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Salesman Alleges Wife’s Cancer Triggered Termination
Court Looks at "Right to Control"
Employers Must Apply Three Tests, Not Just One
Employers may be tempted to save
benefit costs and payroll taxes by designating workers as
independent contractors. However, government agencies fine employers
that incorrectly label employees as independent contractors. This
case illustrates a correct use of independent contractor status.
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A Seventh Circuit Court of Appeals decision provides guidance to
employers that classify workers as independent contractors. In Aberman v. J. Abouchar & Sons, Inc., No. 97-1423 (11/18/98), an
outside salesman sued for discrimination under the Americans with
Disabilities Act (ADA) when the company terminated him after he
announced his wife had cancer. The court decided that the salesman
was an independent contractor, not an employee, and thus not
protected by the ADA. In reaching its conclusion, the court focused
on five factors to determine independent contractor status.
Salesman Alleges Wife’s Cancer Triggered Termination
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According to the facts of the case, the salesman joined the company
in December 1994 and received $2,500 per month under an oral
contract. About two and one-half months after his starting date, the
salesman informed the company that his wife had cancer. The company
terminated him three days later. The salesman claimed the company
violated the ADA by terminating him for his association with a
disabled person, his wife. The district court determined that the
salesman was an independent contractor, not an employee, and
therefore was not covered by the ADA, and granted summary judgment
to the company. The salesman appealed to the Seventh Circuit.
Court Looks at "Right to
Control"
To
determine whether workers are employees or independent contractors,
courts typically use a test that focuses on which party has the
"right to control" the workers’ activities. In this case, the court
focused on five factors. The first, most significant factor the
court considered was the amount of control the hiring organization
exerted over the worker’s activities. Although the salesman and the
company president had 68 phone conversations, the court found that
the salesman exercised extensive control over how his work was to be
accomplished and worked for other organizations at the same time.
The second factor the court examined was the responsibility for the
costs of operation, such as equipment and supplies. In this case,
even though the company split some costs, the salesman appeared to
be an independent contractor because he paid many operating
expenses, such as computer, mobile phone, and travel costs. Next,
the court considered a third factor, the method and form of payment
and benefits. The company did not pay any benefits or withhold any
payroll taxes for the salesman as it would for an employee, so he
was treated as an independent contractor. Fourth, the court examined
the length of the job commitment the company made to the salesman.
Since the salesman could not prove he was hired permanently, he was
an at-will worker, not an employee. The court also identified a
fifth factor, the nature of the occupation and skills required, but
did not specifically address this factor. Based on these five
factors, the court determined that the salesman was an independent
contractor and thus not an employee protected by the ADA.
Employers
Must Apply Three Tests, Not Just One
As this
case demonstrates, employers that use independent contractors must
be able to prove that they classified the workers properly. If they
do not, they may face claims under the many laws that protect
employees, including discrimination laws like the ADA, the Fair
Labor Standards Act (FLSA), and payroll and benefit laws.
Determining independent contractor status, however, is no easy task
since three different standards may be used, depending on the nature
of the challenge.
The
common law "right to control" test is used by courts, such as in
this case, to determine whether a worker is an employee who is
protected by various employment laws, including those prohibiting
discrimination. The Internal Revenue Service applies a 20-factor
independent contractor test to decide whether an organization
correctly classified a worker for purposes of wage withholdings.
Finally, the Department of Labor uses the "economic reality" test to
determine worker status for purposes of compliance with the minimum
wage and overtime requirements of the FLSA.
Employers must be familiar with all of the tests and meet the
specific criteria used by the investigating agency or the courts to
prove a worker is an independent contractor. Generally,
misclassification of workers for purposes of federal tax withholding
can cause the employer the most harm because the IRS is very
aggressive at questioning independent contractor status and has
severe penalties for noncompliance. Although these tests differ,
they share several common factors. The most important one, and the
one this court gave the greatest significance, is the amount of
control the hiring party exercises over the work relationship.
An
interesting sidenote to this case is that the salesman’s
discrimination claim was based on association with a disabled
person. Many employers may not know that in addition to protecting
disabled employees or those perceived to be disabled, the ADA also
specifically prohibits discrimination based on association with a
disabled individual. Thus, for example, an employer may violate the
ADA by terminating an employee because his disabled dependent needs
expensive medical care that increases the employer’s health
insurance premiums.
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