Thursday, April 06, 2006

Employee or Independent Contractor?

Today in BLAW, we discussed agency relations, the most common being the employer-employee relationship. One of the issues that came up was how a court would distinguish between a person being an employee or an independent contractor. There are some businesspeople out there who "hire" their employees as independent contractors to avoid paying benefits and employment taxes. If the IRS ever catches them, they're screwed. In any case, here are some tests to determine whether the agent is an employee or independent contractor.
  • Control: the greater the control you have, more likely an employee.
  • Occupation or business: if worker is engaged in occupation distinct from employer, more likely independent contractor.
  • Supervision: the greater supervision, more likely an employee
  • Tools of work: if employer supplies tools, more likely employee
  • Method of payment: by time period (employee) or at completion of job (independent contractor).
  • Time of employment: greater time, more likely employee
  • degree of skill: greater skill, more likely independent contractor
Normally, I wouldn't bore you with the details of my class notes. I had this question for my Prof. Ramon regarding the practice amongst some of the companies down in the Sharyland industrial park adjacent to the Foreign Trade Zone. Many of these companies will contract with temp agencies like Kelly Services for their workforce. This is called outsourcing. However, it's a bastardization of the term. Outsourcing refers to issuing out work to another company for something in which you are not proficient or unable to do. For example, if you have a company experiencing rapid growth and your customer service department cannot keep up, you can outsource some of your customer service calls to call centers. Or, let's say that you need to produce 200,000 widgets in 1 month but your factory is at capacity. You find another manufacturer willing and able to produce the widgets to spec for you. That's outsourcing. Another example of outsourcing is Delphi and General Motors. GM designs and puts cars together. Delphi makes all the parts. That part of the process is outsourced by GM To Delphi.
In all these examples, the company outsourcing is in one location and the outsource company is elsewhere. They conduct their parts in separate locations.
What these companies, like Panasonic through Kelly Services are doing is not outsourcing. What they have done, basically, is lay off their workforce. The employees then have the option of signing up for their old job through Kelly Services at a lower pay rate and with arguably fewer benefits. So, the employees are still working the same job. They are under the supervision of their old company. They are under the control of their old employer. Their old employer provides them the tools of their work. The workers are engaged in the business of the old employer. The workers are paid by period. And, they have worked at those jobs for a long time as direct employees; and many are still working those jobs. So, are they employees or independent contractors (which I am making equivalent to outsourcing).
It quacks like a duck. It swims like a duck. It's a freakin' duck! Companies doing this seem to be getting away with wholesale screwing over of their employees. In some cases, wages are going from $12/hr to $7/hr under Kelly. Under all the tests, these "outsourced" workers are employees of these companies. I would love to see some situation where this gets challenged in court to see what the outcome is. Furthermore, I'd like to see what the legal remedy would be. Would all employees be ordered to be hired directly to their old jobs? Would there be a cease and desist of the practice, leaving the outsourcers without a workforce? Would the employees be paid back wages? This has happened and is probably going on as we speak; except there has not been any legal challenge.
I was just wondering.


Writer said...

Good luck with your litigation. Keep in mind that the tests only say that in such condition, such is likely, not certain. I'm still jobless, except for a remodeling job that I'm doing. So I have time to chat during the day.

Anonymous said...

I just received a determination from the IRS involving a Limousine company. I own my own Limousine Company. I hire myself out to the public as a Chauffeur to driver their car as an Independent contractor. The public hires my company. I hired my company out to another Limousine company beleiving I would be considered a vendor. This was not the case. I was found to be an Employee because the Limo company I was working for controled when, where and how to do the job. They owned the equipment and paid all of the expenses.

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