- Featured Businesses
- Work Life
The Department of Labor and the Internal Revenue Service have been quietly going full tilt to find employees misclassified as independent contractors. These two agencies have determined that “[t]he misclassification of employees as something other than employees, such as independent contractors, presents a serious problem … to the entire economy.” The little-known “Misclassification Initiative” is an interagency agreement to go after employers to “reduce the incidence of misclassification” and to “help reduce the tax gap.”
Most workers and businesses think they know the differences between “independent contractors” and “employees,” however the truth is that it is way more complex than it would seem – and the stakes can be very high
From the worker’s perspective, being an “employee” means that:
On the other hand if a worker is an “independent contractor”:
Obviously, from a business’s viewpoint, paying its workers as “independent contractors” offers the benefits of no income tax withholding or employment taxes, along with additional benefits such as: no liability for the actions of its employees; no federal and state discrimination laws which cover employees; and no fringe benefit, pension, retirement, or other plans.
The government typically wants every worker to be an “employee.” Employers have a duty to withhold taxes, which allows the government to get its share faster and more reliably, and it makes collecting all the different taxes out there a lot easier. It also means that if a worker’s taxes don’t get paid, they can go after the worker and the employer – including the business’s managers, supervisors and owners.
Businesses take a huge risk when they classify a worker performing services as an “independent contractor” instead of an “employee,” and if a court determines that a misclassification occurred, the business and its owners, managers or other responsible parties can be liable for:
With the passage of SB 459, California’s Labor and Workforce Development Agency can fine a business and its owners or managers (and even some consultants) from $5,000 to $15,000 per violation for “willfully misclassifying” an employee. The exposure increases to $25,000 per violation if there is a “pattern and practice” of “willfully misclassifying” workers.
So how do you make the call between “independent contractor” and “employee”? A recent case may shed some insight. The issue that came to the court was whether the company failed to pay overtime to three workers who performed road crew services (setting up and breaking down displays) at the company’s various events.
The workers told the court that their working relationship with the company was relatively permanent; that they worked hundreds of hours of uncompensated overtime over several months; and that company exercised strict control over their schedule and day-to-day activities while out on the road. The company claimed however that the individuals worked on a job-by-job, independent contractor basis; that they got paid more than they could have earned as employees; and that they had a great amount of autonomy regarding when they worked and how they completed their work.
The court determined that the company had wrongfully classified them, and as such owed them unpaid overtime as “employees.”
The truth is that independent contractor vs. employee is often a blurry line. The courts and governmental agencies use a number of criteria or test to compare the degree of control exerted by the company to the degree of independence retained by the worker, which can often be distilled down in three ways:
When considering whether to classify a worker as an independent contractor, your answers to these three questions will determine whether that individual is a bona fide contractor, or instead, is an employee. Generally, the more control an employer exerts over what, when and how work is performed, the more likely a worker would be classified as an employee.
When in doubt, you should consult an attorney or other professional well versed in this area of the law. With all the hidden costs of having “employees,” the temptation to overlook the complexities and ambiguities will be great. The safer course is to err on the side of caution.