Employers Should Classify Their Workers Correctly to Avoid Costly Fines

Employers who utilize the services of independent contractors need to make sure the worker is an independent contractor and not a misclassified employee. Business owners could be forced to pay significant back-taxes, damages, or penalties if they fail to classify workers correctly.

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 in back taxes, fines, and other costs.

Why do employers hire independent contractors?

Employers may hire independent contract workers instead of full-time employees for many 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.

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 the office, more control of their work, and even job security.

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

How does an employer determine if the worker is an independent contractor or an employee?

According to the IRS, employers should weigh the following factors when determining if a worker is an independent contractor or employee:

  • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial: Are the business aspects of the worker’s job controlled by the employer? (This may include how the worker is paid, if expenses are reimbursed, and who provides tools and supplies).
  • Type of Relationship: Are there written contracts or employee benefits (including pension plans, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Some factors, according to the IRS, may indicate that the worker is an employee, while others may indicate the worker is an independent contractor. Since there are no set rules, employers should look at the entire relationship and consider the extent of the right to direct and control the worker.

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.

Categories: Business