Employee vs. Contractor Debate to Become Even Hotter

The employee vs. contractor debate has the potential to have a major impact on the insurance industry, according to a pair of experts speaking on the topic on last week at the annual Risk Management Society conference held in San Diego, Calif.

It’s estimated there are 10 million independent contractors in the U.S. and that 10 percent of those people are misclassified, according to John Zeigler, an attorney with Marshall Dennehey Warner Coleman & Goggin.

“That’s a huge number of people out there who are working as independent contractors but likely are misclassified,” he said, noting that federal and state governments could swoop in with new rules and regulations. “The reality is the pressure on the government is becoming that much greater.”

Zeigler and Stephanie Watts, resolution manager at Gallagher Bassett, held an education session titled “The War on Employee Misclassification: Risks and Costs to Employers and Insurers,” at the annual RIMS conference for risk management and insurance professionals.

Planners of this year’s conference said more than 10,000 people are in attendance at the conference, with more expected to register in coming days. That would make it the largest conference since 2003, they say.

In the session held by Zeigler and Watts, the employer vs. contractor cloud that has arisen by way of the gig economy explosion has created an “uneven playing field” where one company does things one way and the other company another way.

It’s also made protections for benefits, including workers’ compensation, uneven for workers, and has created uncertain risks and exposures for insurers, they said.

They also outlined several tests federal and state governments are using to determine whether a worker is an employee or a contractor.

One such test was the U.S. Department of Labor’s economic realities test, which includes the consideration of the following factors:

• The extent to which the work performed is integral to the employer’s business;
• Whether the worker’s managerial skills affect his or her opportunity for loss;
• The relative investments in facilities and equipment by the worker and employer;
• The worker’s skill and initiative;
• The permanency of the worker’s relationship with the employer;
• The nature and degree of control by the employer.

The last one has been key in many legal battles that unfolded in many states.

“Ultimately when the courts are looking at this they are looking at the right to control and the actual control exercise,” Zeigler said. “That really, in many respects, is the absolute key factor.”

Other federal government entities with independent contractor tests include the Internal Revenue Service, which includes behavior control, financial control and the relationship of the parties, and the Equal Employment Opportunity Commission.

Many states have their own tests.

A popular test for many states uses three factors:

• Is the employee free from directions and controls?
• Is the work performed outside the usual course of business?
• Is the individual customarily engaged in independently established trade, occupation, profession or business as the involved service performed?

The presenters cited Alexander Vs. FedEx Ground in which the California 9th Circuit Court ruled in 2014 that drivers were not independent contractors despite drivers owning their own vans and being allowed to set their own routes.

The court in its ruling used several factors, most notably control.

“The drivers must wear FedEx uniforms, drive FedEx-approved vehicles, and groom themselves according to FedEx’s appearance standards,” the ruling states. “FedEx tells its drivers what packages to deliver, on what days, and at what times. Although drivers may operate multiple delivery routes and hire third parties to help perform their work, they may do so only with FedEx’s consent.”

“At the end of the day FedEx took a big hit here,” Zeigler said.

With decisions like this being made all over the U.S., vigilance is becoming increasingly important, Watts said.

“It starts at the bottom,” Watts said. “It starts with the agents and brokers writing these policies incorrectly.”

Zeigler advised paying close attention to a topic that he believes will only become more important to businesses and insurance professionals in the future.

“The best you can say is you need to be on top of it,” Zeigler said. “You can look at the patterns, you can look at the trends, you need to look and see where it’s going.”

At the conference RIMS and American International Group Inc. announced that William H. McGannon and David Mikulina are the 2016 inductees to the Risk Management Hall of Fame.

The hall of fame serves as a means to maintain the history of the field of risk management and recognizes risk practitioners who have made significant contributions to advancing the discipline, according to RIMS.

McGannon was considered a risk management pioneer, according to those who bestowed the award on him.

He is considered one of the first Canadian risk managers to establish a full-service risk management department that included loss prevention and statistical support at NOVA Chemical Corp. in Alberta. McGannon frequently lectured at the University of Calgary, where he was instrumental in setting up the Chair of Risk Management position and served as executive in residence from 1998 to 2000. He died in 2015.

Mikulina is a retired vice president of risk management for Hyatt Hotels Corp., and was a member of the risk management profession for nearly 35 years. He headed the risk management department at Hyatt for 23 years as the organization grew from 130 hotels to 350 hotels worldwide