Whether a person is an employee or an independent contractor will depend on the facts of each case. A company’s misclassification can have a significant monetary and tax impact on individuals. Misclassifying employees as independent contractors (“IC”) is on the rise in virtually every of sector of the economy from home health care, construction, delivery services, information technology, internet and telecommunications, marketing specialists, copywriters, physicians, and analysts, just to name a few. The US Department of Labor has reported that 10% to 30% of all employers misclassify their employees as ICs in a cost-cutting move. In fact, the federal government estimates that it is losing over three billion dollars each year in federal income and employment tax revenue from this misclassification.
Generally speaking, an individual is an independent contractor if the employer has the “right to control or direct only the result of the work and the not the means and methods of accomplishing the result.” In determining the degree of control, the courts and federal agencies examine the following factors:
- Do you have an employment contract? How long will your assignment last?
- Does the Company control or have the right to control what you do and how you perform your duties?
- Are the business aspects of your duties controlled by the Company? For example — how are you paid, do you bring your own tools to work, do you bring your own computer, are your business expenses reimbursed.
- Is the work being performed as a regular part of the company’s business?
- Do you require a special skill to perform the duties?
- Are you provided with employee benefits, such require a as a pension plan, vacation and/or sick pay, health plan, insurance, stock options, etc?
In addition, the New York State Labor Law lists criterion in determining whether an individual is an Independent Contractor (“IC”) or an employee. The following are some factors indicating an individual is an IC: having an established business, conducting your own separate advertising, maintaining a listing in the commercial pages of the telephone directory, using business cards, carrying separate liability insurance, maintaining a place of business, paying one’s own expenses, setting or negotiating own pay rate, and being free to hire assistants.
The New York State Labor Law provides that even if your Company claims you are an IC, you could be entitled to unemployment insurance benefits if you are legally found to be an employee. For example, merely filling out a 1099 form or signing a statement claiming to be an IC will not make you an IC if your role qualifies as an employee. Like your right to overtime, you cannot legally waive or sign away this right.
Given the current economic atmosphere, employers are extremely motivated to classify workers as IC’s instead of employees for several reasons. By using classifying individuals as ICs, employers seek to avoid making payments for overtime, minimum wage, payroll taxes, social security, disability or unemployment insurance. Companies also seem to avoid reimbursing workers for business expenses or providing workers compensation insurance. By classifying a worker as an IC, employers try to avoid compliance with most labor and employment laws such as giving ICs the right to form a union and bargain collectively.
Although it is easier to classify a worker as an IC by giving them an IRS Form 1099 instead of a W-2 and making all the required payments, the consequences of misclassifying are quite harsh and can be devastating to most businesses. An employer caught for misclassifying may be liable for years of unpaid federal, state, local income tax withholdings, Social Security and Medicare contributions, unpaid workers compensation and unemployment insurance premiums, unpaid work related expenses, overtime compensation, as well as interest and penalties. For example, Microsoft paid $97 million to settle a benefits case to its ICs who weren’t covered under its stock purchase plan and that amount did not include what it owed the IRS.
Two bills were recently introduced in Congress that target businesses who misclassify ICs. The first one, called the Taxpayer Responsibility, Accountability, and Consistency (TRAC) Act of 2009, would limit the “safe harbor” provisions of the Revenue Act of 1978 which businesses rely on to classify workers as ICs for federal employment tax purposes. The second bill, called the Employee Misclassification Prevention Act, amends the Fair Labor Standards Act by imposing strict recordkeeping and notice requirements on all businesses that use either employees or independent contractors. The Act does not forbid the using of ICs but requires that they be properly classified. The bill imposes fines from $1,100 up to $5,000 per employee for each violation. Additionally, President Obama’s proposed budget for 2011 authorized $25 million to the Department of Labor to crack down on employee misclassification. Given the regulatory environment, it would be wise for businesses to be cautious of how they classify their workers.
If you should have been classified as an employee, you could be entitled to past employee benefits such as paid vacation time, health insurance and overtime compensation. There is a significant difference in how employees and consultants are paid and treated under the law. If you or someone you care about believes that he or she may have been misclassified, our New York Misclassification Lawyers can help you. Call us now at (800) 893-9645 or e-mail us now by filling out the contact information on this page.
Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act, US
Department of Labor
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