Why Are Businesses Redefining the Meaning of ‘Employee’?

Source: Thinkstock
Source: Thinkstock

“The saying around the building was, ‘It’s their sandbox. We only get to play in it,’ ” former FedEx driver Agostino Scalercio told Bloomberg last year. Scalercio worked for the package delivery company five days a week for 10 years, and says he went to work every day at 6 a.m., put in 10-hour shifts, strictly adhered to the company’s policies on delivery times, vehicle maintenance, and employee grooming standards. He even deducted money from his paycheck to pay for his uniform.

Scalercio was a model worker, except for one big issue: FedEx never really considered him an employee. He was just playing in the company’s sandbox.

FedEx is one of many companies that classifies its workers — like Scalercio — as independent contractors, rather than employees. Because of this, the company absolved itself from paying him overtime or contributing to his Social Security benefits. Yet, the company was more than willing to treat contractors exactly like full-time staff members in nearly every other regard, including deducting money from its driver’s paychecks to pay for uniforms and expecting them to show up at work at a set time and location for years.

In response, Scalercio and hundreds of other drivers took FedEx to court. The workers’ case basically said that FedEx misidentified full-time employees as independent contractors, and that those who were affected are due back pay for overtime and other earnings or expenses. The courts have found that Scalercio and his fellow drivers were correct, though things are still being sorted out at this point. But by classifying employees as independent contractors, FedEx was able to save a huge amount of money by avoiding sick and vacation pay, health care costs, and by making its drivers pay for their own uniforms and FedEx-branded trucks and equipment.

Source: Bureau o f Labor Statistics
Source: Bureau o f Labor Statistics

The use of independent contractors has become very popular among America’s business powers in an effort to skimp out on the additional costs of actually hiring staff full-time. By instead doling out contracts to workers, companies can avoid having to pay benefits, Social Security costs, health care and supplying paid time off. While it seems like a good strategy from a business standpoint, it ends up effectively putting those these companies employ in a rough spot, often with little to no job security. Not only that, but businesses appear to be abusing the use of contractors for their own benefit, many times outside of legal boundaries.

According to a report from Navigant Economics from 2010, more than ten million U.S. workers — roughly 7.4% of the entire American workforce — are classified as independent contractors (based on data obtained from the Bureau of Labor Statistics). On top of that, another 4 million work under other similar arrangements. Together, this segment of American workers earns about $1 in every $8 in the United States.

Now, that’s not to say that all of these workers are unhappy with their employment arrangements. The report also says that a vast majority of 82.3% prefer independent contractor status, which allows for increased workforce flexibility, and a more genuine sense of pay-for-performance.

While it appears that many contractors may be OK with their situations, how does their widespread use and deployment in American businesses fit under the law? According to the IRS, the boundaries are fairly straightforward as to what constitutes an independent contractor, and what does not.

“If you are an independent contractor, you are self-employed,” the IRS says. “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”

“If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor.”

While this definition does offer a lot of room in which to work with, it does conflict with how many companies use contractors. FedEx drivers, for example, were told how and where to do their jobs, and were asked to do it by fronting the money to outfit their equipment and uniforms with FedEx branding. It’s obvious that there are plenty of incentives for companies to want to go with independent contractors instead of hiring full-time staff, and apparently a good number of workers who willingly accept these roles are happy with the arrangement. So, where’s the harm?

The damage is mostly inflicted upon those who are unhappy with the arrangement, and end up getting screwed on benefits and overtime pay. While the numbers cited earlier indicated that that was a minority of independent contractors, the number has likely gone up as more and more workers become aware of how big businesses are taking advantage of their legal designation.

As for how much money companies are really saving by skirting employees on health care and benefits, there really isn’t a clear answer or direct figure that can be pointed out, but tallying up the amount of unpaid overtime hours, savings on paid time off, benefits, healthcare and the myriad of other potential savings can add up to a very vast amount. Of course, the inverse effect of those savings comes in the form of resentful workers who do wish for full-time status, or workers coming to work sick or stressed-out because they are not offered paid sick days or vacations.

Again, workers who are entering into these arrangements with companies are doing so willingly, and if the numbers are accurate, are happy to do so. But serious questions are being brought up regarding the legality of using the independent contractor label, especially when its applied to those who clearly are better identified as employees. As the FedEx case and others wind their way to an eventual end, more companies that use similar setups should take a look at their own practices, and use it as an opportunity to strengthen their own organizations by using or abandoning the contractor label.

For those wondering why so many companies don’t like to call their employees ‘employees’, the answer is because it can save them a lot of cash.
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