The misclassification of workers as independent contractors presents serious problems for both employers and employees. Some employers try to game the system by overusing the independent contractor classification. In the short run, this may allow them slight gains, such as reducing payroll costs and tax contributions. In the long run, however, they could suffer greatly.
In 2015 alone, the United States Department of Labor recovered $74 million on behalf of 102,000 workers who had been misclassified as independent contractors. When American workers are improperly classified as independent contractors, they are cheated out of employment advantages, such as:
- Payment by the employer into the Social Security system;
- Unemployment and workers’ compensation coverage;
- Rights to fringe benefits offered by the employer, such as leave time and health care; and
- Coverage under various federal laws, such as the Fair Labor Standards Act, the Family and Medical Leave Act, and the Affordable Care Act.
The Wage and Hour Division of the DOL provides assistance to workers in determining whether they are employees or independent contractors. Fact Sheet #13 details several factors that may be considered in determining the nature of the employer-employee relationship:
- Is the work performed integral to the employer’s business? If so, the worker is more likely an employee.
- Does the work performed include managerial skills that affect the worker’s profit or loss opportunity?
- What are the relative investments of the worker and the employer in both facilities and equipment? The more these investments are borne by the employer, the more likely the worker is an employee.
- What is the worker’s level of skill and initiative? The more independent business judgment that is exercised by the worker, the more likely she is an independent contractor.
- What is the duration of the parties’ relationship? The longer the relationship, the more likely the worker is an employee.
- What level of control does the employer have over the work and the worker? The greater the nature and degree of the employer’s control, the less likely the worker is an employee.
More than ever, employers are tuned into their potential liabilities for misclassification. Both the Internal Revenue Service and the DOL have current initiatives targeting worker misclassification. These and other federal and state agencies may bring enforcement actions against employers for violations of law.
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