Employee or Independent Contractor: Why It Matters?

From JDSupra Business Advisor, Christopher Boman and Boris Sorsher write about the liability for misclassifying workers as independent contractors when they should be considered employees and they review the liability and discuss the test for determining whether a worker is an employee or independent contractor.  They write:

Liability for Misclassifying Employees

Misclassifying employees has very serious consequences. Failing to properly classify workers can subject the employer to administrative enforcement actions, civil penalties, fines, unpaid wages, class-action and representative-action lawsuits, and the assessment of back taxes, premium payments, and related penalties. In addition, misclassification in certain industries, such as general contracting, or certain states, such as California, could result in discipline or even license revocation from state licensing boards.

Some employers may be tempted to misclassify workers because they believe that the government is unable or unwilling to audit or fine them due to a lack of resources. While this may have been true in the past, in recent years a number of state and federal agencies have begun to aggressively police this issue.

Moreover, because wage and hour laws in many states allow attorneys to recover fees in a private lawsuit filed against employers who misclassify workers, attorneys are now highly motivated to pursue claims on behalf of independent contractors either on an individual or class basis. When these claims are filed as class actions, every worker you hired as an independent contractor over the past few years may join in and the resulting damages can easily bankrupt a company.

Although the consequences of misclassifying employees can be disastrous, it’s possible to avoid liability and lawfully classify service providers as independent contractors. In order to do so, you must be able to show that they satisfy the tests for determining independent contractor status.

Various Independent Contractor Tests

There are a number of different tests used by the Internal Revenue Service (IRS), state agencies and courts, federal courts, and the U.S. Department of Labor to decide if the service provider is a genuine independent contractor. While the tests are all slightly different they contain three key similarities.

First, all of the tests use multiple factors to determine if someone is an employee or a genuine independent contractor. Second, the tests all agree that the existence of an independent contractor agreement will not on its own establish that someone is an independent contractor. Third, they all focus on the level of control that the employer has over the worker. If the employer has significant control over the individual, including how services are performed and treats that individual as their employee, then that individual is most likely an employee. But if the individual has a great deal of autonomy and is not subject to the control of the employer, then the person likely will qualify as an independent contractor.

In conducting their independent contractor tests, courts and government agencies ask a number of key questions. No single question will decide the issue but the answers to each of these questions will tilt the scale in favor of a finding that the individual is an independent contractor or an employee. These questions include:…”

To read the various questions and the rest of the story, see Employee or Independent Contractor: Why It Matters?

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