What’s An Employee? Incorrect Definitions Are Costly

images(Post by Rick Dacri, May 10, 2014)

Every morning I pour a cup of coffee, grab the newspaper, and turn directly to the sports page. It’s my way of relaxing before I have to think about work. Unfortunately, not lately.

Earlier this year, I read about harassment and bullying within the Miami Dolphin’s team; later that the NFL is grappling with how they’ll handle openly gay players; and now the NLRB has determined that the Northwestern University football players can unionize. It’s getting to the point that there is no escape from work. The sports page is becoming the new edition of LexisNexis.

I am not going to address any of these three issues directly today. But the NLRB’s decision implies that the players are “employees” and that’s a good segue to what I want to discuss with you: what is an employee? This sounds basic, but it isn’t, and incorrectly defining someone as NOT an employee can have significant consequences to you and your company. Let me explain.

First a definition: “An employee is a person who works in the service of another under express or implied contract for hire, under which the employer has the right to control details of work performance” (Black’s Law Dictionary). That’s clear until you understand there are some broad exceptions to that definition created by the U.S. Department of Labor. Independent contractors and student interns are not employees. Still with me? OK, here it comes.

Independent contractors are not employees and therefore, under the law, employers who engage them have no obligation to withhold taxes or offer benefits (workers comp, unemployment comp and the usual holidays, etc.). But where you can get into trouble is when the IRS, or the Department of Labor or the state views this Independent Contractor as an employee. Now you’re in trouble.

The general rule is that an individual is an independent contractor “if the payer (the business employing the contractor) has the right to control and direct only the result of the work and not what will be done and how it will be done.” Not very clear, is it? The IRS, Labor and each state have put out their own distinct and sometimes conflicting definitions, just to further complicate matters. And they are actively enforcing them. Make sure your independent contractors are bonified independent contractors and not really employees.

Let’s now discuss unpaid interns. With summer approaching, unpaid interns will soon be joining many companies. Here again the Federal DOL has a strict definition of what constitutes an intern, and who is really an employee that must be paid. If you are going to hire an unpaid intern (I started my career many years ago as an unpaid intern), you must meet the six educationally based criteria. Otherwise, your unpaid intern is an employee and you must put them on the payroll. Incidentally, if you are already paying them at least minimum wage for the hours they work, you’re home free.

If you “employ” Independent Contractors and unpaid interns, carefully evaluate their status and how they are being used and compensated. Make sure they meet all of the various state and federal criteria. Mistakes are costly. Call me if you have any questions (207-967-0837 or rick@dacri.com).

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