CRACKDOWN: Misclassifying Employees as Independent Contractors
With mounting deficits and economic challenges facing both the federal and state governments, expect to see a crackdown on companies that misclassify employees as independent contractors. The 2010 budget of the Obama Administration presumes that the effort will result in approximately seven billion dollars in additional revenue over the next decade. Several states are stepping up their enforcement efforts in order to improve their bottom lines.
By having independent contractors, rather than employees, companies can avoid paying social security, Medicare, and unemployment insurance taxes. They also can hold down their costs because independent contractors are not eligible for employee benefits – which can easily run 25% or more of an employee’s base compensation. Independent contractors are ineligible for overtime and unemployment compensation. And they are not protected by anti-discrimination laws or laws designed to protect organized labor.
Simply “dubbing” a worker an independent contractor, of course, does not make it so. In the eyes of a number of government agencies, whether or not an individual is an independent contractor depends on the nature of the relationship between the business and the worker. Different federal and state agencies use various legal tests for determining a worker’s status. There is no single controlling factor, although one common thread runs throughout: the more the business has the right to control when, where and how assigned tasks are accomplished, then the greater the chance that the worker will be considered an employee. There is no bright line of just how much control is sufficient to cause a worker to be classified as an employee as opposed to an independent contractor. Rather, each case depends on an analysis of its own particular set of facts.
Companies that have misclassified workers can pay dearly for their mistakes, including back payment of taxes, providing retroactive benefits (e.g., vacation pay and 401(k) contributions), making up payments for failure to pay overtime, and tough financial penalties.
There are a number of measures a company can undertake to protect against allegations of misclassification. They include controlling only the result (not the means) of assigned work, entering into a written independent contractor agreement, paying workers a flat fee, ability of workers to market to and handle assignments/jobs for other companies, having workers pay their own business expenses, keeping independent contractor files separate from employee files, requiring that independent contractors submit invoices prior to payment, and verifying that workers have purchased insurance and are doing other things that support independent contractor status, such as having business cards and yellow page listings. When in doubt, consult legal counsel for more guidance.
Jon Vegosen is a founding member of Funkhouser Vegosen Liebman & Dunn Ltd. and has more than 33 years experience practicing law. He is nationally recognized for his work in labor and employment relations and is sought after as an author and spokesperson on labor and employment issues.
Tags: employees, employment law, Funkhouser Vegosen Liebman & Dunn, FVLD, independent contractors, Jon Vegosen, law, Legal, misclassify
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