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United States HR Law: ‘misclassifying’ employees as independent contractors

Hiring an employee is an expensive proposition. Employees must be trained, they must be paid regardless of their productivity while they are employed, they have many rights under the law including workers’ compensation coverage, and terminating a difficult employee can be a costly nightmare. In an age of constantly increasing regulation, many businesses are turning to independent contractors to complete work for them because they usually need minimal training and can be acquired or dismissed as the situation warrants.

To receive the low regulatory burden provided by independent contractors with the control offered over employees, some employers will simply call an employee an independent contractor. Classifying workers incorrectly is a common way for employers to avoid paying certain taxes and expenses. Some industries are highly prone to worker misclassification; industries that require unskilled laborers for short periods are the most prone — most notably the construction and transportation industries. Construction and transportation companies will often involve subcontractors frequently performing the same work for the same contractor repeatedly and for similar pay. Employers who are concerned about their rights and obligations should consult with an employment or tax attorney specific to their industry; i.e., a skyscraper construction company in New York would want to contact a NY construction attorney.

What is your worker classification?

Simply calling an employee an independent contractor does not make the employee an independent contractor. Whether a worker is an employee or an independent contractor depends upon the circumstances. Courts and the Internal Revenue Service use a test involving a wide number of factors to determine whether someone is an employee. Generally, these can be segmented into three different categories: financial controls, behavioral controls, and factors involving the relationship itself.

Courts and the government will analyze the financial aspect of the relationship between the worker and the hiring party. Independent contractors will normally have a significant investment in equipment, expenses that are not reimbursed by employers, and they will receive payment per job. Employees will usually receive consistent hourly payments or a salary, use equipment provided by employers, and have little invested in the job apart from their time. No single factor is determinative of whether a worker constitutes an independent contractor or an employee; they are to be taken as a whole and weighed against one another.

The extent that an employer controls a worker’s behavior is important in determining whether the person is an employee or contractor. A high degree of control is indicative that the worker may be an employee. Employees will be instructed when to work, what equipment to use, what to do, where to obtain other equipment. Employees will also be trained in performing certain tasks and receive an evaluation for their work at a later date.

Several factors pertaining to the nature of the worker’s employment will also be considered in determining whether a worker is an employee or an independent contractor. These include the presence of any written contracts, any benefits typically reserved for employees that are extended to an independent contractor, or the duration of the employment.

The effect of employee classifications

Employees are treated differently than independent contractors under the law. Misclassified employees must pay the employee’s share of payroll taxes under the Federal Insurance Contributions Act. Independent contractors normally pay these taxes under the Self Employment Tax Contributions Act. Employees who have already been paid as self employed workers can file for a refund for the difference in taxes between the two statutes.

Employers must withhold Social Security and Medicare taxes from worker paychecks. Employees who are incorrectly classified as independent contractors will not have had such things withheld from their pay. The Internal Revenue Service expects employees who have been classified incorrectly to file Form 8919, which reports the uncollected Social Security and Medicare taxes. Additionally, an employee misclassified as an independent contractor may not need to pay taxes on certain employer-provided benefits such as insurance. Business expense deductions are also handled differently.

These are just some of the federal differences. On a state level, workers’ compensation coverage is mandatory for employees. Each state may also grant specific rights to employees that may not be granted to independent contractors. It is imperative that workers know their classification to ensure that they are receiving all the benefits they are entitled to. Workers with questions or concerns about their employment status are encouraged to contact their employer.

Cara-Marie Taylor is a freelance writer and entrepreneur living in Metro-Atlanta. Construction companies in the New York area who want to ensure the proper classification or their workers can contact the NY attorney firm of Canfield, Madden & Ruggiero LLP. Since the firm’s creation in 1981, the majority of their caseload has been the legal representation of construction companies.

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