An independent contractor by any other name

Do labels matter? Sometimes they do. What do you think of when you hear “freelancer”? Does your visual change when someone says they’re an “independent contractor” instead? What about “consultant”? Let’s take a look at each of them:

Freelancer
According to Wikipedia.org, this terms was coined back in medieval days by Sir Walter Scott “to describe a ‘medieval mercenary warrior’ or ‘free-lance.’” Just as it sounds, a lance is a weapon or a spear. In today’s world of work, the freelancer label is usually attached to a writer or an artist—a graphic designer, an illustrator, a photographer, for instance. For some, a freelancer may be a hobbyist; so that could be a downside to this label.

Independent Contractor
This is a useful and common catchall label. It usually gives the impression that the individual is an owner or operator of a micro business, sometimes with one or two employees. Outside the corporate world, this term sometimes gets confused with a type of contractor who is specifically in the construction or building industry.

Consultant

Many take advantage of the vagueness of this label. This could be someone who is a lone individual or someone attached to a large consulting firm. This label is more formal. And it is most commonly associated with someone dispensing expert, professional advice. Usually, this is not a label for a practitioner of a craft.

So who cares about these labels anyway? Not the IRS.
To them, the important question is: who is your employer—in practice, regardless of the label? Yourself? A company or business? The user of your services? Based on this question the IRS has two categories of workers: employed or self-employed. For income reporting, the employee gets a W-2 form from the employer and an independent contractor receives a 1099 form from a client.

What other labels have you seen out there?

Harmony disrupted in the Pocono Mountains; 259 sales representatives win IC misclassification lawsuit

A judge in Pennsylvania ordered Vacation Charters LTD to pay over $2.2 million in wages, benefits, penalties and interest to 259 timeshare sales representatives. The class members were deemed misclassified as independent contractors (IC) for Split Rock Resort in Lake Harmony, Pennsylvania, in the Pocono Mountains. The April 29, 2011 judgment is considered significant and precedent-setting in the timeshare industry. This could also have ramifications in other industries and worker classification cases.

Here are a few takeaways and triggers from this case that should make you pause, no matter your industry:

Benefits
The company re-classified the independent contractors as employees “in order to take advantage of a retirement plan…when that failed they reverted back to Independent Contractors” according to a report in insidethegate.com, a website that covers timeshare news. These arbitrary changes “did not impress the court.”

Compensation
The sale representatives were on a commission-only plan. The company withheld 10% of the commissions and placed it in a reserve fund to cover any refunds or chargebacks. The sales representatives claimed significant income loss because they were entitled to monies in the reserve funds that the company held on to. From a worker rights perspective, this undoubtedly bolstered their case.

IRS SS-8 Form
The lawsuit’s trigger traces back to the Form SS-8 filed by Austin Miller-Orteneau. He was a former sales representative who believed he was owed money; the company disagreed. So Mr. Miller-Orteneau requested an IRS ruling as to his classification as a “non-statutory employee” in the category of real estate agent. The article in insidethegate.com points out that “in Pennsylvania a timeshare sales license is required to sell timeshare, but not a real estate license. Miller-Orteneau was working under such a timeshare sales license.”

While workers have every right to request a ruling from the IRS via Form SS-8, this is a reminder of what can happen when workers question the way they are being treated, especially where their classification as an IC is based on questionable grounds.

Section 530 (a) Safe Harbor Relief
The Form SS-8 trigger is tied to this point. The company may have assumed relief under Section 530 (a) where real estate agents are accepted to be independent contractors. It appears that the company mistakenly assumed that timeshare sales representatives could be safely docked in this harbor.

Independent Contractor Agreement
The agreements in place for the “independent” work arrangement between the company and the individual sales representatives were nullified. They were legal but deemed “immaterial” and “unenforceable.” This is a reminder that the fact of how you treat workers in real life can easily turn any agreement on paper into a work of fiction that will not hold up in court.

Vacation Charters LTD’s IC classification misstep was a self-inflicted one-two-three punch. On the one hand there was a strong case made for worker rights violations in the benefits and compensation arena. Combine that with a wrong assumption of relief under Safe Harbor. And then pile on the loss of revenue for the government by failing to collect income taxes, you end up with a legal yet unenforceable IC agreement and a mess in the Poconos.