You might be an Employee if….

On Friday, I used the phrase “Uber Settlement” as (maybe) click-bait to introduce an important, but hidden, issue facing Irish and Northern Irish companies operating in the US. As I noted in that post, many Irish and Northern Irish companies use a variety of ‘independent contractors,’ especially in the early stages of operating here—consultants and the like who are not intended to be employees. The risks associated with just labeling someone as an independent contractor can be significant, and very expensive. I’ve seen many Irish and Northern Irish companies make the same mistake—assuming that because the relevant contract states that someone is an independent contractor, such person is, in fact, an independent contractor and not an employee. Based on my experience, Irish and Northern Irish companies:

–should not assume that the agreements used at home will work in the US. There are strong similarities among the US, Irish, and Northern Irish legal systems, and certain legal concepts may be treated/analyzed in a similar fashion across the jurisdictions. But Irish/NI-based contracts need to be Americanized. In one admittedly extreme case, I saw an Irish company take its ‘standard’ Irish form consultant agreement and swap out certain words and phrases. But they did not amend a crucial part of the agreement related to level of effort, thinking that if the agreement worked in Ireland….At the end of the day, that agreement was construed to actually be an employment agreement, with the Irish company responsible for the penalties associated with misclassifying a worker (more on that below); and

–should not assume that US boilerplate language is enough. For example, a US style consultant agreement might include standard language like “Consultant is an independent contractor, not an employee or agent, of Company. Without limitation of the foregoing, Consultant will: (i) not enter into any contract, agreement or other commitment, or incur any obligation or liability, in the name or otherwise on behalf of Company; (ii) not be entitled to any worker’s compensation, pension, retirement, insurance or other benefits afforded to employees of Company; (iii) provide for all federal income tax and other withholding relating to Consultant’s compensation; (iv) pay all social security, unemployment and other employer taxes relating to Consultant’s employment or compensation; (v) provide all worker’s compensation and other insurance relating to Consultant’s employment; and (vi) perform all reporting, recordkeeping, administrative and similar functions relating to Consultant’s employment or compensation.” But, since the IRS and the Labor Department look at the economic realities of a working relationship, this boilerplate language is not bullet-proof. It may help support the conclusion that someone is an independent contractor, but will not overcome by itself the determination that someone is an employee (rather than an independent contractor) if other factors are present.

For both the IRS and the Labor Department (Federal, although state labor departments’ interpretation of these issues generally track the Federal interpretation), the focus is on the “economic realities” of the relationship. The US Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor but the “economic realities” test provides a broader scope to the concept of ‘employment’ than the common law control test. Before signing a putative ‘independent contractor agreement’ for US personnel, each Irish and Northern Irish company should get guidance on, and answer the following questions:

Is the work an integral part of the employer’s business?

Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?

How does the worker’s relative investment compare to the employer’s investment?

Does the work performed require special skill and initiative?

Is the relationship between the worker and the employer permanent or indefinite?

What is the nature and degree of the employer’s control?

The answers to these questions, and other information, can help Irish and Northern Irish companies avoid misclassifying an employee as an independent contractor. Misclassification, and subsequent reclassification, of putative independent contractor can result in the imposition of fines, penalties, and back-taxes (income, Social Security, Medicare, state/local) for which the employer is generally liable. These amounts could cost a business large sums of money, but the risk of misclassification can be mitigated by Irish/NI companies by asking a few questions before signing an agreement.