Legal Advice about independent contractors for a small business owner

Both startups and established businesses can be seduced by the opportunity to hire independent contractors. Who wouldn’t want to have more workers while avoiding withholding taxes, unemployment insurance, benefits, overtime, and mandatory health care?

“Way Too Smart Laundry Services” owned two laundromats and serviced several others. The owner wanted to reduce his expenses and increase profits. He turned to “Clueless,” his well-intentioned buddy, for some business advice. Clueless made several recommendations, including a plan to make all 6 of the company truck drivers independent contractors.

The truck drivers were responsible for laundry pickup and delivery and on-site equipment service and repair. They worked at least 10 hours daily, 5 days a week. The workday began and ended at the owner’s shop. They were given a daily worksheet — a precise schedule for deliveries and service calls — and each driver was required to be in phone contact with the home office throughout the day. The truck drivers were required to wear a uniform that said, “Way Too Smart,” and the company truck also said, “Way Too Smart.”

Following the advice of Clueless, the drivers were paid $450 per day, as a flat amount. They rented the truck from Way Too Smart for $150 per day, and they were responsible for buying gas, which cost about $80 per day. The drivers grossed $22 per hour.

A few years later, a competitor of Way Too Smart heard about the drivers and “dropped a dime” with the Department of Labor.

The DOL showed up at Way Too Smart’s shop and asked for every business record you can imagine. When they examined the drivers’ duties and responsibilities, they concluded there was no way they were Independent Contractors. They had no freedom to decide how and when to perform their work, the owner controlled every aspect of the workday, the work performed was in the usual course of the business of Way Too Smart, and the drivers worked exclusively for one company.

This meant that the drivers should have been paid hourly wages, including overtime. In order to calculate what was owed for the past 3 years, the DOL requested time records. Since the owner had classified the drivers as Independent Contractors, he had no time records. So, the DOL interviewed the drivers and took their word for it.

‘Shorted’ wages

The owner was told that he should have been paying hourly wages, including “time and a half,” or $33 per hour, not $22, for every overtime hour. The owner had “shorted” the drivers 10 hours of OT every week. Those 10 hours of unpaid overtime over the prior 3 years totaled $16,500 per driver, plus interest. In addition, under Massachusetts law, when an employee is successful in a wage claim, treble damages are mandatory, which meant that those 10 hours per week of unpaid overtime equaled $49,500, per driver.

In addition, Way Too Smart owed back taxes, penalties and interest to the IRS — not only on the unpaid overtime wages, but also on the money previously paid to the drivers as independent contractors. Lastly, when the owner of Way Too Smart underpaid its Workers Compensation and Unemployment Insurance premiums, it constituted criminal insurance fraud.

So, for Way Too Smart Laundry Services, the bottom line was simple. If it sounds too good to be true — well, you know how that one ends. When it comes to legal compliance, there are no shortcuts. Take the high road; you’ll sleep better.

Excerpted from the DailyGC™ Workshop entitled Don’t Be That Boss: How to Avoid Common Employer — Employee Mistakes. Jan Glassman is the Founder of Daily General Counsel™, a Boston-based startup that provides very affordable legal services to small businesses and startups that otherwise could not afford a highly experienced business lawyer and would “go it alone.” DailyGC™ lawyers spend a full business day at their clients’ places of business, working directly with owners to resolve their most pressing sales, operations, employment and other legal/business problems. Prior to founding DailyGC™, Jan was General Counsel for a national management consulting firm that served small businesses throughout the United States.