Companies who use freelancers, contractors, consultants, day laborers or any other workers who are not categorized as employees must exercise extreme caution. The NYS Labor Department and other agencies have stepped up their enforcement efforts to investigate companies’ practices and whether workers are properly classified in all industries. An innocent error can lead to a multitude of problems for businesses including but not limited to a class action lawsuit and monetary damages in the form of unpaid payroll-related taxes, unpaid overtime wages, and failure to provide employee benefits (vacation pay, health insurance, etc.) Companies should carefully examine a worker’s duties and determine the proper employment characterization before work is commenced. There are different rules that apply to employees and contractors. In general, employees are issued a W-2 tax form, provided with Wage Theft Prevention Act Notices and paid accordingly to applicable federal and state labor laws. Conversely, in general, contractors are issued a 1099 tax form, have some expertise, and are not supervised or controlled by the business.
One of the industries that has come under particular scrutiny is the construction industry. The Department of Labor created a “Separate Business Test” to determine whether a business can be properly classified as a contractor. In order to meet the definition of a contractor the business must meet the following criteria:(1) be performing the service free from the direction or control over the means and manner of providing the service subject only to the right of the contractor to specify the desired result; (2) not be subject to cancellation when its work with the contractor ends; (3) have a substantial investment of capital in the entity beyond ordinary tools and equipment and a personal vehicle; (4) own the capital goods and gain the profits and bear the losses of the entity; (5) make its services available to the general public or business community on a regular basis; (6) include the services provided on a federal income tax schedule as an independent business; (7) perform the services under the entity’s name; (8) obtain and pay for any required license or permit in the entity’s name; (9) furnish the tools and equipment necessary to provide the service; (10)hire its own employees without contractor approval, pay the employees without reimbursement from the contractor and report the employees’ income to the Internal Revenue Service; (11) have the right to perform similar services for others on whatever basis and whenever it chooses; and (12)the contractor does not represent the entity or the employees of the entity as its own employees to its customers. The entity must meet all 12 criteria to be considered a separate business entity otherwise it may be considered an employee.
If you have any questions about the classification of your workforce, contact our Award Winning NY Misclassification Lawyer at (800) 893-9645. Proactive action can be valuable in these cases.
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