TASK FORCE ON INDEPENDENT CONTRACTORS

Staff Contact: Tom Minnick

FINAL REPORT

In Executive Order #78.1 establishing the Governor's Task Force on Independent Contractors (TFIC), Governor Pataki cited the need for creating a State system in which determinations as to whether workers are employees or independent contractors are made simply, consistently and fairly. The present system causes confusion and concern for both business and labor. Given that the designation of a worker as an employee or independent contractor has significant legal, policy and cost ramifications, including concerns over eligibility for unemployment insurance benefits, workers' compensation and disability insurance, tax liability and the ability to adopt business practices geared to changing economic realities, the Governor asked the Task Force to conduct a complete inquiry into the current system.

The charge given to the Task Force is to: (1) identify and recommend guidelines to provide clarity concerning the proper classification of workers; (2) propose recommendations to achieve uniform determinations of independent contractor or employee status among the various State agencies; (3) ensure that any recommendations are designed to continue the protections afforded to legitimate employees; and (4) receive and evaluate information from labor unions, business groups and all other interested parties.

This charge was reaffirmed by testimony received at four days of public hearings held in Albany, New York City, Rochester and Buffalo. This testimony focused on the changing nature of the workplace and the need to have consistent and clear standards concerning the classification of workers. Consistency and clarity provides protection against unfairness while also maintaining confidence in government operations. A clear illustration of constituents' concern is provided by the testimony of Alice O'Rouke and David Bixby of the New York New Media Association. The Association represents businesses that develop, promote and use Internet-related services and products to conduct business. According to Ms. O'Rourke's testimony, this is an industry which is growing rapidly and requires a high degree of flexibility to meet changing workforce requirements. For example, one company in New York City started business only four years ago with two people working out of their homes and it has now grown to employ over 300 people. She stated that this company, and others like it, could not have realized this growth without the use of independent contractors. In closing, she told the Task Force that the need for clarity and consistency from State government concerning the proper classification of these workers is critical if this type of industry is to thrive in New York State.

Workers also need certainty and clarity in their status. The testimony of David Bixby, a worker engaged in Internet commerce is informative on this point. He stated that he frequently changed status between independent contractor and employee. Ultimately, he has chosen to be classified as an employee. According to Mr. Bixby, there should "at a minimum be[,] consistency" throughout the system to ensure that workers are aware of the protections that they may or may not have under the law.

Consistency protects workers from abuse. The testimony of Jeff Murray, an organizer from the carpenters union, demonstrates this point. Mr. Murray testified about a person who worked on a construction project as a sheetrocker who was classified as an independent contractor by the business for which he provided services. He was advised by the union to file an unemployment insurance claim at the end of the job and had a separate issue regarding proper wage payments. According to Mr. Murray, it is critical that the various State agencies and the departments within those agencies make decisions "based on the same set of rules" so that workers can have their claims for monetary benefits resolved in an expedited manner.

The current system can also put companies and their employees at a competitive disadvantage when submitting bids for construction and other types of public projects. The testimony of Harold Joyce, a union leader, demonstrates this point. Mr. Joyce testified about a contractor who had lost a bid on an electrical job at a school district. Mr. Joyce later found the work was being performed by independent contractors. The lack of clear and consistent application of a standard in this instance meant the loss of employment opportunities for both the contractor and its employees.

The testimony of Michael Kinnie highlighted the problems businesses face when State agencies make no effort to achieve uniform determinations. Kinnie, the owner and operator of a comedy club, testified about a four year controversy with the Department of Labor concerning the classification of comedians performing at his establishment as either employees or independent contractors. After it was determined that the comedians were independent contractors, Kinnie was notified by the State Insurance Fund (SIF) that they determined that the comedians were employees and that he owed retroactive workers' compensation premiums. He was informed by SIF that the Department of Labor's determination that the comedians were independent contractors was not binding upon SIF. Kinnie expressed frustration that after fighting one State agency and winning, he had to again argue the same issue with another agency.

At the conclusion of the public hearings, and after receiving written testimony from the general public (see attached Appendix), the Task Force began its deliberations on March 10, 1999 and, over the course of six sessions, the Task Force reached agreement on a recommended classification system to meet the charge given by the Governor.

SUMMARY OF RECOMMENDATIONS

The following is a synopsis of the recommendations contained in this report:

  1. Create a Commission on Independent Contractors comprised of the Commissioner of Labor who shall act as chair, the Commissioner of Taxation and Finance and the Chair of the Workers' Compensation Board to approve industry specific independent contractor guidelines and oversee a process which would certify a worker or a position as an employee or as an independent contractor. In addition, the Commission would be empowered to recommend statutory changes.
  2. Create a Labor/Management Council composed of representatives from business and labor, as well as one public member, to draft industry or occupation specific guidelines to be used in the classification of workers. The guidelines would then be subject to approval by the Commission on Independent Contractors. The guidelines, once approved, would be issued as regulations and would be binding upon all three State agencies.
  3. Create a Certification Board overseen by the Commission on Independent Contractors and composed of staff from State agencies (Department of Labor, Department of Taxation and Finance and the Workers' Compensation Board), to provide advisory opinions as well as formal certifications to business and workers that a relationship is either an employment relationship or an independent contractor relationship. Such certification would provide the parties with certainty as to the nature of the relationship and would provide a safe harbor from penalties. There would also be an appeal process for aggrieved parties to contest certifications issued by the Board. In addition, the Task Force recommends the creation of an advisory committee to monitor the timeliness and accessibility of the certification process.
  4. It is also recommended that there be strict time limits within which the Certification Board and the Labor Management Council must carry out their responsibilities.
  5. The Labor/Management Council and the Certification Board must adhere to the common law direction and control test in authorizing guidelines, factors or certifications, respectively. The Task Force recommends that the following factors be utilized by the Labor/Management Council and the Certification Board when rendering determinations with respect to worker classification. It is the recommendation of the Task Force that these factors be used as well by state agencies in determining employment or independent contractor relationships in the absence of a specific guideline or certification.

An independent contractor relationship exists if:

  • The individual providing the labor or services has the right to control the means and manner of providing the labor or services; and
  • The individual has the meaningful right to offer substantially similar labor or services to others; and
  • The individual is subject to an entrepreneurial risk and in that role
  1. is responsible for the satisfactory completion of the labor or services that are contracted to be performed and failure to complete the labor or services gives rise to an action for breach of contract and,
  2. his/her overall business activities has or may have the potential to earn a profit or bear risk of loss, as those terms are commonly understood and to the extent profit or loss is discernable, beyond the risk of not being paid, and the potential for profit or loss depends on the efforts and
  3. decisions of the individual, not limited to the amount of time worked or the amount of work performed on any one project.
  1. The Task Force recommends that all agencies be bound to the above factors in the absence of an otherwise controlling industry guideline or certification.
  2. If the Internal Revenue Service (IRS) issues a determination inconsistent with a State finding, the Department of Taxation and Finance, but not the other agencies, will follow the IRS ruling.

BACKGROUND

The traditional workplace in New York has been in a state of constant change for more than a decade. Technological advances allow individuals to complete work at home, in the car, or from just about any other location. Changing industries often need individuals to work only on a temporary project or only during peak demand periods. Many new work arrangements clash with the conventional understanding of what constitutes an independent contractor or employment relationship under state law. National and global economic competition has intensified. Cost considerations are paramount and businesses seek to reduce labor costs. Classifying a worker as an independent contractor so as to avoid paying unemployment insurance taxes, workers' compensation premiums and withholding taxes is one way to reduce labor costs. However, such practices can also open the door for abuse. Increasingly, individuals also seek to be classified as independent contractors. The benefits of such a classification may include flexibility of work schedule, eligibility for certain benefits and income tax consequences. In today's economic environment, the question of what constitutes an employment relationship has become a legal issue fraught with peril both for affected individuals and the business community.

The determination of an individual's status as an independent contractor or as an employee is often conclusive with respect to that person's entitlement to unemployment insurance, workers' compensation and other state and federal benefits. Such determinations can have a significant impact on both businesses and workers. The employer who funds these benefits often struggles with whether to provide prospective funding even where the business believes there is not an employment relationship, or to risk the consequences of failing to provide funding where an employment relationship may ultimately be found. In fact, a State agency's determination that a business has failed to accurately identify an employment relationship could subject the business to thousands of dollars in unanticipated back taxes, interest and other penalties.

The worker shares an equal amount of risk when determining the nature of the relationship. A finding of an independent contractor relationship can expose the worker to unanticipated financial costs because of the denial of state benefits (i.e., unemployment insurance, workers' compensation). There are employers who classify workers, commonly considered employees, as independent contractors as a means to avoid paying legally mandated benefit costs. For the worker who believes that he or she is an independent contractor and has filed income tax returns consistent with that understanding, determination of employment could subject him or her to state and federal tax penalties.

The problems faced in classifying work relationships are three-fold. First, there is no uniform guideline, rule or regulation that sets out the criteria to be used in determining an employment or independent contractor relationship. Second, there is often no effort among State regulators to reach consistent determinations. Third, State agencies do not recognize each other's determinations. The current situation leaves both parties grappling with how to structure their relationship in order to achieve the intended results.

UNEMPLOYMENT INSURANCE

Often the first encounter with worker classification is when an individual compensated by a business files an unemployment insurance claim. The Labor Department, when determining if an employment or independent contractor relationship exists, uses the common law direction and control test. If the worker is determined to be an employee, the employer will see an increase in its unemployment insurance tax rate. And, if that same employer has additional individuals who are in substantially similar job situations, the employer will need to pay unemployment insurance taxes for those other employees. Under the Labor Law, an employer is subject to up to three years of back taxes as well as interest for individuals erroneously classified as independent contractors. The end result is the business owner's liability for thousands of dollars in unanticipated retroactive payments to the State. The result is equally harsh if a determination is made that the individual is an independent contractor. If it is determined that the individual is an independent contractor, that individual is denied anticipated benefits from the State unemployment insurance system.

WORKERS' COMPENSATION

The classification issue also arises when an individual has suffered an injury or illness during the course of that individual's duties and files a claim for workers' compensation benefits. The business and its insurance carrier can contest such a claim before a Workers' Compensation Board referee, arguing that the claimant was an independent contractor and, therefore, not eligible for benefits.

The Board, when determining if an employment relationship exists, will look to the common law direction and control test and any applicable statutory provisions. Unfortunately, the direction and control test, coupled with no guidance from any statute or regulation as to the specific factors which establish either an employee or independent contractor relationship, leaves both the worker and the business unable to resolve the classification issue at the beginning of the relationship with the confidence of knowing that the relationship is structured on solid legal ground. This issue is especially important to workers because when a claim for workers' compensation benefits is challenged, the benefits are not payable until the matter is adjudicated.

The other player in the workers' compensation arena, for those employers who are not self-insured, is the workers' compensation insurance carrier. When a workers' compensation policy is purchased, it automatically covers all of a business' workers' compensation risk. A policy must be purchased to cover all employees. If it is determined by the carrier that there is a reasonable risk that the Workers' Compensation Board would classify other workers not covered by the policy as employees, the insurance carrier has a right to charge a premium for coverage of those persons. Again, the inability to structure the relationship between a business and a worker denies all of the parties the security necessary for efficient economic transactions.

TAXES

The characterization of a worker as an "employee" or an "independent contractor" triggers a variety of federal income and employment tax consequences to both the worker and the business for which he or she is providing services. Where an employer-employee relationship exists, the employer is required to withhold and pay over income tax and the employee's share of social security and Medicare taxes. The employer is also required to pay the employer's share of social security and Medicare taxes, as well as federal unemployment taxes.

Where an independent contractor relationship exists, the service recipient is only required to file an information return with the independent contractor and the IRS. The independent contractor is required to pay the full Social Security and Medicare taxes on his or her "net earnings from self-employment". Further, in the absence of income tax withholding by the employer, an independent contractor is also required to pay quarterly estimated taxes in order to avoid a penalty.

From the worker's point of view, being classified as an independent contractor has certain income tax advantages. Essentially, these entail the ability to claim various business expense deductions which are either not available to employees or are more difficult for them to claim. In addition, an independent contractor can maintain his or her own qualified retirement plan and deduct contributions, as well as deducting half of the self-employment tax and a specified percentage of health insurance costs.

New York does not impose taxes analogous to the Federal Social Security and Medicare taxes. However, New York does impose a withholding tax on employers and a personal income tax on individuals, both of which are administered by the Department of Taxation and Finance. Taxation and Finance also administers local income taxes for New York City and Yonkers, both of which impose a withholding tax on employers. The withholding and income taxes are, by statute, conformed to definitions contained in the federal income and withholding taxes. Accordingly, any employee/independent contractor classified on the federal level will be applicable for State withholding and income taxes purposes.

If no federal audit of the business is underway in which the employee-independent contractor issue is implicated, the Department will apply the federal withholding tax rules to determine New York withholding tax liability (to ensure conformity). If a federal audit of the same business is underway for the same tax year or years, the Department will acquiesce in the results. If the federal audit has been completed, the Department will follow the federal results.

DETERMINATION CRITERIA

The standards used by State agencies in classifying a work relationship generally fall into one of two categories. First is the common law direction and control test. Using this test, a State agency will examine all aspects of the relationship between the parties in order to determine the degree to which the business is controlling the method and means used by the individual in producing a finished product or service. This test also looks at the degree of supervision exercised over the individual by the business owner. Generally, the more direction, supervision and control that is exercised over the individual, the more likely it is that employment will be found.

Under the common law test, a State agency looks to a number of factors, none of which are accorded any specific weight, to determine if an employment relationship exists. Some of the factors frequently used to establish an employment relationship are: setting hours of work, providing tools and equipment to accomplish the task, requiring a person to comply with instruction as to how to do the job, reimbursement of expenses, providing fringe benefits and many other factors. In reviewing these relationships, agency staff weigh each factor subjectively and make a determination as to employment (see attachment A for various cases in which the courts apply the common law test).

The second method used by a State agency to classify a work relationship is reference to applicable state statutes. Under various provisions of the New York State Labor Law (see Labor Law section 511, Attachment "B") and the New York State Workers' Compensation Law (see Workers' Compensation Law section 2, Attachment "C"), specific work relationships are deemed by law to be employment relationships. Likewise, other work relationships are deemed to not constitute an employment relationship for purposes of the New York State Labor Law or Workers' Compensation Law. Under these provisions, if it is determined that the relationship falls within listed statutory criteria, the statute commands the designated classification.

Some examples of statutory provisions from the New York State Labor Law include: services as a model, section 511(3) (employment); professional musician or other person engaged in the performing arts, section 511(1)(b)(1-a) (employment); laundry and dry cleaning services, section 511(1)(b)(1) (employment); golf caddie, section 511(8) (not employment); and real estate agent, section 511(19) (not employment). Application of a statute to determine the work relationship has the benefit of providing certainty to all parties. Such rigid determinations, however, can also be a source of frustration for individuals and for businesses who intend the relationship to fall in the alternate category.


RECOMMENDATIONS

The recommendations contained herein outline proposed concepts that have been identified as important in meeting the charge given by the Executive Order. The Task Force also believes that the recommendations meet the interests of business, organized labor and governmental agencies concerning the classification of work relationships.

The framework in which the Task Force operated in developing its conclusions rested upon the Executive Order and input received during its public hearings. In his Executive Order, the Governor directed the Task Force to develop recommendations and guidelines that could be used consistently across all State agencies and to ensure that such recommendations protected the rights of legitimate employees.

At the public hearings there was testimony from a broad spectrum of witnesses who asked for clarity in structuring work relationships in order to avoid the consequences of misclassification. Testimony from labor officials and workers also highlighted the need to address the abuses which result when workers are misclassified as independent contractors resulting in exclusion from coverage under laws designed to protect employees. The Task Force believes that the recommendations proposed below will provide the consistency, clarity and protections against abuse that were not only in its charge from the Governor but also presented for consideration at the public hearings. They are as follows:

  1. Create a Commission on Independent Contractors comprised of the Commissioner of Labor who shall act as chair, the Commissioner of Taxation and Finance and the Chair of the Workers' Compensation Board to approve industry specific independent contractor guidelines and oversee a process which would certify a worker as an employee or independent contractor. There would also be an Executive Director of the Commission to administer day-to-day operations. Technical support would come from staff in the various agencies. In addition, the Commission would be empowered to recommend statutory changes.
  2. Create a Labor/Management Council, composed of 6 representatives from business recommended by the Business Council of New York State and the National Federation of Independent Businesses, 6 representatives from labor recommended by the AFL-CIO, and one public member to author industry or occupation specific guidelines outlining the specific factors that must be met in order to establish an employment or independent contractor relationship. Each member of the Council would be appointed by the Governor to overlapping three year terms. The proposed guidelines would be sent to the Commission on Independent Contractors for either approval, rejection or return for modification. A majority vote of the Commission would be necessary for any action. If the guidelines are accepted they would be promulgated as regulations and would be binding upon all State agencies. In addition, the Council would develop a list of factors to be used by State agencies when determining an employment or independent contractor relationship in the absence of industry or occupation specific guidelines. For income tax and withholding purposes, these factors could not be inconsistent with those of the Internal Revenue Service (IRS).
  3. Create a separate Certification Board, composed of senior program staff from the Department of Labor, Workers' Compensation Board and the Department of Taxation and Finance, to provide certification to individual businesses and workers that the relationship in which they are engaged is either an employment relationship or an independent contractor relationship. A formal certification would give all parties advance knowledge of the structure of their relationship. In addition, because the certification would be binding upon all State agencies, it would protect the parties from later adverse determinations by State agencies along with resulting penalties and tax consequences. The functioning of this Board is described below:
  • An application for certification may be made at any time prior to the filing of a claim for State benefits or a State agency audit.
  • The applicant may choose either a confidential advisory opinion or a formal
    • certification.
  1. If an advisory opinion is requested, the applicant would be told that the opinion has no legal effect should there be a later inquiry.
  2. If an advisory opinion is given or requested, no State agency may use that inquiry to initiate an investigation or proceeding on the basis of that request. All documents or data generated as a result of such inquiry shall not be subject to the Freedom of Information Law. Data from these requests may be used by the Commission in the aggregate for the purposes of program and policy analysis.

If a binding decision is requested it:

  1. Would be decided based upon the papers submitted by the parties within 5-10 business days of submission of all documentation.
  2. Could be appealed to an Administrative Law Judge (ALJ) for review within 10 business days after the initial decision. The ALJ would then have 20 business days from the request for review to hold a hearing issuing a decision within 10 business days thereafter. A final administrative appeal could be filed with the Certification Board within 10 business days of the ALJ decision. The Certification Board shall render a decision within 10 business days following the filing of the appeal. Any subsequent appeals would be referred to the Appellate Division, Third Department. The appeal may be taken in the same manner, using the same standard of review, and within the same time frame as provided by the Workers' Compensation Law for such appeal.
  3. Would be binding upon all State agencies, the State Insurance Fund, and the parties until the relationship materially changes. If a claim for benefits is filed or audit activity undertaken, agency review would be limited to ascertaining if there was: (1) a change in material facts; (2) misrepresentation by either party; or (3) coercion by either party.
  4. Certification shall render an employer harmless for all retroactive taxes, premium, interest, and penalties which may otherwise have been due as a result of an adverse decision by the Board, in the absence of any willful misclassification of employees or material and willful misrepresentations of fact. In addition, there should be statutory penalties for those who willfully misclassify workers in violation of the terms of a certification.
  5. If the certification is overturned by an administrative body because of a change in the material facts upon which the initial certification was based, that decision will be treated as prospective only. Any taxes, interest, premiums or penalty imposed will not be retroactive.
  6. In addition, the Task Force proposes the creation of a Labor/Management Advisory Committee to oversee the certification process. This oversight role would include, but not be limited to, timeliness of determinations on appeals, access to the system, and constituent outreach. The committee would be comprised of seven members with the Executive Director of the Commission on Independent Contractors serving as Chair. The Agency Commissioners and the Chair of the Workers' Compensation Board would appoint the remaining members (three each from business and labor). The Commissioner of Labor, the Commissioner of Taxation and Finance and the Chair of the Workers' Compensation Board shall each appoint one representative from business and labor who would serve for three year overlapping terms.
  1. The Labor/Management Council and the Certification Board must adhere to the common law direction and control test in authorizing guidelines, factors or certifications, respectively. The Task Force recommends that the following factors be utilized by the Labor/Management Advisory Council and the Certification Board and all State agencies when rendering determinations with respect to worker classification. An independent contractor relationship exists if:
  • The individual providing the labor or services has the right to control the means and manner of providing the labor or services; and
  • The individual has the meaningful right to offer substantially similar labor or services to others; and
  • The individual is subject to an entrepreneurial risk and in that role:
  1. is responsible for the satisfactory completion of the labor or services that are contracted to be performed and failure to complete the labor or services gives rise to an action for breach of contract and,
  2. his/her overall business activities has or may have the potential to earn a profit or bear risk of loss, as those terms are commonly understood and to the extent profit or loss is discernable, beyond the risk of not being paid, and the potential for profit or loss depends on the efforts and decisions of the individual, not limited to the amount of time worked or the amount of work performed on any one project.
  1. There would be a time requirement imposed upon the Labor/Management Council and the Certification Board in which their duties should be completed.
  2. If the IRS reaches a contrary worker classification conclusion from a State determination, the Department of Taxation and Finance would follow the IRS ruling. Although this may seem inconsistent, the number of contrary IRS determinations is expected to be minimal. This provision is necessary to ensure conformity between State and federal income and withholding tax law.
  3. The Task Force recommends that sufficient resources be made available to State agencies to fully enforce the regulations, decisions and determinations made by the Commission on Independent Contractors and the Certification Board.
  4. The task force also recommends that consideration first be given to the following industries for promulgation of guidelines;
  1. construction
  2. entertainment
  3. information technology
  4. black car and limousine
  5. direct selling
  6. transportation
  7. publishing
  8. personal care
  9. travel agents
  10. securities
  1. The Task Force recommends review of this system during the first three years of operation by the New York State School of Industrial and Labor Relations at Cornell University. The scope and nature of the study shall be determined by the Commission on Independent Contractors.

It is the belief of the Task Force that the recommendations outlined above will need statutory changes for full implementation. However, because the proper classification of workers is fundamental to the interests of workers, business and State agencies, the Task Force recommends that immediate steps be taken to pursue as many of the above recommendations as possible through administrative mechanisms including, if necessary, promulgation of appropriate Executive Orders and regulations.

CONCLUSION

The Task Force believes that the recommendations contained in this report meet the charge given to the Task Force by the Governor. These recommendations will provide the certainty, consistency and clarity lacking in the present system, while at the same time protecting the rights of legitimate employees. The Task Force urges their adoption. Return to Independent Contractor Work Group.