Employee or Independent Contractor?
Paying employees correctly is critical and has a big financial impact when it’s not done correctly. The U.S. Department of Labor collected a record $322 million in back wages in FY’2019. That brings the total to more than $1.4 billion recovered in the last five years!
Two big recent examples:
- FedEx is paying $240 million to drivers misclassified as ICs
- Uber is paying $100 million to 385,000 drivers who were misclassified
The three primary categories are employees, contractors, or temps.
- Costs Increasing. New legislation (ACA, PTO laws, increased minimum wage, etc.) are driving up costs for business to have employees
- Use of Independent Contractors Increasing. As costs increase, companies hire independent contractors to avoid paying for:
- Tax Withholdings (income tax, social security, Medicare, unemployment)
- Workers Comp Premiums
- Health Insurance
- Vacation, Sick Leave
This is a slippery slope for a company if they aren’t making sure these Independent Contractors are classified correctly and can cost a company big $$$ if they misclassify.
Federal and state agencies are applying increased scrutiny on companies because avoiding paying for the items listed above means less revenue for the government at a federal and state level. This is one of the rare instances when the state and federal agencies are collaborating to investigate organizations.
Financial repercussions if someone is misclassified may include:
- Tax Penalties. Company may have to pay significant back tax penalties and subject to additional fines if the mistreatment was deemed intentional.
- DOL Investigations. These can lead to payment of back wages for misclassified workers, and additional fines and penalties.
- Statutory Penalties. Some state legislation provides for statutory penalties for misclassification (One example is the Maryland Workplace Fraud Act of 2009)
The good news is, there are tests to help a company properly classify their workforce and they essentially fall into three primary groups:
- Behavioral control
- Financial control
- Relationship of the parties
We can help you navigate the murky waters, related to classification, testing, etc. Click here for a Department of Labor fact sheet on misclassification. For federal tax purposes, this Internal Revenue Service (IRS) brochure defines worker classifications. Payroll Network’s HR advisors can also offer valuable advice and partner with your company if you need help reviewing this topic. Contact us at firstname.lastname@example.org.