In today’s competitive talent market many organizations engage workers as independent contractors. Strategic companies have a consistent process for classifying workers correctly. Unfortunately many companies make ad hoc decisions, or even worse, have no oversight at all which allows managers to misclassify workers and exposes the company to significant risk. Some companies do this knowingly to save money or because the independent worker forced them to, others do it more out of ignorance around proper worker classification.
The economic motivation for classifying individuals as independent contractors rather than employees is significant. Classifying a worker as an independent contractor (sometimes referred to in the industry as 1099’s because of the year-end tax reporting form by the same name) can provide significant economic benefits to a company. This option is particularly attractive to start-ups or budget-tight departments who are often short on cash to pay salaries and fringe benefits but still have significant needs to get work done.
Independent contractor is still a valid worker status, so long as you do it right.
When qualified independent contractors perform their services, your company is not responsible for tax withholdings, or for workers’ compensation or unemployment insurance, and does not need to adhere to wage and hour regulations (like paying minimum wage or overtime). That’s the part of the equation which tempts many organizations to misclassify workers. However, if you do it incorrectly, independent contractor classification is fraught with risk and brings with it a lot of potential legal liability.
Many state and federal agencies care about proper worker classification. This is not just a byproduct of wanting to collect all the employment taxes they are owed, but also wanting to ensure workers have all the workplace protections and benefits they are entitled to.
On July 15, 2015, the DOL issued a 15-page administrator’s interpretation in which the agency reinforced its position that most workers should be considered as employees, not independent contractors. The bulletin makes it clear that the DOL considers the vast majority of workers classified as independent contractors are in fact misclassified employees and that companies are violating the law by improperly classifying these workers as independent contractors. This proactive action by the DOL illustrates the risks faced by companies who “don’t do it right” when classifying employees as independent contractors.
Both the U.S. Department of Labor (DOL) and the Internal Revenue Service monitor and enforce worker misclassification. The DOL also has agreements with 26 states to share audit information on misclassified workers. In addition, companies may also be subject to civil lawsuits brought forth under the Fair Labor Standards Act (FLSA) which governs wage and overtime payments, not to mention a complex web of individual state employment laws and regulations.
Proper worker classification and engagement should be a concern of every company that leverages independent workers to get vital work done. Clearly, the DOL and number state agencies have made it a priority to crack down on independent contractor misclassification. Their objective is to ensure a steady stream of payroll taxes and funding for their unemployment compensation systems. Fortunately, you have an expert on your side.