By: Claudia D. Orr
Hardly a week goes by without a client asking me if they can hire a worker as an independent contractor rather than as an employee. The motive is quite often to save the cost of employee benefits, especially healthcare insurance. But, as one employer now knows, the independent contractor classification is not always best! See James v Facility Matrix Group, unpublished opinion of the Michigan Court of Appeals (June 23, 2015).
In this case, Facility Matrix Group (“FMG”) hired two temporary laborers to remove wooden pallets at the agreed upon rate of $100/day. One of those laborers, Kevin James, was injured when the FMG forklift he was using tipped over, causing serious injuries to his leg. James initially sought worker’s disability compensation benefits, but his claim was opposed by FMG which argued he was not its employee. Therefore, James retained an attorney who filed a civil action seeking damages for the injuries under various tort theories.
The Worker’s Disability Compensation Act is generally an employee’s exclusive remedy for injuries suffered on the job. Under the Act, the employee receives medical benefits and limited income replacement. However, unless an employee can prevail on an intentional tort theory (which requires proof that the employer knew with near certainty that the injury suffered by the employee would occur, a particularly difficult burden to meet), the employee is not awarded damages for pain and suffering. Thus, while an employer must provide coverage for its employees under the Act, the employer benefits from the Act’s exclusive remedy bar.
When faced with the civil lawsuit, FMG did a complete (and somewhat amusing) about-face and argued that James had been its employee, hoping to now benefit from the exclusive remedy bar of the Act. Moreover, FMG started sending James payments under the Act.
Now, it was James who argued that the agreement to pay $100/day was not enough to create an employment relationship, as FMG had previously argued when it refused to provide him with benefits under the Act! The trial court rejected James’ argument and ruled that James was an employee of FMG and, therefore, his tort claims failed under the exclusive remedy bar. The court dismissed James’ lawsuit.
On appeal, James argued that FMG was estopped from changing its original position. However, the Court of Appeals ruled that James failed to establish equitable estoppel since there was no reliance by him on FMG’s original position and he suffered no prejudice since James was, in fact, now receiving benefits under the Act. Moreover, the Court of Appeals noted that whether James was an employee or an independent contractor is an issue of law under the Act.
To argue against an employment relationship, James claimed he was not required to “punch in” or “punch out”, was paid “under the table”, and was not provided a uniform or required to sign any documents.
However, the Act provides that “a person performing service for an employer is an employee if ‘the person  in relation to this service does not maintain a separate business,  does not hold himself or herself out to and render service to the public, and  is not an employer subject to this [A]ct.’” MCL 418.161(1)(n). Moreover, while the case was pending, the Supreme Court ruled that failure to establish any one of the three criteria will exclude an individual from employment status. The Court of Appeals found that all three criteria were satisfied. Therefore, an employment relationship existed, the exclusive remedy bar applied and James’ tort claims failed.
The independent contractor status is not a panacea. And, misclassifying a worker as an independent contractor can result in significant liability to the employer for failing to pay (and/or withhold) payroll taxes and unemployment taxes, failing to provide the worker with access to health insurance or other ERISA benefits, failing to keep accurate time records and pay overtime, etc. Moreover, the test for determining whether a worker is an independent contractor or employee varies depending on the legal issue (worker’s disability compensation coverage, wage and hour laws, tax issues, etc.).
One thing is very clear: employers must be careful to properly classify workers because errors can be costly! If you are unsure whether workers have been properly classified, contact the author or another experienced employment attorney.
This article was written by Claudia D. Orr, who is Chair of the Legal Affairs Committee of Detroit SHRM, and an attorney at the Detroit office of the law firm Plunkett Cooney (a full service law firm and resource partner of Detroit SHRM). She can be reached at email@example.com or at (313) 983-4863.
Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information, is included in the re-post of the article. July 2015.