Many companies are increasingly using independent contractors to reduce costs in an environment characterized by unexpected fluctuations in the market and intense global competition. Independent contractors, also called “freelancers,” are self-employed individuals who render services directly to companies outside the scope of the traditional employment relationship. Courts and agencies use various common law tests to distinguish independent contractors from employees. The widely used control test, for example, gauges the amount of control exerted by the hiring party over “the manner and means by which the [work] product is accomplished.”
The Internal Revenue Service (“IRS”) may audit companies and, using its own version of the control test, concludes that the companies misclassified their workers. Misclassification occurs when a worker labeled as an independent contractor actually meets the control test definition of an employee. Under federal law, for example, the IRS may assess tax liabilities stemming from misclassification. A federal safe harbor provision, however, relieves employers which, among other things, had a good faith basis for its mistaken classification.
Under the Employment Retirement Income Security Act (“ERISA”), the federal law that regulates employer-sponsored welfare and pension plans, the outcome would not be so clear. ERISA provides the misclassified worker a statutory right to recover benefits due under an established employee benefit plan. Although federal courts have adopted divergent standards to assess benefits claims made by misclassified workers, the standards share a common thread: unlike the IRS and Maryland state law, they fail to differentiate employers who inadvertently misclassify from those who knowingly misclassify.
This Note discusses the inability of federal courts to adopt a coherent standard that distinguishes between good and bad faith employers in the ERISA context. Part I of this Note explores the role of the independent contractor in the labor market as well as the problem of misclassification. Part II discusses the purposes and provisions of ERISA. Part III explores the conflicting standards courts follow to assess benefits claims made by misclassified employees, positing that these approaches upset the balance between employee protection and employer freedom achieved by ERISA. Part IV describes this Note’s proposed ERISA amendment, which aims to harmonize these fundamental policy goals.