Employers must be cognizant of both the federal and state laws that apply to worker misclassification. This is especially important in the State of Tennessee, where a worker could be considered an independent contractor in cases where the federal government had deemed them an employee. That is, until next year.
Below, a Chattanooga contractor attorney with Cotney Construction Law discusses Tennessee’s new worker classification law, which comes into effect on January 1, 2020, and how it will affect employees in the years to come. For assistance with regulatory compliance, consult one of our Chattanooga contractor attorneys.
What Constitutes Worker Misclassification?
Worker misclassification doesn’t just pertain to whether or not a worker is an independent contractor. Employers also commit worker misclassification when they do the following:
- Misrepresent the type of work being performed
- Under-report payroll
- Under-report the number of employees
Employee vs. Independent Contractor
In order to cut costs and forgo paying for workers’ compensation, employers are intentionally misclassifying employees as independent contractors. This is a deceptive practice that puts pressure on honest contractors that struggle to compete. Then there are employers that genuinely have no idea how to classify their employees. The truth remains that steep penalties can be incurred for misclassifying employees, whether it be intentional or unintentional.
The Current ABC Test
As mentioned, worker misclassification standards will be undergoing a major overhaul in the coming months. However, the ABC Test is the current standard for defining a worker as an independent contractor in the State of Tennessee. The factors of this test are as follows:
- A) The worker has autonomy in regards to work performed, “both under any contract for the performance of the service and in fact.”
- B) Work is performed outside the “usual course of business,” or is performed away from the business’s location.
- C) The worker is “customarily engaged” in similar work.
With regards to workers’ compensation, Tennessee has additional considerations when defining an employee. These considerations include working hours, the hiring of helpers, ownership of tools and equipment, and hourly pay.
The 20-Factor Test
With the signing of House Bill 539 by Governor Bill Lee, Tennessee will be adopting new standards come next year. Effective January 1, 2020, employers in Tennessee must utilize the same test as the IRS for determining if a worker is an employee or an independent contractor. This test is aptly named the 20-factor test, and its 20 factors are as follows:
- Instructions: The level to which the worker is required to comply with instructions
- Training: If training indicates that the employer prefers work to be performed in a particular manner
- Integration: If the worker’s services are integrated into the employer’s business
- Services Rendered Personally: If the worker’s services must be performed in person (indicates employer prefers work to be performed in a particular manner)
- Assistants: If the worker “hires, supervises or pays assistants.” (worker may still be an independent contractor if under contract and only responsible for results)
- Employer Relationship: “A continuing relationship” between the worker and employer
- Work Hours: Set work hours
- Full-Time Work: Worker must devote full time to the employer’s business
- Work location: If work is performed on the employer’s premises, “especially if the work could be done elsewhere”
- Pattern of Work: If work must be performed in a sequence as required by the employer
- Reports: If the worker must submit regular written or oral reports
- Payment Schedule: Whether work is paid on a commission or hourly, weekly, or monthly basis
- Expenses: If business or travel expenses must be paid for by the worker
- Tools and Materials: If significant tools and materials are provided to the worker
- Investments: If significant investments are made to the facilities used by the worker
- Profit: If the worker “can realize a profit or suffer a loss as a result of the services (in addition to profit or loss ordinarily realized by employees)
- Multiple Employers: If the worker “performs more than de minimis services for multiple firms at the same time”
- General Public: If a worker’s services are consistently available to the general public
- Right to Discharge: The employer’s right to discharge the worker
- Right to Terminate: The worker’s right to end their relationship with the employer without incurring liability
Don’t Wait to Become Compliant
As mentioned, these considerations take effect come January 1, 2020. You will have an assortment of new factors to account for when deciding whether one of your workers is an independent contractor or an employee. And while the considerations are changing, the penalties remain as severe as ever. The punishment alone for misclassifying a worker and violating the Tennessee Workers’ Compensation Act include a 25 percent penalty for failing to pay disability benefits, a penalty of up to $10,000 or more for failing to comply with a Specialist’s or Administrator’s Designee’s order, and a penalty for failing to acquire insurance, among others.
To ensure that your workers are properly classified and that your company is compliant with all state and federal laws, consult an attorney from our Tennessee construction law office. The price of an attorney pales in comparison to the exorbitant penalties you can incur for violating Tennessee law. For an affordable, on-demand attorney that will safeguard your company’s success, partner with the Chattanooga construction lawyers from Cotney Construction Law.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.