AccelPro | Employment & Labor Law
AccelPro | Employment Law
On Worker Classification and Small Businesses
0:00
-26:33

On Worker Classification and Small Businesses

With Beth Milito, Executive Director of the National Federation of Independent Business’s Small Business Legal Center | Interviewed by Matt Crossman

Listen on Apple Podcasts, Spotify and YouTube.

Welcome to AccelPro Employment Law, where we provide expert interviews and coaching to accelerate your professional development. Today we’re featuring a conversation about worker classification. Our guest is Beth Milito. She’s the Executive Director of the National Federation of Independent Business’s (NFIB) Small Business Legal Center. 

It sounds simple: You’re an employee, or you’re not. But the truth is, determining who should be an employee and who should be an independent contractor is exceedingly difficult, especially considering the standards for making that decision vary from state to state, and sometimes even within each state.

In this interview, Milito describes the challenges small businesses face in deciding whether to classify workers as independent contractors, examines best practices in how to make those decisions and explains the consequences of misclassifying workers as independent contractors when they should be employees.

Listen on Apple Podcasts, Spotify and YouTube.


Interview References:

Supplemental Materials:


TRANSCRIPT

I. THE CHALLENGES OF CLASSIFYING WORKERS

Matt Crossman, Host: You are the Executive Director of the NFIB’s Small Business Legal Center. What does the National Federation of Independent Businesses do? 

Beth Milito: The NFIB represents about 300,000 small and independent businesses across the country. We have members in every state and every industry. The NFIB, which is an advocacy organization, helps small businesses own, operate and grow their businesses. We lobby in state capitals and Congress, and we are also in the courts, and that is my role as the Executive Director of the Small Business Legal Center.

I try to bring the voice of small businesses to the nation’s federal and state courts. A big part of my job in the Legal Center is helping small business owners with compliance issues, whether it’s human resources, taxes or contracts.

MC: We’re going to dig deep on one of those issues in particular, worker classification. I imagine this issue comes up a lot with your membership. What is the most common question you get regarding worker classification?

BM: It’s a tough area. And as we have seen growth in independent workers over the last three years since the pandemic, the questions are coming more frequently from business owners who hire independent contractors or subcontractors.

So when is a worker an employee versus a 1099 independent contractor? You want to make sure as a business that you get it right. Misclassifying workers can be a very expensive mistake.

MC: In your role as the executive director of the NFIB’s Small Business Legal Center, you wrote a letter to Martin Walsh, then the United States Secretary of Labor, and you summed up the challenges small businesses face in dealing with worker classification very well.

You wrote, “The challenge is particularly acute for small business owners who must generally determine worker status without the benefit of outside legal counsel or even in-house human resource expertise. A small business owner’s final determination on worker status can be a risky endeavor with abundant penalties for unintentional mistakes.”

Not to put too fine a point on it, but a small business’s very survival could hinge on this. What advice do you have for small business owners and HR execs when they’re deciding their staffing models?

BM: Great question, and there’s a lot in that, so let me unpack it a little bit. The challenge of determining the classification of a worker is made difficult, frankly, because there are different federal and state tests, and some states have multiple tests. But to simplify it, let’s just say that at the center of all the tests is a question of who has the right to control how the work is performed. If the company has the right to control the manner and means of how the work is performed, then the worker is an employee. 

Misclassifying a worker can be costly. Why is that? First of all, with independent contractors, you don’t withhold payroll taxes. So what happens when you don’t pay your taxes? Not only do you have to pay the back taxes, but usually there is a fine associated with non-payment of taxes.

So if you don’t withhold and pay those payroll taxes, because you’ve misclassified a worker as an independent contractor, odds are the IRS and the state revenue agency are going to come back and say, “You misclassified these five workers here, so now you owe back payroll taxes. And by the way, there is a penalty associated with not paying those taxes.” 

So that’s expensive, right? Because you’re paying a penalty on top of back taxes, too. The other issue that comes up then is a worker might come in and say, “I was misclassified as an independent contractor. I really was an employee. Not only do you need to pay all those payroll taxes that you didn’t withhold, but I was also working overtime. So you also owe me unpaid overtime.” 

So all this is to say that misclassifying a worker as an independent contractor can be a very costly mistake. That’s why businesses want to try to get it right, and we can talk about some things a business can do to make sure they are classifying workers correctly. 

If you have misclassified somebody, I always like to say you need to quietly get into compliance. Don’t be afraid to fix a mistake.

II. THE HOW-TOS OF CLASSIFYING WORKERS

MC: You just said we can talk about what businesses can do to make sure they’re in compliance. If that’s not the most important subject for us to talk about, I’m not sure what is. It is so confusing and so complicated. What advice do you have for HR executives and attorneys to make sure they comply?

BM: Disclaimer here: We’re not giving legal advice. 

So first of all, if you’re ever in doubt about classification of a worker as either an employer or independent contractor, err on the side of making them an employee. That will save you headaches. 

There’s lots of free information available. The IRS actually has a handbook for small businesses on classification. NFIB has a handbook that is free about how a written agreement can be helpful. You can download that, and it has a template in it. 

When in doubt, it’s always good practice to consult with either your tax professional and/or an attorney, too. Even if you are a professional human resources person, it really can be helpful to consult with an attorney, especially if you’re going to have a contract drawn up with a worker. That can be very helpful so that both parties, the worker and the business, understand what is going to be asked of the worker.

A written agreement can set out the scope of work and the understanding that you are not in an employee-employee relationship

Another thing I would say is to make sure that you are not treating independent contractors like employees. Don’t give them sick days, don’t give them parking. You want to make sure they’re not getting the benefits of employment because you should be looking at it as a business-to-business relationship. 

It can be helpful to hire independent contractors who have established themselves as a business. They don’t necessarily need to be incorporated, but if they have a business card and they have other clients, those are the hallmarks of a business. It can be a little bit riskier if you are the first business to engage this independent contractor.

The next thing I would say is use caution when engaging former employees as independent contractors. For example, let’s say I’m an attorney. I retire and decide to come back to the law firm as an independent contractor. That’s going to raise a red flag. Now it’s different if I come back as, let’s say, a website designer for the law firm. Make sure that you are using contractors for what I call non-core work. 

Going back to the example with the law firm. The law firm’s primary purpose is to provide legal services, not to do website design. If you have somebody come in and design the website, maybe do the website upkeep on an as-needed basis, that website designer probably could be classified as an independent contractor, especially if the website designer has other clients. They’re not just working for the law firm. They don’t have an office at the law firm. They’re treated as an independent contractor because website design is not the core work of the law firm, so that is another tip for compliance. 

But if you bring somebody in, they design the website, and then the next thing you know, they have their own office at the law firm, and they’re coming in four days a week and they’re at the law firm about 30 hours a week, well, now you’ve probably crossed the line from having that person as an independent contractor to an employee, and that’s when you want to sit down and say, “Hey, you know what? I think we need to bring you on as an employee.” 

Again, when in doubt, make somebody an employee.

MC: I imagine small businesses don’t like to hear that. What do you tell them?

BM: It is incredibly challenging to say, “oh, just make somebody an employee.” And I don’t mean to oversimplify that, because in some states it really is challenging. 

Like, for instance, in California. In 2019, California Gov. Gavin Newsom signed Assembly Bill 5, which was in the news a lot, and it went into effect January 1st, 2020. Basically the presumption was workers are employees and the burden is on the business to demonstrate that they are an independent contractor. 

Well, that’s such a strict test, and since then, different industries have come in and said, wait, wait, wait. For instance, journalists say, “We can’t all be employees. We don’t all want to be employees.” So they’re doing what’s called carve outs now in California. Different industries are seeking exceptions. 

MC: What advice do you have for companies in terms of training the point of contact to make sure they stay within guidelines? Each violation might be small, but if you do it 50 times, it becomes a big violation.

BM: Exactly. And that’s really tricky. I have a friend who’s at a university, and she said, we have to go through some kind of training for that. And she is a manager of food service at a university.

I went to the website there, and sure enough, the university actually has a tip sheet for managers. They have the IRS test on there, and this is for the managers at the university. 

It really can be challenging, and this is where it’s helpful to educate your managers and do an audit, too. At the end of the year, if you’re a CFO or in the accounting department, it can be very important to take a look at your 1099s. 

Going back to the example of the website designer. Maybe in Year 1, they billed 10 hours a month, and in Year 2, they billed 30 hours a month. And then in Year 3, you look at their 1099 and holy moly, they’re billing 30 hours a week. And so you investigate. You call the manager, who says, “Well, she’s in a lot more, she’s taken over this, that and the other. She’s even got an office down the hall.” 

Relationships evolve and that’s completely fine. That is the normal course of events in a business. So that’s just when you say, OK, Beth is now going to be a W2 employee.

There is a gray area. Audits can be really key, and you might have to ask yourself. “Oh, have we crossed over the line from independent contractor relationship to employee relationship?”

MC: Two phrases there are worth exploring—evolving and gray area. One of the big trends in employment law, certainly since the pandemic, is the rise in remote, hybrid and virtual workforces and how companies should treat those workers. What are the challenges that small businesses face regarding remote, hybrid and virtual workforces? 

BM: There are a lot of challenges related to the independent contractor relationship. You want to make sure that you’re not putting too many demands on a contractor who works remotely. Hey, are you logged on? You should be logged on with the rest of our team.

And the next thing you know you’re treating this independent contractor, who really should just be working on a project when and where they want to, like an employee. Those are challenging issues for small businesses to navigate because many small businesses do not have a human resources professional, so they’re self-taught when it comes to HR and employment law.

MC: I want to read another quote to you from your letter to the Department of Labor. “The issue of independent contractor classification has vexed lawmakers, administrative agencies, employers, and taxpayers for decades.” 

And the reason I bring that up now is what you just said about the company saying to the independent contractor, Hey, are you logged on? Why aren’t you logged on with the rest of the team? 

In black and white, clearly that would violate the standards that we have set for determining if somebody’s an employee or an independent contractor. But I’ll use myself as an example: If a magazine says, “Hey, Matt, can you jump online?" I have to abide by that because I want to write for them. How do we figure that out? 

BM: That’s a great question. It’s not just going to be one thing. It is going to be a very fact-specific inquiry. All the classification determinations are very fact specific. The IRS test has 20 factors. So it’s not just one thing that’s going to be determinative about whether a person should be an employee or independent contractor.

If it’s a one-time request for you to join a call, as opposed to you need to be logged on every day between the hours of 9 and 3, those are important distinctions. Those are all going to be fact-specific determinations. You’re weighing all the factors. 

Going back to that right of control. How much control is the employer exerting? Is it, “We want you to log on this one call and oh, by the way, that’s because it’s going to pertain to the article you’re writing for us, which we don’t care if you’re writing in the middle of the night, but we just need it by April 30th.” 

It’s very fact specific, and there are different variables. That can be good and bad for both the worker and for the business owner because it can be challenging when you have to go through all these lists there.

MC: You used the phrase “quietly get into compliance.” What does that mean exactly? 

BM: Quietly get into compliance means you don’t need to necessarily broadcast it to your entire organization, particularly if it’s with regards to, let’s say, one worker who you’ve decided has crossed over the line from independent contractor to employee. You bring the worker in, you discuss it, but you don’t need to necessarily broadcast it.

— 

III. PIVOTING FROM PRIVATE PRACTICE

MC: Now I want to pivot and ask you professional development questions. You switched from private practice to the NFIB 20 years ago. Why did you make that switch?

BM: I got burned out on litigation. I was representing employers, so I was always defense side. Litigation is sort of like a roller coaster. Some people get high on the thrill of, oh my goodness, I have court, I have a deposition. But I got burned out. 

I had a friend who was in policy working for a trade association, and she loved her job, and I thought, goodness, I never even thought of doing policy work, and I’m not a lobbyist, by the way.

I support lobbyists here at NFIB. I review bills, I review legislation, and I also do regulatory work, which I love. But the greatest part about my job here at NFIB is I get to advise business owners, to translate the policy and reach out to business owners to find out how policy would affect them—a proposed bill, a proposed regulation, that sort of thing. 

I still have friends who are in litigation, and they just kind of get a high on it. But I really love having time to review a bill, review a regulation, write a thoughtful comment. And I love the compliance assistance part that I do, and I did a little bit of that at my other job, too.

But I just love working with NFIB members and small business owners.

MC: You used three expressions there that I think anybody who has a job would love to use: “Get to,” not “have to.” “Fun.” And “love.” 

I want you to think back over your career and tell me a story about helping a business that solidified your ability to use those three expressions. You got to help this person. It was fun to do it. And you loved the result. 

BM: That’s an easy one. It was during Covid, the height of the pandemic. And I walked a business owner through the completion of a PPP loan application. It was in April or May of that year, and she was just frantic.

She had borrowed her grandson’s laptop to complete the PPP application from her bank online. She had her cell phone on speaker, and she would read the box and together we completed it. And she called me when she received the money in her bank account, and she said, “That just saved me.”

She said, “I was at the end of my rope. I couldn’t pay my rent.” So that to me was so gratifying. The two of us together, walking through it, filling it  out—I just have so many stories like that during the pandemic when I was just talking to business owners and then helping them. We figured it out and got through it. 

MC: I want you to imagine somebody doing either litigation or some other version of law that they don’t like and they hear what you just said and they think, I want to do that. Walk them through the steps that you went through to get to where you are.

BM: I started looking, and I gave myself a deadline of getting out of my job. Twelve months is what I gave myself. And I thought in 12 months, I want to be doing something different. And I started proactively taking steps to make that happen. And I turned down other job offers, and it wasn’t that I just absolutely hated my job, but it was something that I just didn’t like.

I started doing a lot of networking, which now of course you can do online, reaching out to people, going to lunches, and talking to people who were not in law firms.

As I said, I got a couple other offers, and then it was just through a book club that I had at the time with a woman who worked for an association. She was like, oh my goodness, I love my job. You should consider working for an association. It’s really great work. It’s a good lifestyle, all those sorts of things.

And of course, nowadays too, you hear more about flexibility and all that. When I was looking 20 years ago, those were things I was thinking about, and I was networking even in my personal life, too, at my book club. And that’s where I got the idea and explored it and started looking at ads and applying to associations I’d never thought of before.

And it came about, and it was just an absolute great fit.

MC: When you were searching, were you looking specifically for a job in which you could use your employment law background? Or did you happen to get a job in your area of expertise via luck and experience?

BM: It was a combination of luck and experience because NFIB was looking for somebody who had an employment law background to support the advocacy team. I mentioned at the outset that NFIB members are in every industry, but one commonality is that most do have employees. We do a lot in the labor and employment sphere, so it was helpful to have somebody that had labor and employment experience.

Listen on Apple Podcasts, Spotify and YouTube.

This AccelPro audio transcript has been edited and organized for clarity. This interview was recorded on April 26, 2023.

AccelPro’s interviews and products accelerate your professional development. Our mission is to improve your day-to-day job performance and make your career goals achievable.

JOIN NOW

Send your comments and career questions to questions@joinaccelpro.com. You can also call us at 614-642-2235.

If your colleagues in any sector of the employment law field might be interested, please let them know about AccelPro. As our community grows, it grows more useful for its members.

AccelPro | Employment & Labor Law
AccelPro | Employment Law
AccelPro’s expert interviews and coaching accelerate your professional development. Our mission is to improve your everyday job performance and make your career goals achievable. How? By connecting with a group of experienced Employment Law professionals. You’ll get knowledge and advice to help you navigate the changing field. You’ll hear deep dives with experts on the most important Employment Law topics. You’ll give and receive advice on how to make difficult job decisions. Join now to accelerate your career: https://joinaccelpro.com/employment-law/