The Government Accountability Office estimates approximately 3.5 million workers are improperly classified every year. Improperly classifying employees is a common error, but one that could impose liability for both employers and employees. Improper classification of employees occurs when an employer inaccurately classifies an employee as an independent contractor regardless of whether that classification was intentional or not.
When an employer misclassifies a worker as an independent contractor instead of an employee, the worker’s rightto various employment benefits and employer contributions may be affected. Employers are required to withhold employment taxes and may be required to provide health benefit programs for their employees. Additionally, employees are entitled to safety protections and worker’s compensation benefits in the event of accidents and injuries suffered in the course of their employment. In contrast, independent contractors are generally not afforded any of these benefits and are solely responsible for paying both state and federal taxes.
It is imperative that an employer thoroughly analyze an individual’s employment status to avoid a misclassification. The Internal Revenue Service (IRS) provides several factors to consider when determining a proper classification. The following outlines some of those key factors to consider:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
- The worker must comply with employer’s required work schedule, place and manner of completing work
- The worker must perform the work specified instead of having the option to substitute other worker’s performance to complete the work.
- The worker is required to work, or be available to work, on a full-time basis.
- The worker receives a regular paycheck or payment based on a time period such as hourly, weekly or monthly.
- The worker’s expenses, such as travel or business expenses, are reimbursed by the employer.
- The worker uses the employer’s tools, material or equipment to perform the work.
- The worker has the right to quit without incurring liability for failing to complete the work requested.
An employment classification will depend on the entire relationship and will not weigh exclusively on one factor or another as dipositive. Further, factors which are relevant in one situation will not necessarily be relevant in another situation and therefore each worker’s situation should be evaluated individually.
The consequences of misclassifying a worker can be costly for an employer. A business may be selected by the IRS for an employment tax examination to determine if certain workers were correctly treated as independent contractors. If an employer classifies an employee as an independent contractor without any reasonable basis, the employer may be held liable for past employment taxes for that individual, as well as other monetary penalties. However, the IRS may provide relief to an employer under certain conditions. If an employee is incorrectly misclassified as an independent contractor under a reasonable basis and the employer treated all other similar employees in the same manner, the employer may qualify for employment tax relief under IRS Section 530 Employment Tax Relief.
If you are an employer, employee or independent contractor and want to evaluate your current employment classification, contact the Law Office of Rosano, P.C. Our staff has experience in determining employment classifications, in a variety of industries and employment contexts, and can provide legal advice on how best to formulate your employment relationships to comply with all state and federal law.
