Legal: Lowe’s $10 Million Settlement Provides 3 Lessons For Firms Working With Independent Contractors…Common Misconceptions Held by Today’s Businesses is that Working With an LLC Removes the Risk Associated with Misclassification

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Another Fortune 500 titan, another misclassification lawsuit. Lowe’s became the latest company this week to settle a legal dispute over the classification of its independent contractors. The home improvement outfit joined the likes of Google, FedEx FDX +0.72% and Uber, all who have been mired in similar controversies over the last year.

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Earlier this week, a federal court judge approved a settlement between Lowe’s Home Centers and a class of its home improvement contractors. The contractors claimed that they had been misclassified as independent contractors instead of employees. According to the lawsuit:

The plaintiffs in this case are home improvement contractors comprised of both individuals and businesses. The complaint alleged that Lowe’s had the right to control, and did control, all aspects of installation jobs. The complaint also alleged that:

  • Lowe’s Production Office managed each installation project
  • Lowe’s set the fees to be earned by each home improvement contractor
  • Lowe’s imposed a non-compete covenant on installers

The Lowe’s settlement gives us yet another chance to reflect on the growing trend of misclassification. More importantly, it allows us to highlight 3 key lessons every business should consider when working with an independent contractor.

     1) Retaining contractors who operate in the form of a business entity, such as an LLC, does not necessarily mitigate your compliance risk

One of the more common misconceptions held by today’s businesses is that working with an LLC removes the risk associated with misclassification. The idea that sole proprietors are somehow riskier to work with simply isn’t true. In the case of the Lowe’s, the original complaint filed did include installation contractors that operated in the form of a business entity.

Furthermore, the U.S. Court of Appeals for the Ninth Court and the Kansas Supreme Court both found that FedEx Ground had misclassified employees as independent contractors who were operating as a business entity.

Businesses seeking to mitigate their compliance risk would be wise to acknowledge that contracting with a business entity does not automatically eliminate your misclassification exposure.

 

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     2) Billion Dollar Enterprises Are Just As Vulnerable To Worker Misclassification

The notion that the biggest, most prosperous businesses are somehow immune from regulatory oversight is simply ludicrous. These powerful megacorps are just as susceptible to labor violations as their small and mid-sized counterparts.

From Uber to Google GOOGL +0.35%, independent workers are playing a critical role in the growth of some of today’s biggest brands. That’s why it’s so surprising that many of these enterprises have yet to implement affordable freelance management software (FMS) they can use to track, manage and document their 1099 work engagements.

Worker classification has always been important, but with the federal government announcing new steps to crack down on this growing practice, now more than ever is the time to take labor compliance seriously.

     3) The Cost of Non-Compliance Can Be Staggering   

Fines levied by the IRS and State Labor Departments for worker misclassification can exceed millions, if not tens of millions of dollars, depending on the severity of the infractions. The threat of class action lawsuits (as was the case in the Lowe’s lawsuit) should also serve as a further deterrent for companies straddling the boundaries of improper classification.

The cost of the lawsuit to Lowe’s is likely to exceed $10 million when it’s all said and done (not to mention Lowe’s is reportedly involved in other misclassification lawsuits). The obvious question here is why would these businesses continue to expose themselves to such staggering financial risk when the cost to address misclassification is far less than the fines themselves.

It’ll be very interesting to see how businesses, especially the Fortune 500 giants, adapt to this new workforce dynamic and if they begin leveraging technology to improve their classification accuracy and reduce their compliance risk. Only time will tell…

Forbes.com |  January 20, 2015 | Jeff Wald and Jeffrey Leventhal