Worker misclassification is not a new problem in the business world, but recently, the repercussions of misclassifying workers with state entities have seen some changes. A worker is considered misclassified if they have been labeled an independent contractor. when in reality they should be considered employee.
Why would a business misclassify their workers?
While many times misclassifying a worker is an honest mistake, there are many employers who will purposely misclassify a worker so they can avoid paying the employee benefits or not make required payroll tax payments. When you are an employee of a company, state law requires that you be covered under a worker's compensation policy which will cover injuries that are sustained as a result of your employment. Worker's compensation coverage can be a large expense, especially for companies with a lot of employees, so they may choose to instead label workers as independent contractors to reduce their overall labor costs.
How does a business distinguish between an independent contractor and an employee?
It can be sometimes hard to distinguish whether a worker should be classified as an employee or an independent contractor due to differing legal statues, and definitions by both state and federal entities. One of the easiest ways to make the determination is by determining who controls the work of the worker. This can include who determines where and when a worker works, how they are supervised, and who provides the tools and necessary supplies. If the employer has control over the work that the worker produces, and the manner in which it is produced, they would be considered an employee. If the worker has a say in their work approach, how the timeline is affected, and the terms of the business agreement, then they are considered an independent contractor.
How have states changed the way they are approaching misclassification?
States have begun cracking down on worker misclassification with a number of bills that have been filed by various states across the country. States like North Carolina, Vermont, and Arizona have all introduced bills to investigate and evaluate worker misclassification, classification reporting, and how misclassification affects employees. Some have even developed task forces to make recommendations regarding employee misclassification in specific industries.
With misclassification coming more to the forefront of legal concerns, both Federal and state entities will be on the lookout for businesses that utilize independent contractors and freelancers, to ensure that they are properly classifying their workers and not attempting to evade Social Security, Medicare, workers compensation, unemployment taxes, and disability insurance. Companies can be regularly audited and face fines and penalties for being in non-compliance.
Companies may also be subjected to an audit if the IRS notices something suspicious about the 1099 forms that are being sent in from independent contractors.
How can misclassification affect workers?
As business continues to change and evolve, employee classification is becoming more fluid, making misclassification a more common concern of those in the workforce. With the determination being difficult to make and some businesses both purposely and inadvertently trying to misclassify workers, the problem is becoming more widespread. If an employee is misclassified as an independent contractor, they have no rights to the benefits they are entitled to such as overtime, minimum wage, FMLA, unemployment, and safe workplaces.
What this means for employers
This means that employers have to be more vigilant about classifying their workers. They should be careful when issuing 1099s and make sure that everything is in order, so they don't trigger an audit. Employers that want to be proactive should conduct a self-audit of their labor pool and review the nature of the relationship between each one of their workers and the company. The difficulty is that there is no one test to make a clear determination. This means that employers should focus on classifying workers as independent contractors only if they are free from the supervision of the company and remain in control of all the duties that they perform.
Employee-friendly legislative and regulatory activity has continued to increase in recent years, making it even more critical for employers to make sure that they are following the rules and laws when dealing with their workforce.