Independent contractor misclassification is at an all-time high. Questions about the classification of independent contractors are one of the most frequent inquiries we get from our Clients. It seems that it’s becoming more and more common that potential candidates are asking to be classified as an independent contractor, when in fact; they should be an employee.
The IRS and Federal Government have recently taken a heightened interest in making sure everyone in the workforce has been correctly classified. Vice President Biden recently launched the Misclassification Initiative. In 2011, an agreement was signed between the Department of Labor and the IRS that outlines that they will work together and share information to reduce the misclassification of employees and to improve compliance with Federal Labor Laws. The concern around independent contractors is that they are not paid the same way as employees. They also are not typically covered under a company’s workers comp coverage. Taxes are typically not withheld by a company. Finally, they are not eligible for health insurance benefits or other benefits (FMLA, STD/LTD, Vacation/Sick time). The IRS and the DOL want to make sure that any individual categorized this way is meeting the IRS standards of an independent contractor, and that individuals are properly categorized so that they are eligible for any benefit due to them.
The IRS previously had what they called the, “20 Factor Test,” for determining whether an individual should be classified as an independent contractor or an Employee. However, that hard and fast checklist has since been discarded since ALL factors must be weighed when determining whether a worker is an employee or independent contractor. There is no set number of factors that makes the worker an employee or independent contractor, and no one factor is responsible for making this determination.
Independent Contactor Misclassification Will Cost You
If they decide you’ve misclassified an independent contractor unpaid taxes will have to be paid. Both the IRS and the Department of Labor could become involved. The DOL Wage and Hour Division could look at this issue as a violation of the Fair Labor Standards Act. This could lead to the company having to pay for missed overtime, hourly wages, and damages associated with lost benefits. They take this very seriously since misclassifying someone could lead to losses for the US Treasury, Social Security, Medicare, state unemployment, and workers comp funds. Further, if someone was misclassified they were not offered benefits that were potentially due to them (health insurance, medical leave, vacation and sick time, etc.). You do not want the courts to be the ones that assign a dollar amount to those losses.
Ask Yourself Some Honest Questions to Prevent Independent Contractor Misclassification
However, the IRS does provide some guidance when determining how a worker should be classified. Some of the main questions to ask are:
- How much instruction and training will you provide this individual?
- Does the worker provide his own tools?
- Is he or she free to obtain other employment while doing work for your business?
- Is the individual’s job long term, or just a temporary project?
It is key to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. Classifying your workers can be confusing. If you have any questions at all please feel free to contact us…we are here to help!!