Employment and Labor Law Risks
Farmers markets need to be aware of how employment laws affect their business or organization. Many markets do not sufficiently understand the complexity of employment law. Confusing though it may be, not knowing the law is not an excuse for violating it. Further, employment law focuses on the facts of a situation, not on titles. For example, a farmers market might use “intern” as a job title and operate on the assumption that that person is not an employee. Yet, under the law, an intern might be an employee and employment laws apply, regardless of the job title.
The bottom line is that every farmers market must research and understand employment laws in detail. These rules are detailed, and enforcement by workers, state regulators, and federal regulators is not uncommon.
Farmers markets have very few, if any, ways to minimize liability once an employment or labor law violation occurs. It is best to prevent a violation in the first place. This section explores a few steps to promote compliance.How to Manage this Risk
Employment Classification Risks
Properly classifying workers as volunteers, interns or apprentices, independent contractors, and employees can be very complex. The sections below introduce the basics and offer a few resources with more information. For comprehensive information, farmers markets will want to speak with an employment law attorney licensed to practice in their state.
Legally speaking, for-profit businesses (sole proprietorships, partnerships, limited liability companies, corporations, and cooperatives) cannot have “volunteers.” Under the law, a volunteer is a person who gives his or her time to government or charitable purposes. For this reason, if a person is “volunteering” for a for-profit business, they do not meet the legal definition of a volunteer. Rather, the law will see anyone who does the work of a for-profit business an employee. Under the law, to “employ” someone is to allow a person to do work for a business, so even those who agree not to accept money for their labor are still employees. Technically, the worker could be an employee or an independent contractor, depending on the circumstances (see the section on independent contractors below).
There are legal limits on the ways nonprofits can use volunteers as well. Volunteers should not be an essential feature of a nonprofit’s workforce and should not be dependent on the organization for a living. For more details on the specific risks of using interns and volunteers at for-profit and nonprofit businesses, see Farm Commons’ guide Managing Risks of Interns and Volunteers.
Interns and apprentices
Legally, when farmers markets hire “interns” or “apprentices,” they are offering an educational experience in exchange for lower wages or benefits. Most markets treat interns differently from other employees in terms of payroll and employment procedures. Legally speaking, at for-profit businesses, all interns and apprentices are employees and meet the same legal requirements as any other employee. This means a market would likely need to pay interns at least the minimum wage and workers’ compensation, among other requirements of employment law.
An exception occurs if the internship meets the six criteria laid out by the federal Department of Labor (detailed in Fact Sheet 71), which include that the business may not benefit from the labor of the intern and that if the intern were not present, no one would need to be hired instead. At least one court decision has taken a broader view of when workers can be considered interns. It considered several factors like those in the Department of Labor fact sheet, but its analysis emphasized whether the focus of the internship was on education and whether the intern, not the employer, was the primary beneficiary of the work relationship. This area of law is somewhat in flux—for questions specific to your market, consult an attorney licensed in your state.
Interns at nonprofit operations are different. In that case, the individual may legally be considered a volunteer, as discussed above. For more details on the specific risks of using interns and volunteers at for-profit and nonprofit businesses, see Farm Commons’ guide Managing Risks of Interns and Volunteers.
Legally speaking, an independent contractor is a small business owner who provides their own tools and resources, is paid a flat fee, and is in control of when and how the work is accomplished. The more control the farmers market has over when and how a worker does their job, the more likely the person would legally qualify as an employee, not as an independent contractor.
Businesses and nonprofits that hire independent contractors do not need to cover payroll taxes, workers’ compensation insurance, or unemployment insurance for the independent contractors. As such, many businesses and nonprofits are motivated to hire independent contractors. What many don’t realize is that there are strict rules defining who is and is not an independent contractor.
For extensive details on classifying workers as volunteers, interns, and independent contractors as opposed to employees, see Farm Commons’ resource Classifying Your Workers: Employees, Interns, Volunteers, or Independent Contractors?
Classifying Farmers Market Managers
Read below to learn more about how and why to properly classify farmers market managers as employees or independent contractors, or download a PDF of the full resource, Employment Classification for Farmers Market Managers.
Farmers market managers – also known as market operators, market coordinators, market assistants, and other similar titles – are often the main point of contact for a farmers market team on market day. Although specific duties may differ between markets, market managers generally oversee market day operations, marketing efforts, vendor relations, customer relations, and food access programs and often serve as the contact for administrative matters.
Markets should have a written job description for their market manager. (This is a part of good recordkeeping!) Many sample market manager job descriptions can be found online, such as on the Farmers Market Coalition Resource Library, but markets should keep in mind that every market is unique, and what works for one market may not work for another, particularly when the markets don’t share similar governance structures. Markets may want to check with their state farmers market association as they create a job description for their market manager.
The legal relationship between a farmers market and its market manager is determined by the facts and circumstances of the relationship and not the market manager’s title. Understanding how to properly classify a market manager can help a farmers market manage the risks of employee misclassification. The risks of violating employment and labor laws include fines and costs associated with going to court. Proper employment classification can also ensure a fair working environment where the work of market managers is justly compensated and protected.
For-profit markets (sole proprietorships, partnerships, limited liability companies, corporations, and cooperatives) may have market managers who are employees or independent contractors, but they cannot legally have market managers who are volunteers. Nonprofit markets may have market managers who are employees, independent contractors, or, under limited circumstances, volunteers.
There are several risks associated with the misclassification of an employee as an independent contractor (or volunteer):
- A federal or state agency may order payment of penalties.
- A federal or state agency may order payment of back taxes, including payroll and unemployment taxes, with interest.
- A misclassified employee may sue for unpaid wages and benefits. Liability for these costs can fall on the farmers market itself, as well as on any individual director or officer who played a role in the misclassification or failure to pay wages and benefits.
- Insurance, including commercial general liability (CGL), directors and officers liability (D&O), and even employment practices liability (EPL), generally does not cover penalties, back taxes, or unpaid wages and benefits.
The costs for paying penalties, employee-related taxes, and potential litigation can add up and be a serious threat to the success of a farmers market. The best way to manage this risk is by understanding employment classification and properly classifying market managers and other farmers market workers.
Proper classification of workers is purely fact-based—each situation is unique and requires an understanding of the facts surrounding a particular worker’s duties and responsibilities. Titles do not determine the classification of a worker. Regardless of the relationship a farmers market and a market manager may believe they have, the market manager’s classification is based on the facts of how the manager completes their duties and responsibilities.
To manage the risks associated with employee misclassification, farmers markets should understand how different classifications are determined. An employer-employee relationship is assumed under the law, unless one can prove the worker is an independent contractor.
There are different tests that exist to determine whether a worker is an employee or an independent contractor, including the economic realities test, the right-to-control test, and the state-adopted ABC test.
- The economic realities test helps determine a worker's classification for federal employment law purposes.
- The 20-factor or right-to-control test helps determine a worker's classification for federal tax purposes.
- Many states use a version of the ABC test to help determine a worker's classification for purposes of state employment, workers compensation, and unemployment insurance laws.
These tests are truly guides that require a balancing of the factors considered to determine whether a worker is an employee or independent contractor. In any given situation, certain factors may weigh more heavily than others. Markets that want to classify their market manager as an independent contractor should ensure the market manager meets the criteria under all of the tests, so the market complies with federal and state employment and tax laws.
Courts have created the economic realities test to analyze whether a worker is an employee or independent contractor under federal employment law. The economic realities test weighs a set of factors to determine the worker’s economic dependence on the employer. Specifically, the economic realities test weighs these five factors: degree of control over the work; investment in equipment and facilities; worker’s economic opportunities for profit and loss; permanency of the work relationship; and skills required to complete the work. The U.S. Department of Labor balances the factors of the economic realities test as well as others to determine whether a worker is an employee or an independent contractor. Some of these additional factors include how integral the services of the worker are to the business and the ability of the worker to have a business outside of the services they are hired to provide.
The IRS provides a right-to-control test (formerly known as the 20-factor test) to determine whether a worker is an employee or independent contractor for federal tax purposes. Generally, the test is divided into three categories: behavioral factors, financial factors, and the type of relationship that exists between the employer and the worker. The test is a guide for examining the entire relationship between the employer and the worker. Essentially, the focus of the right-to-control test is on the degree of control over the worker’s responsibilities and the worker’s abilities to engage in other work.
Most states have adopted a version of the ABC test to determine whether a worker is an employee or independent contractor for purposes of the state’s employment, workers compensation, and unemployment insurance laws. Some states may differ on the language for some of these factors, but the ABC test generally considers three factors:
- How much control and direction the employer has over the worker
- Whether the worker does the regular business of the employer
- Whether the worker does business separate from the work they do for the employer
The ABC test is quite specific and often, under this test, workers are considered employees and not independent contractors. It is important that farmers markets refer to state employment and labor laws to determine the most appropriate factors to consider in classification.
Consider the following hypothetical example:
- Farmers Market A hired Manager B to manage its weekly farmers market.
- Farmers Market A’s board spent two weeks training Manager B to manage the market according to its 30-page manual.
- Among other duties, the board trained Manager B to draft an email with 10 specific categories of information to market vendors and customers, get approval from the board for the draft, and then send the approved email to market vendors and customers three days before market day each week.
- The board also trained Manager B to draft a report with 10 specific categories of information to review with the board three days after market day each week.
- Manager B spent close to 40 hours a week working on the email, report, and the other duties the board assigned them.
Under the economic realities test, the IRS 20-factor right-to-control test, and the ABC test, Manager B likely is an employee. Farmers Market A exercises the level of control that characterizes an employment relationship. Even if Farmers Market A and Manager B believe and want them to be an independent contractor, based on the fact that Farmers Market A has significant control over the way they perform their duties, they are likely an employee.
Proper classification is a good risk management practice and should be considered before hiring a market manager. This is an opportunity for a farmers market to decide how much control it wants over how the market is managed. Being clear about a market manager’s classification before hiring can lead to better working relationships within the market and allow the market to focus on the goals it has for the market and community.
If a farmers market realizes that a market manager whom it treated as an independent contractor is actually an employee, the farmers market must comply with employment and labor laws. Any taxes due should be paid, and employment and labor laws should be complied with. The IRS offers a program called the Voluntary Classification Settlement Program, a limited amnesty program to help entities that willingly wish to properly classify their workers reduce their liability for payroll taxes, interest, and penalties.
If a farmers market wants to change their market manager from an employee to an independent contractor, the market should proceed cautiously to reduce the level of control it exercises over the market manager and make any other changes necessary to ensure there is no employment relationship under any of the tests. Additionally, the farmers market cannot fire the market manager from being an employee just so that they may later become an independent contractor.
- Proper employment classification of market managers is important to avoid the risks of employment and labor law violations.
- Proper employment classification is purely fact-based. The facts surrounding the work and how the work is done are legally relevant, rather than what the parties call their relationship. Titles do not matter; facts do!
- The economic realities test is the legal test that determines whether a worker is an employee or independent contractor for federal employment law purposes.
- The right-to-control test is the legal test that helps determine whether a worker is an employee or independent contractor for federal tax purposes.
- Farmers markets should look to their state employment and labor laws to understand what test their state uses to determine whether a worker is an employee or independent contractor.
Employment Classification Implications
Many farmers markets discover at some point that their volunteers, interns, and independent contractors are actually employees under the law. What does this mean? This means the market is obligated to follow all employment laws. The section below discusses the requirements of three aspects of employment law.
Employment Law Obligations and Risks
Generally speaking, every employee must be paid at least the minimum hourly wage under state law. In some states, farm operations are an exception to this rule. This exception does not extend to farmers markets. Farmers markets are regular businesses that must follow minimum wage rules. Nonprofits are also held to minimum wage requirements and nonprofit employers must pay their employees at least the minimum wage, just like for-profit businesses.
Workers’ compensation is a program that provides coverage for individuals injured in the course of employment. It works much like an insurance policy. The employer pays the premiums and injured workers are eligible to make claims for coverage. Workers’ compensation programs are established by state law, and the procedures for purchasing and using workers’ compensation are set by statutes and regulations.
The original purpose of workers’ compensation was to protect employers just as much as employees. Prior to the creation of workers’ compensation programs, employees who were injured could sue their employers for the unsafe working conditions that caused their injuries. Employers had to spend a lot of money to defend themselves in lawsuits or deal with unpredictable outcomes and jury awards. Workers’ compensation solves this problem faced by employers. Now, where workers’ compensation is available, an injured employee is prohibited from suing his or her employee regardless of the circumstances that caused the injury. In exchange, businesses must provide safe working conditions. These conditions are regulated through the Occupational Safety and Health Act rather than through individual lawsuits, by and large.
Nearly every business and nonprofit is required to carry workers’ compensation coverage. Some states have limited exceptions for small businesses or nonprofit businesses. Workers’ compensation is different in each state, and each farmers market will need to investigate obligations in their own state. State departments of labor and private insurance agents are good sources of more information.
Unemployment insurance is a tax collected by the government from employers through the payroll process. The business is responsible for paying this tax, not the employee. The money collected goes into a fund to compensate workers who have lost their jobs through no fault of their own. Both the federal government and the states run unemployment insurance programs. The amount of tax paid by a business depends on several factors. The current resources of the total fund and the level of unemployment at the time are major factors. An individual employer’s history also affects the business’s tax rate. Businesses whose former employees utilize the unemployment insurance program pay a higher tax rate. Generally, all businesses including nonprofits must pay unemployment insurance tax. Small farms are not required to pay for unemployment insurance, but this exception does not extend to farmers markets.
The Small Business Administration (SBA) helps businesses understand how to comply with employment laws, and they have offices throughout every state. (Find one near you at www.sba.gov.) Of course, state departments of labor and employment are also good resources.
Risk Management Tools
Governance does not provide an effective risk management tool for the risks of an employment law violation. An LLC, corporation, nonprofit corporation, or cooperative can typically insulate market owners’ personal assets from business liabilities. But in many states, business owners or directors can be held personally responsible for the failure to secure workers’ compensation or comply with other employment laws, even if the business is incorporated. Assets belonging to the business itself are always available to satisfy business liabilities.
To learn more about Governance as a risk management tool, click here.
Insurance is not available to manage the risks of noncompliance with employment laws. Insurance is available to cover the costs of defense or liability in an employment practices dispute, such as discrimination or wrongful termination of an employee. But, such policies do not cover the back wages, back taxes, and penalties levied by governments for minimum wage, payroll tax, or misclassification noncompliance or mistakes.
To learn more about Insurance as a risk management tool, click here.
Solid internal procedures that ensure board members or staff are properly hiring workers can be useful to avoid accidental non-compliance with employment laws. However, in most businesses and organizations, it’s assumed that the person in charge will research and follow the laws relevant to hiring workers. So, it can be difficult to find templates or model internal procedures that directly require it.
To learn more about Market Rules and Procedures as a risk management tool, click here.
Most employment-related laws already have very specific recordkeeping obligations, and failure to keep mandatory records is a separate non-compliance issue by itself. For example, minimum wage laws require that timesheets be kept, and the timesheets generally must state the date and exact hours worked, including any lunch breaks. State departments of labor, attorneys, and local Small Business Administration offices are excellent sources of more information on employment recordkeeping compliance.
To learn more about Recordkeeping as a risk management tool, click here.