sherman in St. Charles who specializes in worker classification and employment law.

Since the Illinois Employee Classification Act took effect Jan. 1, 2008, the state Department of Labor has found 3,400 violations and assessed penalties of $1.3 million, a spokeswoman said.

On the federal level, instead of trying to audit hundreds of thousands of independent contractors who may inflate expenses to reduce their taxable income, the government hopes to tackle the issue more efficiently through more stringent policing of employers' classification of workers, experts said.

The federal government is increasing the number of investigators and auditors by a projected 36 percent, said attorney Paul Starkman, chairman of the labor and employment group practice at Arnstein & Lehr in Chicago.

"At the same time the IRS is gearing up, you've got state agencies and state attorneys general that are actively pursuing these kinds of issues," Starkman said.

Hiring independent contractors instead of employees can save a company about 35 percent in benefits and taxes, Joerg said. But those savings can evaporate if the company is found to have misclassified those workers because of penalties and lawsuits, among other actions. "Employers have to be on their guard," Joerg said.

Worker misclassification also includes nonexempt workers whom employers call exempt to circumvent overtime pay. "We're seeing that wave of litigation from private employees' attorneys also is increasing," Starkman said.

It's all happening against a backdrop of a rapidly changing work force, with more workers choosing the flexibility of being their own boss and many employers aiming to reduce their permanent headcount in a tough economy, experts said. What's more, because of the high unemployment rate, "more people are willing to take a job that might not be structured the way they think it should be, just so they have income," said Karen Codere, senior human resource specialist for Administaff in Rosemont.

To hold the line on full-time employees, senior managers at many corporations are targeting a contingent work force of 25 percent or more, said Jai Shekhawat, chief executive at Chicago-based Fieldglass, which provides software-as-a-service to help corporations procure and manage contingent workers.

But the trend is two-sided, because many individuals also are choosing to be independent contractors for a variety of reasons, including work flexibility. "A highly skilled worker will often only be available to you on their own terms," Shekhawat said.

To avoid the issue, more companies looking for contingent workers are turning to staffing firms.

"The best way to employ contractors is to W-2 them," said Tony Sherwood, managing partner at staffing firm CyberSearch Ltd., which specializes in supplying contract and contract-to-hire information technology workers to corporations. "We used to always use 1099s, but the government agencies believe it's a way to skirt employment taxes."

So the firm hires workers, then farms them out to other companies in need of contingent workers.

Ironically, many of Sherwood's tech workers don't want to be employees. "The majority of our people enjoy being a contractor. They like the flexibility, and they get paid a little more" for the work they do, Sherwood said.

But even legitimate contractors, and the businesses that hire them and abide by the rules, face scrutiny.

"We have people testifying at hearings that they want to be independent contractors, but it falls on deaf ears," she said. "You have a lot of overzealousness on the part of some auditors who just don't seem to believe anyone could be a legitimate independent contractor."

Meanwhile, there are workers classified as independent contractors who would like to get benefits, including overtime. Increasingly, they're suing.

Many FedEx Ground drivers have filed suit against the company, because the company classifies them as independents, even though they do the same work as FedEx Express drivers, who get overtime, health insurance, vacation pay and other benefits, said Mike Johnson, an attorney with Halunen & Associates in Chicago.

In a statement, FedEx said it believed the lawsuits are without merit and cited several recent court and agency decisions supporting its position. "We will continue to defend this position in Illinois and across the network," the statement said.

But Illinois might be one of the tougher states to convince, Joerg said.

For example, Illinois cracked down on violations in the construction industry by passing the Illinois Employee Classification Act and stipulates that workers are automatically considered employees unless they pass several tests, including one that says they are free from control or direction in performing the work. What's more, the state uses a broad definition of construction to include everything from painting and decorating to landscaping and transporting materials, Joerg said.

The result has had a chilling effect on hiring of independent contractors. "It isn't worth it from our point of view" to use an independent contractor, said Loretta Molter, president of Molter Corp., which provides masonry.

mindingyourbiz@gmail.com

Contractor vs. employee

When considering how a worker should be classified, the IRS looks for evidence of the degree of control and independence in three categories:

Behavioral: Does the company control how the worker does the job?

Financial: Does the company control how the worker is paid, whether expenses are reimbursed and who provides supplies?

Relationship type: Are there contracts or employee-type benefits, such as vacation pay? Is the work performed a key aspect of the business?