Wednesday, September 5, 2007

Court confirms that independent contractors can be discriminated against

In a case affirming the longstanding rule that independent contractors are not covered by Ohio's employment discrimination laws, the Lucas County Court of Appeals highlights the pitfalls employers face in treating workers as independent contractors instead of employees.

Bill Perron served Atlas Roofings as a sales agent. Atlas set forth the terms of his relationship in a Sales Agent Agreement. Under the Agreement, Atlas provided Perron with a specific sales territory, which Atlas could adjust at its own discretion. Perron worked out of an office in his home, and was to use his best efforts to procure customers. Atlas, however, retained control over the products Perron could sell, as well as their pricing and other terms and conditions of sale. Also, Perron was prohibited from selling any competing products. Atlas paid him solely on commission, with no benefits of any kind, because, according to the Agreement, he was "engaged in [his] own independent business." Perron was to maintain his own insurance policies, and pay his own taxes, none of which would be withheld. Finally, to make sure that the terms of the relationship were perfectly clear, the Agreement specifically provided that Perron was an independent contractor.

When Perron turned 65, Atlas began to transition Perron's sales territory to another, presumably younger, representative. In fact, Perron's manager admitted as much in an intra-company e-mail:

As Bill approaches his 65th birthday (late June 2004) we thought of using 2004 as a "transition year" for Bill by starting to develop Bill's eventual replacement group.... Atlas's game plan for Bill Perron had always been for Bill to handle the commercial line for a couple of years, to get him past his 65th birthday.... Thus, the 2004 transition plan would ... keep Bill Perron compensated through November 1, 2004, keeping his Social Security in tack [sic] without fear of penalty for early retirement.

Unsatisfied with a forced retirement, Perron sued Atlas for age discrimination. Despite the smoking gun e-mail, the trial court dismissed the age discrimination claim because Perron was an independent contractor, and not an employee. In Perron v. Hood Indus., Inc. d/b/a Atlas Roofing Corp., the Lucas County Court of Appeals upheld the dismissal of the lawsuit and Perron's treatment as lawful.

While the civil rights laws clearly only cover employees, and not independent contractors, what is not always clear is what qualifies one as an employee as compared to an independent contractor. The Court cited to the well-worn "right of control" test to make its determination:

If the employer reserves the right to control the manner or means of doing the work, the relation created is that of master and servant, while if the manner or means of doing the work or job is left to one who is responsible to the employer only for the result, an independent contractor relationship is thereby created.... Factors to be considered in determining who has the right to control includes indicia such as who controls the details and quality of the work; who controls the hours worked; who selects the materials, tools, and personnel used; who selects the routes traveled; the length of employment; the type of business; the method of payment; any any pertinent agreements or contracts.

The Court agreed that Perron was an independent contractor, and not an employee. In reaching that conclusion, it relied heavily on the language of the Agreement, the fact that he worked out of his home, set his own hours, was paid solely in commissions, received no benefits, and paid his own taxes. The Court was not persuaded by Atlas's discretion and control over its products, pricing, and orders.

Companies might be tempted to use this case as a template for designating workers as contractors. This case, however, could have just as easily been decided in Perron's favor, and on another day it very well might have been. It points out the very real dangers companies face in trying to classify workers as independent contractors. Separate and apart from the serious tax implications of misclassifying an employee as a contractor, I would not want to be in front of a jury trying to justify Atlas's e-mail on a legal distinction between independent contractor and employee. Employers should consider all of the risks associated with classifying someone as an independent contractors, and should not make such a decision without first consulting with employment counsel.

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