Independent Contractors: Problem or Solution?
Many employers classify some workers as independent contractors as a tactic to save money. Even though most independent contractors earn higher per-hour pay than a traditional employee, the employer does not have to pay Social Security and Medicare taxes or workers compensation and unemployment compensation premiums. Also, independent contractors receive no employer-provided benefits. Altogether, these expenses can increase payroll costs up to 30 percent.
But an independent contractor is not a label that can apply to just anyone. According to the Internal Revenue Service, "an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done." A person who must come into a place of business at scheduled times to do tasks in a specific way generally cannot be classified as an independent contractor.
A business that misclassifies workers as independent contracts can be liable for all of the unpaid taxes and premiums and for compensation for denial of overtime and benefits. This does not include any civil penalties that might be levied. We also have seen a number of employers face personal liability for workplace injuries that would have been covered by workers compensation for traditional employees.
There are several factors that indicate whether a worker is an independent contractor and most come down to a question of control. According to the Equal Employment Opportunity Commission, situations that indicate a worker is an employee and not an independent contractor include:
1. The employer controls when, where and how a worker performs a job.
2. The work does not require a high level of skill
3. The employer furnishes the tools, material and equipment.
4. The work is performed on the employer's premises.
5. There is a continuing relationship between employer and the worker.
6. The employer has the right to assign additional projects to the worker.
7. The employer sets the hours of work and the duration of the job.
8. The worker is paid by the hour rather than on an agreed cost of doing a particular job.
9. The work performed by the worker is part of the regular business of the employer.
10.The employer can discharge the worker.
This list is not exhaustive. Other factors may determine whether an employer-employee relationship exists.
Federal and state agencies are cracking down on the misclassification of workers. The Payroll Fraud Prevention Act was introduced in the Senate late last year and is designed to curtail the intentional misclassification of employees, which would be a new federal labor offense. Among other things, the law would impose triple damages for willful violations of minimum wage or overtime laws where the employer has misclassified a worker.
Also, the law will require all employers, even those that do not use independent contractors, to provide a notice to all employees that they have been classified by the business as either an employee or non-employee. The notice would direct workers to the U.S. Department of Labor for information about their rights as employees and urge them to contact the Labor Department if they suspect they have been misclassified. Failure to provide such notices could result in a fine of $1,100 per employee. The fine rises to $5,000 per employee for a second violation.
Employers will be facing increased scrutiny in their classification of workers. If you employ independent contractors, you should contact us for a review of your policies, a step that could help you avoid problems in the future.
Bellas & Wachowski