Business owners love the idea of independent contractors. They afford flexibility, expertise, outside perspective, and of course, reduced insurance, benefit and tax burdens. Unfortunately, for these same owners, the Federal and state authorities are coming down big time on what they claim are independent contractor misclassification schemes. They don’t like the idea of you not collecting payroll taxes and not providing employees with Workers Comp, healthcare, and other benefits they might otherwise enjoy. Here are four of the more common ways employers get into trouble when they misclassify employees:
- They get hurt on the job — Guess what? Since these people are not considered employees, your Workers Comp policy doesn’t cover them; which means they can sue you directly for negligence, expanding their recovery potential dramatically. What’s more, you might face a fine for not treating them as employees and providing them with Work Comp coverage.
- They file for unemployment — A number of HR That Works Members have told us that because one person filed for unemployment, the authorities are trying to attack their independent contractor relationship with dozens of people. If a company in this situation comes out on the wrong side of a misclassification judgment, it could go out of business. Part of the thinking involved is that you can somehow “control” employees, but not independent contractors. For example, when I hire an independent contractor to paint my house, I pay them to get the job done and I don’t tell them how to apply the paint.
- They didn’t pay self-employment taxes — When the IRS comes knocking on an independent contractor’s door and asks them about their tax payments and the work they did, they tend to conclude that they were an employee and you should have been withholding that 14% annually. If they can’t collect this from the independent contractor, they’ll try to collect it from you — not to mention fines and penalties. Some states, such as California, have kicked this up a notch and are making it a criminal offense to engage in intentional misclassification. Unsurprisingly, these bills are introduced into the legislature by the plaintiffs’ bar, which makes sure that the legislation includes handsome attorneys’ fees for enforcement.
- Finally, the NLRB is getting interested too — Independent contractors don’t have the ability to organize the workplace, only employees do. This means that the National Labor Relations Board, which is very pro-union, doesn’t like it when you classify folks as independent contractors. Recently, because of one or two disgruntled employees, they ruled that independent contractors from a small orchestra were really employees, which will probably end up shutting down that business. I wrote an article about this called “The Day the Music Died.”
The bottom line: This fight is not about common sense or economics. It’s about political power, plain and simple. The pendulum has swung and employers have been pushed up against a wall. The problem is that they’re powerless to do anything about this situation and have to change the way they do business, even when they don’t think it makes sense to do so. That’s the beauty of living in a democracy.