Businesses today use diverse workforces to accomplish their goals, including full- and part-time employees as well as independent contractors. The trouble is, many business misclassify employees as independent contractors and end up in trouble.
According to the American Business Bureau, “By some estimates, contingent or temporary workers could reach 30-50 percent of the U.S. workforce. A federal study contends that an estimated 3.4 million employees are classified as independent contractors when they should be reported as employees. A 2009 study by the treasury inspector general estimated that misclassification costs the United States $54 billion in underpayment of employment taxes and $15 billion in unpaid FICA and unemployment taxes.”
Employee vs. Independent contractor
Let's start with a definition of that will help clear up the difference between and employee and an independent contractor. Some of the questions you might ask yourself to distinguish and employee versus a general contractor include:
• Can the person choose to work without fear of losing employment?
• Can he or she be discharged or dismissed at any time?
• Does the person supplies his or her own equipment, materials, tools or computer?
• Does the person control the hours they work?
• Do you or the person supply all materials needed to complete the job?
• Is the work temporary or permanent?
Here are a couple examples of independent contractors:
• A web maintenance person who works a few hours a month on your behalf on your website but has many other clients.
• A freelance bookkeeper who works a few hours a month to handle your billing and budgeting and who works on behalf of many other businesses.
Here are a couple of examples of employees:
• A full time sales person who hours that you set – 30 hours per week or more – selling goods or services on behalf of your business and does not work for other employers.
• An office manager who works more than 30 hours per week and does not provide these services to other employers.
Keep a few things in mind.
• There is no such thing as a 1099 employee.
• An employee who is given a W-2 must undergo screening under the Legal Arizona Workers Act and complete an I-9.
• Independent contractor status is difficult to prove these days.
• One of the greatest risks is that a contractor will be injured working for you and claim you as his or her employer.
The trouble with misclassifying workers is that employees are often denied access to critical benefits and protections they are legally entitled to, including minimum wage, overtime compensation, family and medical leave, unemployment insurance and safe workplaces. Here's the really tricky part … it also means the IRS and State are receiving lower tax revenues, so they tend to look VERY closely at worker classifications. In fact, the federal government has increased the number of auditors working to weed out these misclassifications and penalties can be severe for businesses found to not be in compliance with the law.
Here are some the recent court cases that show just how severe penalties can be:
• Vizcaino v. Microsoft, which resulted in a settlement of $97 million
• Estrada v. FedEx, which brought a verdict for drivers, $5 million compensation and $13 million in attorneys' fees
Once the federal government gets involved, cases of misclassification can take years to settle. For example, FedEx was under scrutiny for many years before a decision was reached… the IRS found the company misclassified employees, owed $319 million in back taxes and penalties for tax years 2004-2006. The decision was later rescinded but it resulted in plenty of time and money lost for the company.
If you are interested, you can read more about the issue at:
Fair Labor Standards Act “Suffer or Permit” Standard
Keep in mind that these laws are set in stone, so if you have questions regarding the status of a worker, or are preparing to hire a new worker, talk to an HR professional or a business attorney like me before making any final classifications.