What are the Consequences of Employee Misclassification?

In 2021, there were nearly 60 million independent contractors in the United States, and experts predict the number of workers opting for 1099s is expected to grow.

Independent contractors – who are essentially their own bosses – often enjoy the freedoms tied to their employment classification, which may include little to no time in an office, more control of their work, and even job security.

Employers may hire independent contract workers instead of full-time employees for multiple reasons, but the biggest may be the cost savings. Typically, employers are not responsible for an independent contractor’s traditional employee benefits, payroll taxes, unemployment and worker’s compensation insurance, and more. Independent contractors are not subject to overtime pay or minimum wage requirements.

But while a worker’s independent contractor status offers some benefits to both the worker and the business, employers are still responsible for getting their employee classifications correct. Business owners who misclassify their workers face consequences including government audits, lawsuits, and more.

Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee without a reasonable basis, it could be held liable for employment taxes for that worker.

For example, in a widely publicized 2014 case, the federal 9th Circuit Court of Appeals ruled that FedEx Ground drivers had been misclassified as independent contractors. The case cost the company over $225 million.

How employers should determine worker status

The U.S. Supreme Court has on several occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the Fair Labor Standards Act. The Court has held that it is the total activity or situation which controls the determination. Among the factors which the Court has considered significant are:

1. The extent to which the services rendered are an integral part of the principal's business.
2. The permanency of the relationship.
3. The amount of the alleged contractor's investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor's opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others that is required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.

Help is available

The business attorneys at O’Reilly Rancilio are available to answer your questions regarding employment and independent contractor agreements. For more information, please visit our website or call 586-726-1000.