If your clients include businesses that employ independent contractors, now would be a really good time to make sure they’re classifying these folks properly: A growing number of lawsuits target the misclassification of workers as independents—when they really aren’t. The issues are complex and the penalties for getting it wrong are stiff. Help sort out your clients this year and get them on the right track for following years.
Employers have a great incentive to list works as independent contractors, says attorney Nick Fortuna, a partner in Allyn & Fortuna in New York, who represents employers. “It’s a lot less expensive to have someone as an independent contractor instead of an employee.”
But local governments miss out on the taxes they otherwise would get, and the misclassified independents are cheated of employers’ contributions toward Social Security, unemployment benefits and workers compensation, he says.
Since the so-called Great Recession, such cases have skyrocketed. “It’s one of the hottest areas in employment litigation right now,” Fortuna says. Misclassification cases have increased 20 percent to 25 percent every year, though that also includes employers who misclassify workers to avoid paying them overtime.
Companies typically are caught when states review business filings and notice insufficient numbers of employees. “The liability is significant,” Fortuna says. “There are huge fines, and they’ll have to pay back taxes if they’re caught.”
Here are 10 aspects of employee versus independent contractor status your clients should consider. And consulting with an employment lawyer would be wise, too.
Independent contractors generally control how they do their work. (There are some exceptions for licensed brokers and certain workers who are hired as companions.) Known as "behavioral controls", these refer to situations where a worker given instructions and told what tools and equipment to use, where to buy supplies and services, and in what sequence the work should be done would qualify as an employee, Fortuna says.
If the job requires training, that’s evidence that the worker is an employee.
Is there a significant investment by the worker? Independent contractors typically provide their own equipment.
Is there an opportunity for profits or losses? Employees don’t invest in equipment or take on business risks.
Independent contractors are free to seek additional business or work.
A written contract can give the impression that the worker is an independent contractor. But the employer may not meet any of the other tests for that relationship, Fortuna says. So the mere presence of a contract doesn’t allow a worker to say they are an independent contractor.
Independent contractors don’t get benefits such as vacations, sick days, and disability.
Employees expect permanency and an indefinite term of the relationship.
Are the worker’s services a key activity of, or central to, the business? That could indicate she’s an employee.
An evaluation system and performance measurement point to an employee status.
The statute of limitations on these cases varies by government and agency but is generally is two to six years.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.