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Author Archive: Laura Musick

Classification of Employees under the IRS Guidelines

In our last post, we discussed analysis of the employer/independent contractor relationship through the lens of the Fair Labor Standards Act (“FLSA”). Employers who hire individuals as independent contractors – because it seems less often the case that an independent contractor is errantly classified as an employee – should keep in mind that the Internal Revenue Service (“IRS”) has its own set of standards for classifying employees for tax purposes. Thus, any analysis of employee classification under the FLSA should be, likewise, scrutinized through the lens of the IRS guidelines, of which there are many.

As a general rule, an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done: think of relationships with vendors and others who are retained for services but perform work without input from the payer. Whether a worker is an independent contractor or employee depends upon the circumstances of the parties’ relationship, with particular focus upon behavioral, financial, and other relationship-based factors (i.e. Are there written contracts or benefits? Does the relationship have a set term/duration?)

Businesses must evaluate the above factors when analyzing whether a worker is an employee or independent contractor. Many employers find especially challenging the common situation where some factors indicate that an individual is an employee, while other factors indicate that the individual is an independent contractor. Further complicating the issue, IRS guidelines make clear that there is not one factor in particular that unequivocally dictates the outcome of such analysis. Factors that are of great interest in one relationship may have no relevance to other employer/employee or payer/independent contractor relationships.

Fortunately, the IRS’s website provides additional guidance concerning the three largest categories of classification factors. To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.

  • Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
    • Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving instructions in these examples may indicate a worker is an employee.
    • More detailed instructions may indicate that the worker is an employee. Less detailed instructions demonstrate less control, making it more likely that the individual is an independent contractor.
    • Evaluation systems to measure the details of how the work is done suggests that a worker is an employee. However, evaluation systems measuring just the end result point to either an independent contractor or an employee.
    • Training a worker on how to perform a job — or periodic or on-going training about procedures and methods — is viable evidence that the worker is an employee. Independent contractors ordinarily implement their own methods of performing work. (More detail is available here).
  • Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:
    • The employer’s (or putative employer) investment in the equipment the worker uses in working for someone else. This can lead to an inference that a worker is an employee.
    • Independent contractors more often incur unreimbursed expenses than employees.
    • If there exists an opportunity for profit or loss, it can be indicative of an independent contractor relationship.
    • Independent contractors are generally free to seek out business opportunities, whereas employees may be restrained in some way from working simultaneously to provide the same services for other clients/employers.
    • An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee. (More detail available here)
  • Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
    • Written contracts can cut both ways in an employee/independent contractor analysis under IRS guidelines. However, the most critical point for any employer to understand is that a contract stating a worker is an employee or an independent contractor is not dispositive on the issue of worker classification. If a relationship appears to be employer/employee driven (more control and direction over areas beyond the results of the work) despite being categorized on paper as an independent contractor relationship, the facts will rule the day.
    • Businesses generally do not grant benefits such as vacation, health insurance, sick pay, pensions, etc., to independent contractors. Therefore, the presence of such benefits militates strongly for a conclusion that an employer/employee relationship exists.
    • The longevity of the relationship is also a crucial factor. A relationship that is somehow limited in duration may contribute to a conclusion that a worker is an independent contractor. However, if the relationship’s temporal scope is not defined, it is more likely suggestive of an employer/employee relationship. Other facts that suggest the intent of the parties in the initial phases of the relationship may influence analysis of this factor.
    • If the worker performs services that are vital to the regular function of the business or a critical component of its work, this factor may lead to a conclusion that a worker is an employee of the business. (More detail available here).

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

In addition, the IRS also applies a 20-factor-test that can be utilized to aid in the differentiation of employees from independent contractors. The factors include:

  1. the employer’s right to require the worker’s compliance with instructions;
  2. the employer’s training requirements;
  3. the integration of the worker’s services into the employer’s business;
  4. the worker’s personal rendering of services;
  5. the employer’s hiring, supervision, and payment of assistants;
  6. a continuing relationship between the employer and the worker;
  7. the employer’s setting of hours;
  8. the employer’s requirement of full-time service;
  9. performance of work on the employer’s premises;
  10. the worker’s performance of services in a sequence set by the employer;
  11. the employer’s requirement that the worker submit oral or written reports;
  12. payments on an hourly, weekly, or monthly basis;
  13. the employer’s payment of business or travel expenses;
  14. the employer’s furnishing of materials or tools;
  15. lack of significant investment in the facilities by the worker;
  16. lack of realization of loss or profit by the worker;
  17. lack of work for multiple firms by the worker;
  18. lack of availability of the worker’s services to the general public;
  19. the employer’s right to discharge the worker; and
  20. the worker’s right to terminate her or his services.

Consequences of Treating an Employee as an Independent Contractor

Misclassification of employees can have serious consequences. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker, as applicable relief provisions, generally, do not apply to “unreasonable” misclassification.

With the assistance of legal counsel and their tax or accounting professionals, employers should, periodically, examine employees’ classifications and duties to determine whether employees and independent contractors are properly classified. If you have questions about the content of this article or wish to discuss any employment law issue, please contact Laura Musick or any of our employment lawyers.

Employer Basics: FLSA Classification of Employees

There is seldom a bad time for employers to reevaluate employee classifications. While some occasions are less optimal than others, for example, reevaluation upon an employer’s receipt of a complaint from the United States Department of Labor (“DOL”), employers should carve out time each year to scrutinize changes in employee assignments and relationships, along with other factors that impact classification.

The Fair Labor Standards Act (“FLSA”) offers minimum wage and overtime pay protections to almost all workers in the United States. Assuming for the purposes of our discussion that an employer is subject to the FLSA, there are certain factors that necessarily impact the independent contractor versus employee-employer analysis. At base, “In the application of the FLSA an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.”1

The critical determination is, perhaps based upon the most nebulous standards – as the U.S. Supreme Court has, time and again, indicated that no single rule, test or standard, alone, dictates classification. Rather, the current standard applied by the Court looks, on the whole, at the “total activity or situation.”2 Factors included in this analysis are:

    • The extent to which the services rendered are an integral part of the principal’s business.
    • The permanency of the relationship.
    • The amount of the alleged contractor’s investment in facilities and equipment.
    • The nature and degree of control by the principal.
    • The alleged contractor’s opportunities for profit and loss.
    • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
    • The degree of independent business organization and operation.3

The Court adds clarity by highlighting certain factors which are immaterial in determining whether there is an employment relationship.4 For example, the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship.5 Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.6 What happens next in the analysis is (typically) an evaluation of the relationship in which courts will consider the above-factors, while taking into account the industry, the nature of the work, and other situation-based considerations. Because these situations are routinely fact-intensive, it is worthwhile for employers to revisit classifications when making changes in their workforce.

Despite the oft-repeated refrain, “everyone in our industry classifies workers this way”, common industry practice is insufficient to excuse employer misclassification of employees – whether or not willful. Employers should be especially careful about taking cues from their competition. Simply because other employers in your industry classify employees as independent contractors, does not make it accurate. Equally unpersuasive in misclassification cases is an employee’s “agreement” to be misclassified, whether informally or via written employment agreement – even if the employment contract specifically defines an employee’s relationship to the employer as that of an independent contractor. Employers should also be aware that while an employee may be an independent contractor pursuant to state law or Internal Revenue Service standards, the FLSA may still create an employer/employee relationship where, for tax purposes or under state law, the analysis produces a different result.

What do you risk by failing to properly classify your employees? Employees may file complaints with the Wage and Hour Division of the DOL. Employees may also file private lawsuits to recover back pay, and liquidated damages, in addition to court and attorneys’ fees. The Wage and Hour Division of the DOL is also empowered bring its own enforcement actions. A two-year statute of limitations applies to actions to recover back pay. However, if a violation is “willful”, a three-year statute of limitations may apply.

The takeaway: Employers should make time before the end of the year to reevaluate their employee relationships and policies. Should you have any questions about this article or labor and employment law, please contact one of our employment lawyers.


1 “Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA)”, https://www.dol.gov/whd/regs/compliance/whdfs13.htm (last accessed 9/12/2019).
2 Id.
3 Id.
4 Id.
5 Id.
6 Id.

Calpine and Direct Energy Win Again, Continue to Provide Renewable Energy in Virginia

The Virginia State Corporation Commission (the “Commission”) denied Dominion Energy Virginia’s (“Dominion”) July 16, 2019 petitions for declaratory judgment in Case Numbers PUR-2019-00117 and PUR-2019-00118 by Final Order on September 18, 2019. Dominion’s petitions sought to have the Commission standardize “around the clock,” “control of renewable capacity” requirements for competitive service providers (“CSPs”) to serve customers under Virginia Code § 56-577 A 5 (“Section A 5”). That section provides a statutory right to customers of all classes to purchase “electric energy provided 100 percent from renewable energy” from a CSP unless the utility has its own 100% renewable energy tariff. Dominion’s application for a 100% renewable energy tariff is pending before the Commission, and Dominion had refused to process enrollments submitted by Calpine Energy Solutions, LLC (“Calpine”) and Direct Energy Business, LLC (“Direct Energy”) under Section A 5 in the interim and initiated these cases at the Commission.

The Commission previously granted Calpine’s and Direct Energy’s requests for injunctive relief, requiring Dominion to process enrollments while these cases are pending. We blogged about that here.

Dominion’s petitions took aim at Calpine and Direct Energy, seeking a determination that CSPs seeking to serve under Section A 5 must establish that they can supply customers with electric energy provided 100 percent from renewable energy on an “around the clock” basis and that the CSPs must have “control” over “renewable capacity.” The Commission flatly rejected Dominion’s positions and declared that both Calpine and Direct Energy provided information to reasonably establish that they have contracted for sufficient renewable energy to match renewable supply with a participating customer’s load on a monthly basis, which is consistent with Section A 5 and Commission precedent.

Regarding Commission precedent, the Commission refused to adopt Dominion’s interpretation of a prior order approving Appalachian Power Company’s Rider WWS (“Rider WWS Order”), which Dominion believes requires a CSP to have “control of sufficient renewable generation resources, including renewable capacity and associated renewable energy, to enable it to serve the full load requirements of the customers it intends to serve.” The Commission’s refused to provide the requested declaration, explaining that the Rider WWS Order did not require “’renewable capacity,’ nor did it define ‘full load requirements’ to mean (as argued by Dominion) ‘full load at all times’ or ‘full load requirements around the clock.’” Significantly, the Commission’s Final Order makes clear: “Nothing in [the Rider WWS Order], however, found that [Appalachian Power Company’s] proposal was the only way to comply with Section A 5.”

The crux of the Commission’s decision relied upon its close reading of Section A 5. “The plain language of Section A 5 also says ‘energy,’ not ‘capacity.’” In acknowledging this critical distinction, the Commission put a finer point on Dominion’s efforts to muddy the waters between “energy” and “capacity” requirements, despite the fact that Section A 5 requires customers to purchase renewable electric “energy” – not “capacity.” In the same way, the Commission examined closely Dominion’s request for more stringent matching standards, noting several times that in other proceedings, Dominion has taken positions inconsistent with those it takes in its petitions for declaratory judgment: “There is nothing in the plain language of Section A 5, however, that mandates Dominion’s “100% of the time” (i.e., “around the clock”) requirement.”

The Commission also scrutinized Dominion’s proposal from a consumer protection perspective, finding that Dominion’s “100% of the time” standard would adversely affect a customer’s right to purchase renewable energy – essentially, upending the entire aim of Section A 5. Dominion’s argument would read certain renewable generating sources (e.g., wind or solar) out of the statute because of their intermittency regardless of the amount of nameplate capacity or peak load served. Finally, the Commission evaluated Dominion’s proposed standard with special focus on the fact that Virginia’s existing monthly matching standard is already one of the most stringent in the country for states with renewable energy markets, as other states generally require customer load and renewable supply to be matched on a yearly basis.

The Commission declined to accept Dominion’s proposed language that would adopt a new standard for Section A 5, presented for the first time at the hearing on August 20, 2019. The Commission reasoned that to do so would contravene the Commission’s past rejection of “capacity,” “peak demand,” or “100% of the time” requirements – including the Commission’s rejection of Dominion’s past requests (notably in the Rider WWS proceeding) for “around the clock” supply of renewable energy pursuant to Section A 5. Similarly, the Commission held that Dominion’s proposal at the hearing regarding what Dominion believes the current law should reflect “improperly goes beyond the specific relief requested in the Petitions for Declaratory Judgment… [and] does not reflect current Commission precedent and is otherwise procedurally improper.”

The Conclusion in the Commission’s Final Order makes clear that:

  • Commission precedent permits a CSP to match customer load with renewable supply on a monthly basis and does not requires CSPs to provide “renewable capacity”;
  • Direct Energy and Calpine have satisfactorily demonstrated that they can supply their customers with electric energy provided 100 percent from renewable energy on a monthly matching basis;
  • Direct Energy and Calpine are required to continue providing information as directed in the Final Order – regarding each CSP’s customer load and wholesale generation contracts, in accordance with Section A 5, the Commission’s Rules Governing Retail Access to Competitive Energy Services, as well as Dominion’s Competitive Service Provider Coordination Tariff; and
  • Even if Dominion’s new proposal were procedurally appropriate, which it is not, the Commission further finds that: (1) the plain language of Section A 5 does not mandate – as a matter of law – adoption of Dominion’s proffered standard; and (2) matching customer load with renewable supply on a monthly basis represents a reasonable standard under Section A 5, and Dominion’s proposed standard is not necessary in order to implement Section A 5 in a reasonable manner,

GreeneHurlocker represents Calpine in these proceedings.
If you have questions about this case or electric service in general, please contact one of GreeneHurlocker’s energy and regulatory lawyers.