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Employee or Contractor?
Avoid Pitfalls When Hiring Temporary Crew
The reasons why aircraft operators need temporary cockpit or cabin crew vary as widely as operator types. An absent crewmember may be vacationing; family emergencies may call them away; recurrent training and educational opportunities occasionally pull flightcrew away from their duties. Regardless of the reason, temporary crewmembers can fulfill operators’ needs to keep their aircraft flying despite shortages of full-time personnel.
For operators who use temporary crews, understanding, correctly classifying and accounting for temporary staff as either “contractor” or “employee” carries legal and financial implications.
Which Is It? Review Common Law Rules
The Internal Revenue Service (IRS) common law rules, previously known as the “twenty common law factors,” are one tool that employers can use to help properly classify workers. The three main categories of evidence that the IRS considers are:
- Behavioral control: These factors focus on instructions and training given to the worker. For example, does the company control or have the right to control what the worker does and how he or she performs the job?;
- Financial control: These are facts showing whether the business has a right to control the business aspects of the worker’s job, including expense reimbursements, how the worker is paid and who pays applicable taxes and other withholdings;
- The type of relationship: Which type of contract exists, if any; does the worker receive benefits; and is the arrangement permanent or temporary?
Specifically in the case of pilots, managers must closely review the “behavioral control” factors discussed above, as in many cases the aircraft owner or operator can exert a significant degree of control over the pilot. As these categories illustrate, classifying a pilot as an independent contractor requires a specific set of facts and is not without potential risks.
Other rules that apply to these situations include state statutes and regulations covering labor and worker’s compensation coverage, state and federal laws governing labor and tax treatments, unemployment insurance, and Social Security and Medicare withholdings.
Within the language of these requirements lurk innumerable ambiguities in application and interpretation that challenge the inexperienced and are daunting even for the most seasoned operators.
Although a worker’s status as an employee or contractor has nothing to do with the Federal Aviation Regulations, operators hiring temporary crewmembers must remember to comply with the applicable Federal Aviation Administration rules regarding currency, type-ratings, other aircraft qualifications, and compliance with and qualification under a commercial operation’s operational specifications.
Risks of Non-Compliance
Improperly applying these various rules and regulations can cost a company dearly. Some operators have been hit with substantial fines and penalties after government audits discovered innocent, improper categorizations of employees as contractors – not to mention administrative fees that can accumulate from an audit, such as attorney and accountant expenses. Furthermore, company employees will have to divert attention from their primary job responsibilities. It is not unheard of for the administrative costs of an investigation into the misclassification of workers to stretch on for months or even years.
“For these reasons, we suggest two things,” said Scott O’Brien, NBAA’s senior manager, finance & tax policy. “First, we’ve created an online guide outlining best practices for when you need temporary crew resources, NBAA Best Practices for Utilizing Independent Contractors, available to Members on NBAA’s web site (see For More Information at the end of this article).
“Second, we urge operators to consult human resource professionals and employment lawyers in the review of the reference, and to take steps, as necessary, to ensure compliance with the applicable laws and regulations related to classification of workers.”
The potential for serious, costly problems is real; misinterpreting a regulation can create further issues for the operator and, potentially, the temporary crews themselves.
Despite the potential consequences, misclassification of contractors remains relatively common and is often done innocently, observers note.
Liability Factors to Consider
“This industry for so many years has functioned by just calling Joe, who works for a different company on the same airport flying the same type of airplane, a ‘contractor’ – and they’ve paid him as an independent contractor,” observed Margaret Vernet, founder and president of Corporate Aviators Inc., an “employer of record” professional service corporation providing statutory compliance relating to the employment of supplemental, contingent business pilots and flight attendants. (An “employer of record” is a firm that hires individuals as its own employees and then rents those individuals to other companies in need of their particular skills.)
But “considerable liability factors” exist for flight departments that just call Joe when they need some help, she said. “That’s why we worked so long and hard writing NBAA Best Practices for Utilizing Independent Contractors,” explained Vernet, one of the NBAA Members who served on the NBAA Employment Issues Working Group that produced the guide. There are indeed a number of liability factors to consider, including:
- Does the contractor carry insurance in case the contractor contributes to an accident that damages the aircraft or causes bodily injury?
- Who pays employment-tax obligations, the contractor or the company that hires the individual?
- Who exercises “direction and control” (the power to dictate how a job is done)?
Some operators have been hit with substantial fines and penalties after government audits discovered innocent, improper categorizations of employees as contractors.
“Independent contractors really should come with their own armor of liability insurance,” she stressed. The company’s exercise of “direction and control,” she continued, makes the temporary crew more like an employee than a contractor.
Still, the problem occurs that a temporary worker is misclassified as an independent contractor but is in fact an employee of the company in the government’s view.
The Audit Threat
Before Dave Weil founded Flight Department Solutions, LLC, he served as CFO of TAG Aviation and Solairus. Weil contributes to NBAA’s Employment Issues Group the perspectives he gained as one who hired contract flightcrew at TAG. “We used a very large number of contractors,” he said.
The practice came under the audit microscope when, as he put it, “one of our contract flight attendants filed for unemployment, thinking she was an employee.”
That audit cost the company considerable money and changed how TAG filled temporary crew needs; they began hiring former contract crewmembers as part-time employees. “That worked fairly well,” he said.
Not that the approach was without its own issues. Part-time employees cost less, for example, but require more time up front on paperwork, clearances, qualifying them for the aircraft and so on, Weil explained. Also, sometimes a pilot might not want to be a part-time employee, which could be complicated if you really needed that person, he said.
Make It Simple: Use an Agency
While the contractor versus employee issue is complicated, it doesn’t have to be if a company applies the same approach to temporary crew staffing as it does when temporarily filling positions in other departments, from accounting to IT to janitorial: employ a company that provides workers with specialized skills – flightcrew, in this case.
Independent contractors really should come with their own armor of liability insurance. Margaret Vernet Founder and President, Corporate Aviators Inc.
The solution may be a larger employment agency with multiple crews available for a range of aircraft, or a small company composed of an individual or two who provide such services. As long as the agency acts as an employer of record service and meets the employer tax obligations, provides rights and protections to temporary workers, and meets the tests of direction and control, potential problems can be avoided.
The downfall: cost – but perhaps one that is well worth it. “There was more paperwork for us than contracting for someone through a pilot-staffing company,” Weil said. “It’s simpler but more expensive to use a staffing company. They’re taking on the paperwork and qualifying the employee.”
A Pilot’s Guide to Do-It-Yourself Contracting
Margaret Vernet, president of Corporate Aviators Inc., recognizes the appeal of working as an independent contract pilot or cabin crewmember.
For pilots or flight attendants who prefer to remain independent, Vernet offered some seasoned advice: “The first thing they should do is incorporate themselves; the second thing they should do is buy a whole suite of insurance for the work they’re going to be doing.”
Contractors can be sued for an accident or incident, and a company’s workers’ comp and aircraft liability policies generally exist to protect the companies, not contractors.
“Expect flight departments to require a certificate of insurance that proves you carry the requisite insurance to protect your own well-being and assets and that of the company to which you’re providing services.”
Other tips to help increase the odds of success: a good accountant, not just accounting software; a system to track expenses and invoices; and a lawyer to review company papers, plus any contract forms used – before actually entering into those contracts.
Beyond Logbooks and Checkbooks
The size of the market for temporary flightcrew is anybody’s guess, but the field is big enough to support several companies providing temps full-time and to provide revenue streams for other companies offering related services – aircraft management, for example, said David Weil, founder of Flight Department Solutions, LLC.
Weil said that when he was with TAG, “The goal was to have permanent fulltime staff assigned to an account; but there was a catch – it was up to the owners to decide how many pilots they wanted... some wanted no contract pilots, others wanted several.”
And, Weil noted, regardless of the provider, the need exists to assure regulatory compliance of the temporary pilot: appropriate ratings, currency, medical and insurance, of course; plus substance-abuse testing and security and background checks – all of which vary by the operation type.
And these factors may apply regardless of the classification – contractor or employee.
For More Information
Read an Ask the OSG article, titled “How Does NBAA’s New Independent Contractors Guide Help Operators Avoid Tax Pitfalls?” in the May/June 2012 edition of Insider.
Get the new Best Practices for Utilizing Independent Contractors guide at www.nbaa.org/contractors.