Worker Classification as a Competitive Edge

How a company classifies its workers — as employees or independent contractors — can produce a significant competitive edge. The company treating workers as employees must pay employment taxes (employer share of FICA, state and federal unemployment taxes) and insurance (workers compensation). The company treating workers as independent contractors can offer higher compensation to attract and retain better workers because of the tax and insurance savings it reaps from its worker classification.

Tortious interference

No one questions whether worker classification can produce a competitive edge. What is unclear is whether it can give rise to a legal action against a competitor. In order to learn the answer, a little understanding of the law is required.

Tortious interference is a civil legal claim that someone has intentionally and improperly interfered with another person’s economic relations. For example, if Company X is about to sell property to Company Y and Company Z tells Y that the property is rodent-infested when in fact it is not, causing Y to cancel the sale, then X has a cause of action against Z for tortuous interference; Z’s deliberate actions interfered with X’s economic opportunity.

Can a claim of tortious interference be applied in the case of worker classification?

Worker classification as tortious interference?

In one recent district court case in Utah, one pest control company brought suit against another pest control company on this very issue. The first company, who hired students as employees to market its products, sued the second company, who used independent sales representatives to market its products. By using independent contractors, the second company could lower its overhead, enabling it to pay higher compensation to engage better workers, which supposedly lead to more sales and greater profits.

The court dismissed the case on the grounds that the first company did not have “standing” to bring the action. You must have standing to have your day in court.

Standing is a legal term that means having a legal right to initiate a lawsuit because of being sufficiently affected by the matter at hand. It failed to show that it has sufficient interest in the matter (worker classification resulting in underpayment of taxes) to have standing.

The company initiating this case made no claim that there was any direct interference in its business. Instead, it alleged that the other company did not pay its fair share of taxes (it should have treated its workers as employees and thus incurred comparably employment taxes and insurance costs). The court noted that federal and state employment tax laws are created for revenue collection; they are not enacted to foster economic relations.

Lesson

The bottom line is that business decisions can create a competitive edge by saving taxes and other costs. There is no private cause of action to challenge another company’s violations of minimum wage rules, health laws, environmental protection laws, or other government regulations. As long as a competitor does not intentionally and directly interfere with the operations of another company, the competitor’s actions probably can’t be challenged…at least by competitors.

The government is still free to contest worker classification and other violations of the law. And there are whistleblower options to bring matters to the government’s attention.

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