In violation of myriad applicable laws, many businesses will often hire workers as independent contractors, rather than employees. The worker classification determination is often made without a thorough analysis of the applicable factors to be used for making the correct classification and without regard to the potential penalties and consequences for improperly classifying an employee as an independent contractor.
As an initial matter, the fact that both the business and worker agree on an independent contractor relationship does not matter – even if the parties enter into a contract documenting such relationship. There are various worker classification tests and factors under federal and state laws, of which a full explanation is beyond the scope of this article, but the primary focus areas are the degree of control that the business has over the worker and the degree to which the worker is economically dependent upon the business.
A common reason that a business would wish to classify a worker as an independent contractor is to avoid the costs associated with hiring an employee. A business is not required to withhold income tax, pay social security and Medicare taxes, pay unemployment compensation taxes or provide worker’s compensation insurance for independent contractors. Independent contractors are not subject to minimum wage or overtime pay requirements. Moreover, independent contractors are not eligible to participate in employer sponsored health plans and retirement plans.
Such cost savings, however, are miniscule and insignificant compared to the potential penalties and related consequences of misclassifying a worker as an independent contractor. The Internal Revenue Service may pursue monetary penalties that include being subjected to as much as 41.5% of the worker’s wages going back 3 years. If the IRS thinks you intentionally misclassified workers, they can seek a criminal conviction that may include jail time. In addition to federal and state back taxes and penalties, the business will also owe state unemployment taxes and unpaid worker’s compensation premiums, and may owe unpaid overtime or minimum wages, medical expenses and unpaid vacation and sick pay.
Government enforcement, however, is not the only risk. Large companies that use independent contractors to supplement their regular workforce or that operate on an independent contractor business model (such as Uber) are increasingly being targeted in class-action lawsuits brought on behalf of workers who are allegedly misclassified as independent contractors. Certain corporate officers may be held personally liable for plaintiff awards in such lawsuits, as well as for the employment taxes and penalties described above.
In addition, recently terminated workers and workers injured on the job are likely to retain attorneys and sue for unpaid overtime or for payment of medical expenses on the ground that they should have been classified as employees, not independent contractors. Note that when an individual files a claim for Worker’s Compensation and the state board rejects the employer‘s defense that the worker was an independent contractor, if the employer does not have Worker’s Comp insurance, it will not only be hit with a penalty for failing to maintain insurance but will also be ultimately liable on the underlying Worker’s Compensation award to the individual.
Federal and state authorities are actively and aggressively pursuing enforcement actions related to worker misclassification. Accordingly, businesses should thoroughly review their independent contractor arrangements. Should you have any questions or require assistance with the proper classifying – and the appropriate documenting of same – of your business’s workers, please contact Mauro Viskovic at 516-751-6537 or firstname.lastname@example.org.
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.
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