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Misclassifying Employees as Independent Contractors: Front-Burner Issue Again

by Kara E. Shea

Independent contractors, by definition, are self-employed. Because they aren’t employees, they aren’t covered by employment, labor, and related tax laws. As a result, some employers may be tempted to reclassify employees as independent contractors to avoid taxes, benefits, record-keeping requirements, overtime, and other expenses.

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Contractors are a popular solution
Does your organization use independent contractors? More and more of you do, for lots of reasons. Technological advances that allow more off-site work and work from home have forever changed the workplace landscape, resulting in many categories of jobs that can be performed more independently than in the past. Many workers want flexible schedules that afford better work-life balance, and they prefer an independent contractor relationship for that reason.

And then, of course, there’s the economy. Independent contractors are appealing to cash-strapped employers for many reasons — no payroll taxes, no benefits, and no need to worry about pesky matters such as Family and Medical Leave Act  (FMLA) leave and wage and hour compliance. And if a contractor isn’t working out, you can just terminate the contract without worrying about receiving a charge from the Equal Employment Opportunity Commission (EEOC) in the mail.

The problem is a worker isn’t an independent contractor just because you’ve classified him that way, even if he agrees and even if you have a written contract. The law determines who is and isn’t an independent contractor, and if your workers don’t meet the legal definition used by whatever agency or court is looking at the issue, you’ll be charged with all the taxes and wages you should have paid, possibly going back several years.

And make no mistake, contractor misclassification is a front-burner issue for federal and state enforcement agencies right now. State agencies administering unemployment compensation funds will likely aggressively seek premium payments for as many covered workers as possible. Likewise, the IRS is looking for every dime of revenue it can get. Meanwhile, the U.S. Department of Labor (DOL) continues to take an increasingly aggressive position on contractor misclassification, and new federal legislation that would make employee misclassification a separate violation of the Fair Labor Standards Act (FLSA) has been introduced.

Economic independence and control are key
All of this spells very bad news for employers that incorrectly label employees as contractors. But how do you know if you’ve correctly classified your independent contractors? The criteria vary under different enforcement schemes, but the two main concepts to keep in mind are economic independence and control.

A true independent contractor is in business for himself and, as such, can suffer a profit or a loss. In other words, he isn’t economically dependent on the employer. Likewise, a true independent contractor is responsible only for producing a certain result and will not be subject to close supervision and control by the employer. So if you demand an exclusive relationship with a worker, tell him when, where, and how to do the work, and provide him with equipment to perform the work or reimburse his expenses, what you have on your hands may be an employee, not an independent contractor, despite that 1099 form. As always, when in doubt, seek the advice of an experienced employment attorney.

Kara Shea is the editor of Tennessee Employment Law Letter and a partner with Miller & Martin PLLC, practicing in the Nashville office. She can be reached at (615) 244-9270.