Cost of Contractor Misclassification Increases Dramatically Following Important Court Judgment

On November 29, 2017, the European Court of Justice (ECJ) ruled that misclassified self-employed contractors who are really employees could claim back vacation pay going back to 1996 (the year that the European Union’s (EU) Working Time Directive was introduced), much further back than had previously been understood. In King v. The Sash Window Workshop Ltd, the court awarded £27,000 (USD 36,400 : EUR 30,551) to compensate a window cleaner for the paid annual leave to which he would have been entitled had he been classified as an employee.

Background

In the EU, workers and employees have the right to at least four weeks’ paid vacation leave. By contrast, independent contractors are not entitled to paid vacation leave. In the event that a worker was misclassified as a contractor, he or she would be entitled to a back bill for the benefits that he or she would have received as an employee. In the past, these back bills tended to cover the last two years of unpaid benefits. The King v. The Sash Window Workshop judgment made it such that claims can go back to the commencement of the right.

Independent Contractor or Employee: Factors to Consider

Courts use a similar test to assess whether a worker is an independent contractor or employee across Europe and indeed in the US. Some factors include:

• whether the company pays the worker on a regular schedule or at the completion of projects;
• whether the individual is working on specific tasks defined by the company; and
• the extent of control that the company exercises over how and when the individual works. 

Comments

As companies that use contractors have found, particularly in the growing “gig economy” there are many consequences when a contractor successfully challenges his or her status and is found to be a worker or employee. EU employers that use contractors may want to take this opportunity to assess the risks of misclassification and examine their independent contractor agreements. Some practical steps companies can take when drafting these agreements include:

1. State that the contractor is registered as an independent service provider and include the local business registration number where applicable.
2. State that the contractor will comply with all local laws and taxation requirements.
3. Exclude the contractor in employee compensation or equity plans.
4. Use terms such as “services” rather than “work,” “liaison” instead of “supervisor,” and “defect in performance” instead of “discipline.”
5. If you need to issue a badge, business card, or email address ensure it clearly states that he or she is a contractor.
6. Use indemnities to make the individual liable for the cost you incur if he or she claims, in the future, to be an employee. Countries vary in the effectiveness of these provisions but the wording will be a deterrent regardless.
7. It can often be preferable to enter into a contract with a company set up by the contractor rather than the individual direct. This generally results in reduced risk of liabilities for misclassification claims.  

For more on this topic, see our recent article, “The Increasing Costs of Contractor Misclassification in the EU: What Companies Need to Know About the New ECJ Ruling”

Written by Roger James of Ogletree Deakins