Independent Contractor or Employee?
Monday, May 3, 2010 at 04:20PM The answer to this question is one that is being looked at very closely by both federal and state governmental agencies. If answered incorrectly by an employer, the door could be opened to serious consequences. Over the past year, various federal and state agencies have indicated they will begin to more seriously investigate employee classification issues – with emphasis on workers misclassified as independent contractors instead of employees. The Internal Revenue Service (IRS) began intensive audits of 6,000 randomly selected employers in February of this year. The key objective of the IRS audits is to determine whether employers are attempting to save on taxes and legal risks by incorrectly classifying workers and recover any lost revenue.
The U.S. Government Accountability Office (GAO) recently reported that employee misclassification “could be a significant problem with adverse consequences,” as it reduces the amount of tax revenues that flow into federal and state governments. This is because Independent Contractors are not covered by most employment laws (as they are not considered “employees”) and payroll taxes are not assessed against monies paid to them. The Federal government estimates that between 1996 and 2004 it lost an estimated $34.7 billion in tax revenue due to the misclassifications of Independent Contractors. In 1984, the IRS did a study and estimated about 15% of employers nationally misclassified a total of 3.4 million workers as Independent Contractors. A 2005 Bureau of Labor Statistics (BLS) report indicated approximately 10.3 million workers or 7.4% of the workforce were classified as Independent Contractors.
The IRS provides guidance on how to classify workers. There are legitimate Independent Contractors currently working; however, there are a great many workers that are, in fact, misclassified employees. The penalties for this misclassification can be severe. It is important to note that even if a worker asks to be an Independent Contractor or agrees to this classification in writing, they are not an Independent Contractor unless they meet the criteria established by the IRS.
The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 was introduced in Congress last year and it allows individuals classified as independent contractors to petition the IRS to determine their correct classification. As it stands today, an employer or a worker can ask for an IRS analysis utilizing IRS Form 88: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. If passed, the current proposed legislation would expose employers with independent contractors to an increased chance of investigation and more severe monetary penalties. According to Mark Schoeff, Jr., the Department of Labor (DOL) is allocating $25 million (in their proposed budget for fiscal year 2011) in a joint initiative with the Department of the Treasury to specifically investigate and target employers that misclassify workers.
It is important to also note that many states have passed laws aimed directly at the misclassification issue. Currently, Illinois, Colorado, Maryland, Massachusetts, New Jersey and New Mexico have passed laws that target the construction industry, as it has been an industry rife with misclassification issues. An Illinois construction contractor received a fine of $328,500 in December 2009 for incorrectly classifying 18 workers as independent contractors instead of employees. Other states have enacted task forces specifically created to find instances of misclassification.
Experts agree that the best defense against misclassification is for companies to look beyond independent contractor work agreements, analyze the actual work that is being done by the worker, and perform continual rigorous internal evaluations of pay practices. As the old saying goes “If it walks like a duck, quacks like a duck, and looks like a duck, it must be a duck.” If a worker classified as an independent contractor looks like an employee, works like an employee, and is under the same controls as an employee, the more likely they will be determined to be an employee. The more you treat a worker like an employee, the more they will be considered an employee, especially in this era of heightened scrutiny. Failure to classify workers correctly can be quite costly. In addition to assessment of payroll taxes and penalties, employers may face insurance considerations such as workers compensation premiums. The misclassification of workers also opens the door to private causes of action from workers such as back pay, overtime pay, lost benefits and liquidated damages.
About the Author:
http://www.mmchr.com – Michele O’Donnell joined the team in January 2007 and currently leads MMC’s elite team of HR Consultants. Ms. O’Donnell has been involved in the Human Resources industry for more than 14 years, bringing vast training and management experience to the MMC leadership ranks. Her experience spans the broad scope of labor law, regulatory compliance and HR Best Practices, drawn from her rich experience as Director of HR for several firms throughout her career. She currently works to ensure that MMC’s consultants forge long lasting relationships with our clients, fostered in exceptional service and unsurpassed HR expertise. Ms. O’Donnell earned her baccalaureate degree in Business Administration from Auburn University before receiving her Masters degree in Human Resource Management from Troy State University.
Reader Comments (4)
Basically when a company incorrectly classify's a person as a independent contractor (IC) instead of an employee those company's take advantages knowingly and sometimes un-knowingly of a system of truth. The impact will be reports boasting incorrect data concerning new business creation resulting in picture that would suggest an inflated amount of businesses newly created or closing in any given state. This looks very much like a few years back when lenders out to make money gave out loans to people like lollipops even though the people would most likely default on the loan later. The country was slow to react because most people involved who knew what was taking place were so blood thirsty for money they would push loans through no matter what. what it left behind would ultimately be taken at the expense of their fellow neighbor as the markets crashed under the weight of the greed/social need. Also this has been going on for as long or longer than that scenario. My point is if we allow companies to promote this type of un-truthfulness they will further undue our country by once again painting a false picture of the real local and regional landscape. How great will our leaders lead when the painted picture they see is much different than the real thing?