When hiring workers, many small and midsized businesses opt to hire the workers as “independent contractors.” This method for hiring is very alluring, potentially limiting liability to a company while at the same time alleviating the company from the need to spend fees on expensive services such as bookkeeping, accountants, as well as federal and state taxes. However, there are several pitfalls employers can get themselves into that would make them wish they had simply hired “employees” instead. The following are four things to look out for when hiring independent contractors:
- Titles Not Relevant. Just because you have someone sign a contract which calls them an “Independent Contractor” does not mean that they are. Connecticut law is clear that any worker is presumed to be an employee “unless and until” certain factors are proven. Commonly referred to as the “ABC Test”, these factors include: (A) the ability of the worker to make his or her own decisions in the performance of the service; (B) the worker uses their own equipment; and (C) the worker has an independent trade or business. Unless all of these factors are met, an employment relationship with the worker will be found by the courts, regardless of their title.
- Avoid Non-Compete Clauses. One of the most common mistakes with businesses signing independent contractors is the use of non-compete agreements or clauses. While more and more disfavored in other parts of the country (including Massachusetts), Connecticut still enforces non-compete agreements as long as they conform to certain standards. Despite the fact that non-competes are still legal in this state, if your contracts with your independent contractors contain non-competes, then the contractors are likely employees. Requiring that someone only work with your company, even within a limited range, calls into serious question whether the worker has the required independence necessary to meet the ABC Test.
- Franchisees May Still be Employees. I know this seems strange to the average business owner. A franchisee is someone who owns their own, independent business who then signs a contract with another company (a franchisor) to allow them certain access to benefits such as name and image use rights. How could the owner of that separate business be an employee of the franchisor? The answer is that under Connecticut law, the ABC test and the test for franchisee status are independent of each other, see both Mujo v. Jani-King Int’l, Inc., 13 F.4th 204, 210 (2d Cir. 2021)and Jason Roberts, Inc. v. Administrator, 127 Conn. App. 780, 15 A.3d 1145, 1150 (2011), pursuant to which the Connecticut Appellate Courts have held that an individual can be a franchisee and still qualify as an employee.
- The Ramifications of Doing it Wrong Can be Harsh. If you improperly categorize your employees, the implications can be devastating for your business. First of all, either or both the Connecticut Departments of Revenue Services and Labor may conduct a thorough examination of your employees and records. These examinations often take a long time and a lot of resources, not to mention the stress it puts on the individuals as well as the business. Then you also have the potential for suits from the workers, potentially even a class action, repayment of all wages due, as well as attorney fees and costs, and potentially punitive damages (up to 3x, plus interest).
Feel free to reach out to Fournier Legal Services if you have questions about how to properly categorize your workers, or any other questions related to your business or estate planning needs.
Justin Krajeski is an Associate Attorney at the firm operating primarily out of our CT office. He graduated from Siena College and from Penn State’s Dickinson School of Law. Justin focuses on business and employment litigation, and he is admitted to practice law in CT, MA, NY, and PA.