Guidance for New Mexico Employers: Misclassification of Independent Contractors
How a business classifies a worker has a dramatic impact on both the worker and the business. For example, in New Mexico, pay received by independent contractors is subject to gross receipts tax unless a statutory exemption or deduction applies to a transaction. Employee wages are exempt from gross receipts tax. Also, employees (as opposed to independent contractors) are entitled to minimum wage, potential overtime compensation, family and medical leave, unemployment and worker’s compensation coverage.
Historically, the classification of workers as either employees or independent contractors was done generally by evaluating the nature and degree of an employer’s control over the work being done. In other words, a worker who uses his own tools, is not subject to the employer’s control or guidance in performing the work, pays his own business expenses, and performs a discrete project or set of tasks would be considered an independent contractor.
In 2015, the Department of Labor (DOL) adopted a new standard for the classification of workers as either independent contractors or employees under the Fair Labor Standards Act (FLSA). Department of Labor Administrator’s Interpretation No. 2015-1, July 15, 2015. Over the past year, these new standards, which are called the “economic realities test,” have received a lot of attention for imposing dramatic changes on how businesses classify their workers. The main complaint from many businesses is that the “economic realities test” makes it much more difficult for a business to properly classify a worker as an independent contractor, thereby imposing significantly more cost and commitment from businesses for their workers. The “economic realities test” uses six factors to determine whether a worker is an employee or an independent contractor, only one of which is the nature and degree of an employer’s control over the worker. The six factors used in the “economic realities test” are:
- Is the work an integral part of the employer’s business?
For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.In contrast, the same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor.
- Does the worker’s managerial skill affect the worker’s opportunity for lost profit?
A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available and his willingness to work more. This lack of managerial skill is indicative of an employment relationship between the worker and the cleaning company.
In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.
- How does the worker’s relative investment compare to the employer’s investment?
A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.
A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. She regularly (as opposed to on a job-by-job basis) purchases material and equipment to provide cleaning services and brings her own equipment (vacuum, mop, broom, etc.) and cleaning supplies to each worksite. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works. These types of investments may be indicative of an independent contractor.
- Does the work performed require special skill and initiative?
A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly-skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.
In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.
- Is the relationship between the worker and the employer permanent or indefinite?
An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.
Another editor has worked intermittently with fifteen different publishing houses over the past several years. She markets her services to numerous publishing houses. She negotiates rates for each editing job and turns down work for any reason, including because she is too busy with other editing jobs. This lack of permanence with one publishing house is indicative of an independent contractor relationship.
- What is the nature and degree of the employer’s control?
A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.Another registered nurse who provides skilled nursing care in nursing homes is listed with Jones Nurse Registry in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.— Department of Labor Administrator’s Interpretation No. 2015-1, July 15, 2015.
In January, 2016, the New Mexico Department of Workforce Solutions entered into a Memorandum of Understanding (MOU) with the US DOL, which allows both departments to, among other things, share information related to State and Federal laws, conduct coordinated investigations, and conduct formal cross training of investigators.Many courts outside of New Mexico have recently used the “economic realities test” and the new DOL/FLSA guidelines to determine whether a worker has been misclassified as an independent contractor by his employer. Although New Mexico courts have not yet analyzed the issue, other courts have found misclassifications under the “economic realities test” and have imposed significant penalties on those businesses who have misclassified their workers.Despite the attention that the new “economic realities test” has received, and despite the New Mexico Department of Workforce Solutions’ recent MOU with the DOL, New Mexico statutes and agencies have not adopted the “economic realities test.” For example:
- Unemployment Compensation
With respect to Unemployment Compensation, New Mexico law defines a non-employee as one who established by a preponderance of the evidence that:
- Such an individual has been and will continue to be free from control or direction over the performance of such services both under his contract of service and in fact;
- Such service is outside the usual course of business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
- Such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the contract of service.
1978 NMSA § 51-1-42 (F)(5); See also, Solar Age Mfg., Inc. v. Employment Sec. Dept. 1986-NMSC-012, 103 N.M. 780, 714 P.2d 584.
- Workers’ Compensation
A worker’s entitlement to Workers’ Compensation benefits in New Mexico is governed by the “right to control test.” Harger v. Structural Services, Inc., 1996-NMSC-018, 121 N.M. 657, 916 P.2d 1324. The “right to control test” focuses on “whether the principal exercised sufficient control over the agent to hold the principal liable for the acts of the agent.” Korba v. Atlantic Circulation, Inc., 2010-NMCA-029, ¶5, 148 N.M. 137, 139, 231 P.2d 118, 120.
- Taxation and Revenue
Finally, the New Mexico Taxation and Revenue Department accepts the determination of employee or independent contractor status made by the Internal Revenue Service, which evaluates the degree of control an employer exerts over a worker or project. See 1978 NMSA 7-3-2 (defining “employer” and “employee” for the purposes of the Withholding Tax Act).It is unclear how the new DOL/FLSA regulations will apply to business in New Mexico. New Mexico common law and statutory authority have not yet recognized or applied the DOL’s “economic realities test,” but the amount of worker misclassification litigation around the country under the FLSA continues to increase. At a minimum, New Mexico employers who categorize workers as independent contractors should be mindful of the DOL’s “economic realities test.”
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