Wednesday, June 19, 2019
Especially with respect to fruit and vegetable crops, seasonal ag workers are vital – particularly during harvest. But is a seasonal ag worker an employee or an independent contractor? What are the factors for determining the proper classification? Why does classification matter? Actually, it matters for several important reasons including withholding of income tax and the filing of the proper tax forms; whether minimum wage requirements apply; and applicable penalties for a misclassification.
During this spring’s academic semester at the law school, my students in agricultural law were required to write a paper on a particular ag law topic. Today’s post features the work of one of those students - Rebecca Bergkamp. Rebecca graduated last month, is presently preparing for the Bar exam, and will then join the Hinkle Law Firm in Wichita, Kansas. She is well-trained to enter the practice world to begin assisting agricultural clients (among others) with their legal issues.
The proper classification of seasonal ag workers – that’s the topic of today’s post.
Rules Governing Classification of Workers
Under the Fair Labor Standards Act (FLSA), a worker is presumed to be an employee, unless the worker is specifically classified as an independent contractor. The term “employee” is very expansive and means any individual employed by an employer. 29 U.S.C. §203(e)(1). This includes individuals who might not normally qualify as an “employee” under traditional agency principles. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 112 S. Ct. 1344, 1350 (1992). Likewise, a contractual designation between a farmer and the worker that the worker is an independent contractor is not controlling for purposes of determining whether that worker is an employee or independent contractor. Rutherford Food Corp. v. McComb, 331 U.S. 722, 67 S. Ct. 1473, 1476-77 (1947). Moreover, the subjective intentions of the parties are not controlling in determining whether an employer-employee relationship exists; it does not matter whether the parties had any intention of creating an employment relationship. Brennan v. Partida, 492 F.2d 707, 709 (5th Cir. 1974).
Factors for Consideration
So how is it determined whether an ag worker is an employee or a independent contractor? An “economic realities” test is often used. Under this test, the courts look to various factors in assessing the economic realities of the situation to determine whether an individual is an employee, or an independent contractor. Those factors are: (1) the nature and degree of the worker’s control of the manner in which the work is to be performed (the less control the worker has, the more likely the worker is an employee); (2) the worker’s opportunity for profit or loss depending upon his or her managerial skill (the less opportunity, the more likely the worker is an employee); (3) the degree of the worker’s own investment in equipment or materials required for the work or employment of other workers (the greater degree, the more likely the worker is an independent contractor); (4) whether the service rendered requires a special skill, (if so, the more likely is independent contractor classification); (5) the degree of permanency and duration of the working relationship of the parties (the longer and more permanent the relationship, the more likely employee classification will be); and (6) the extent to which the services rendered are an "integral part" of the business (the greater the extent, the more likely is employee status). No single factor is determinative. See, e.g., Blair v. Transam Trucking, Inc., 309 F. Supp. 3d 977, 1002 (D. Kan. 2018); Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748 (9th Cir. 1979); In re Kokesch, 411 N.W.2d 559 (Minn. Ct. App. 1987); Mendez v. Brady, 618 F. Supp. 579 (W.D. Mich. 1985); Tobin v. Cherry River Boom & Lumber Co., 102 F. Supp. 763 (S.D. W. Va. 1952).
Although a farmer may have to classify many of its workers as employees due to the application of the economic realities test, a farmer is not required to classify immediate family members as employees. For the purposes of agriculture, the term “employee” does not include workers who are a parent, spouse, child, or other immediate family members. 29 U.S.C. §203(e)(3). This is an important exception for many family farming operations.
Why Classification Matters
There are various reasons for classifying a worker either as an employee or as an independent contractor.
- For many farmers, it’s simply easier to classify seasonal workers as independent contractors and pay them with a checks and issue Forms 1099 at year end. In addition, independent contractors are responsible for paying both the employer and employee portion of Social Security and Medicare taxes.
- For tax years beginning after 2017, the Tax Cuts and Jobs Act (TCJA) provides for a 20 percent deduction for the “qualified business income” of an independent contractor that is other than a C corporation. Wages of an employee don’t qualify.
- The staffing flexibly of independent contractors can be very beneficial and, if the farming operation is in a state that has at-will employment, employees can terminate the working relationship at any time for any reason. In contrast, an independent contractor’s ability to terminate a working relationship with a farmer is governed by a contract that the parties have negotiated.
- If a worker is an employee, the farmer-employer, has greater control over how, when, and which projects are completed at any given time. But, the use of an independent contractor provides the farm operation the flexibility of being able to acquire talent for a specific period of time without having to maintain an ongoing commitment, financial or otherwise.
What About Minimum Wage and Overtime Pay Requirements?
If a worker is an “employee,” the FLSA requires agricultural employers who use 500 “man-days” or more of “agricultural labor” in any calendar quarter of a particular year to pay the agricultural minimum wage to certain agricultural employees in the following calendar year. 29 CFR § 780.305. Man-days are those days during which an employee performs any agricultural labor for not less than one hour. The man-days of all agricultural employees count in the 500 man-days test, except those generated by members of an incorporated employer's immediate family. 29 U.S.C. § 203(e)(3). Five hundred man-days is roughly equivalent to seven workers working five and one-half days per week for thirteen weeks (5.5 x 7 x 13 = 501 man-days). Under the FLSA, “agriculture” is defined broadly. See 29 U.S.C. § 203(f). For related entities, where not all of the entities involve an agricultural trade or business, the question is whether the business operations are so intertwined that they constitute a single agricultural enterprise that is exempt from the minimum wage rules. See, e.g., Ares v. Manuel Diaz Farms, Inc., 318 F.3d 1054 (11th Cir. 2003).
Other agricultural exceptions from the minimum wage requirement include persons that are: (1) members of the employer's immediate family, unless the farm is incorporated; (2) local hand-harvest, piece-rate workers who come to the farm from their permanent residences each day, but only if such workers were employed less than 13 weeks in agriculture in the preceding year; (3) children age 16 and under whose parents are migrant workers, and who are employed as hand-harvest piece-rate workers on the same farm as their parents, provided that they receive the same piece-rate as other workers; and (4) employees engaged in range production of livestock. 29 U.S.C. § 213(a)(6). A higher monthly wage rate applies to a “ranch hand” who does not work in a remote location and works regular hours. See, e.g., Mencia v. Allred, 808 F.3d 463 (10th Cir. 2015).
If a worker is classified as an “employee,” the FLSA requires payment of at least one and one-half times an employee’s regular rate for work over 40 hours in a week. However, an exemption denies persons employed in agriculture the benefit of mandatory overtime payment. 29 U.S.C. § 213(b)(12). Again, for this purpose, “agriculture” is defined broadly, and the 500 man-days test is not relevant. There are also certain workers that are exempt from being paid for hours worked that exceed 40 hours in a week. Included in this category are those “executive” workers whose primary duties are supervisory, and the worker supervises two or more employees. Also included are workers that fall in the “administrative” category who provide non-manual work related to the management of the business. Also exempt are those workers defined as “professional” whose job is education-based and requires advanced knowledge. Many larger farming and ranching operations have employees that will fit in at least one of these three categories.
Income Tax Withholding
For employees, the employer must withhold federal (and state) income tax. The withholding of tax from an individual’s wages is “treatment” of the individual as an employee. See, e.g., Priv. Ltr. Rul. 8323004 (Feb. 21, 1983). Also, it’s not possible to retroactively change the “treatment” of the workers as employees by filing Forms 941c (the Form for correcting withholding information) and requesting a refund of FICA taxes. Even assuming the farmer could do so, the farmer would be prevented from claiming workers as nonemployees for years he did not file the proper federal information tax returns. Likewise, “Section 530 relief” is not available to those taxpayers who did treat workers as employees by filing Forms 943 and withholding FICA taxes. It also doesn’t apply to those who treated workers as employees as a result of past audits.
One of the biggest risks in hiring “independent contractors” is misclassification because it can result in violations of wage, tax, and employment laws. Penalties can also be imposed for failing to timely deposit payroll taxes. Fines from the U.S. Department of Labor (DOL), IRS, and state agencies could total thousands of dollars. Farmers can be held responsible for paying back-taxes and interest on employee’s wages as well as FICA taxes that were not originally withheld. Failure to make these payments can result in additional fines. If the misclassification is found to be intentional, criminal penalties can apply. In addition, for employees, an employer must keep Form I-9 on record for each employee to establish employment eligibility.
Careful thought must be given to the proper classification of ag workers. The issue is particularly acute with respect to seasonal ag workers. Misclassifying can lead to serious consequences.