Contractor or Employee? Misclassifying Workers Can be Costly
Updated: Jul 3, 2019
Ride-hailing services Uber and Lyft have been making headlines over the past few months, defending themselves in class-action lawsuits filed by drivers. What is at stake in these legal cases is whether or not the drivers should be classified as employees or independent contractors – an issue that is becoming increasingly important for businesses of all shapes and sizes.
Worker misclassification – the practice of illegally labeling employees as independent contractors – has been on the rise as more and more people are choosing the flexibility of working as independent consultants or contractors. This trend has been driven simultaneously by the loss of full-time opportunities as a result of the recession and advances in technology that facilitate flexibility and mobility. A study conducted by the software company Intuit predicts that 40 percent of the U.S. workforce is expected to be independent contractors by 2020.
According to the Economic Policy Institute (EPI), workers misclassified as independent contractors can be found in nearly every industry and job sector, from in-home caregiving and construction to technical workers and the trucking industry. While some businesses misclassify their workers in error, others misclassify their employees intentionally in order to reduce costs.
For example, companies that misclassify employees as contractors can avoid paying minimum wage, overtime and payroll taxes such as Social Security and unemployment insurance, as well as incurring costs associated with workers’ compensation and health insurance. The impact on those who are misclassified can be devastating, and federal, state and local governments can sustain substantial revenue losses as well.
Employers often are able to avoid being penalized for classification violations due to a combination of inadequate laws and a lack of enforcement of the protections that exist. However, the risks are significant and the legal consequences can be costly. According to the U.S. Small Business Administration (SBA), if your independent contractor is discovered to meet the legal definition of an employee, you may be required to:
Reimburse them for wages you should have paid them under the Fair Labor Standards Act, including overtime and minimum wage
Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment
Pay any misclassified injured employee’s workers' compensation benefits
Provide employee benefits, including health insurance, retirement, etc.
Although independent contractor status is sometimes difficult to define, it is essential to understand the difference and ensure that your workers are properly classified. The IRS and many states have adopted common law principles to define whether a person is an independent contractor or an employee that generally focus on the amount of control an employer has over the work being done. In addition, work that is temporary may imply independent contractor status.
Here are a few key distinctions to consider when hiring:
An independent contractor typically:
Operates under a business name
Advertises his/her business' services
Invoices for work completed
Has more than one client
Has his/her own tools and sets his/her own hours
Performs duties directed or controlled by others
Is given training for work to be done
Works for only one employer
Works for an entity or person who controls the “manner and means” of the job
The New Jersey Department of Labor and Workforce Development provides state-specific guidelines for employers as well as a questionnaire to aid you in collecting all the information necessary to properly classify the individuals you hire.
Avoiding worker misclassification requires companies to establish and adhere to standardized policies and keep records up to date. Employers who work with independent contractors should be prepared in the event of an audit, and ensure that they have the documentation in place to support their positions
Whether you are starting a business or staffing for a particular job or project, it is critical to define at the start the exact business relationship between you and your employees. If you have questions about the status of your workers, we can help. Please contact me at 973-509-8500 x213 or email: LFarber@LFarberLaw.com.
The contents of this writing are intended for general information purposes only and should not be construed as legal advice or opinion in any specific facts or circumstances.