Considerations When Switching Independent Contactors to Employees

From JDSupra, Scott Leah discusses factors to consider if/when a company has an independent contractor that might be converted to an employee. Scott writes:

Federal and state governments are engaging in heightened scrutiny of employer-independent contractor relationships. There is a concern that many workers have been misclassified as independent contractors (“IC”) when they are actually employees. Along with that heightened scrutiny, many agencies are also adopting more difficult tests a worker must pass to qualify as an IC. As a result, employers have to consider whether or not to switch any ICs to employees. In making that determination, the employer needs to consult with their legal counsel as to any IC tests that may apply to that worker. However, there are other factors to consider as well.

The employer needs to understand and consider all of the costs it may incur once the worker is an employee, so that it can properly determine a compensation level for the employee that will roughly equal what the employer was paying when the worker was classified as an IC. Typical factors are such things as the fact that the employer will have to start paying both halves of the social security tax, will have to pay unemployment compensation tax, and will have to provide workers compensation coverage. The employee may also become eligible for employee benefits such as health and dental insurance, paid vacation, sick, bereavement, and holiday leave, and pension or 401K benefits. Employers should also review their plans to make sure the IC turned employee does not have a claim for retroactive benefits.

Another consideration is whether switching some ICs to employees will put the employer over certain numerical thresholds, such as:

  1. 15 or more employees makes Title VII (the employment discrimination law), the ADA (the Americans with Disabilities Act), GINA (Genetic Information Nondiscrimination Act), and the Pregnancy Discrimination Act apply.
  2. 20 or more employees makes the ADEA (Age Discrimination in Employment Act) and COBRA (Consolidated Omnibus Budget Reconciliation Act) apply.
  3. 50 or more employees makes the ACA (Affordable Care Act) and FMLA (Family Medical Leave Act) apply.
  4. 100 or more employees makes the WARN (Worker Adjustment and Retraining Notification) Act apply and may require the filing of annual EEO-1 reports.

As you can see, deciding whether to switch an IC to an employee (or whether to initially hire a worker as an IC or an employee) and ensuring that the business is following the law and understands the costs and ramifications of any classification decisions can be a very complex process.

Source: Considerations When Switching Independent Contactors to Employees | Tucker Arensberg, P.C. – JDSupra

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