Misclassification of Employees as Independent Contractors
A growing area of governmental investigations and litigation, including class action suits, arises from the misclassification of workers as independent contractors. By classifying workers as independent contractors, employers usually save money because they do not pay workers the federally mandated minimum wage or overtime pay for hours worked over forty (40) in a workweek. They also pay the employee on a 1099 basis – without withholding for income taxes or making contributions to Social Security or Medicare. They also typically exclude the workers from benefit plans such as health insurance. As a result, employers can achieve significant perceived cost savings by classifying workers as independent contractors. The liability for misclassification – especially when it occurs for a prolonged period of time for a class of employees – can be substantial.
Misclassified employees have multiple potential claims arising from a misclassification as an independent contractor. They can assert FLSA claims in the event they were not paid at the federally mandated minimum wage or overtime for hours worked in excess of 40 in a workweek. They can also assert claims arising from their exclusion from benefit plans made available to employees of the company. In addition, workers mistakenly classified as independent contractors can claim unemployment benefits, and/or workers compensation benefits if they were injured in the course of performing their jobs for the company.
The Law Regulates and Limits Independent Contractor Classifications
The Internal Revenue Service (IRS), however, has strict criteria for determining independent contractor status. Employers who improperly classify workers as independent contractors are subject to significant fines, penalties and back pay liability under Federal law. Further, in 2009, Colorado enacted H.B.1310, imposes penalties up to $5,000.00 per employee for a first offense & up to $25,000.00 per employee for subsequent violations for misclassified workers. The IRS and State of Colorado have implemented active initiatives to recover lost tax revenue arising from the misclassification of workers as independent contractors. These initiatives have resulted in the imposition of millions of dollars of fines and penalties against businesses.
Further, businesses and workers can initiate proceedings with the IRS and State of Colorado to determine the independent contractor status of the worker.
Relevant Criteria In Determining Independent Contractor Status
Generally, the IRS looks at three criteria to determine whether a worker is an independent contractor or employee:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? The behavioral control factors fall into the categories of types of instructions given, degree of instruction, evaluation systems, and training.
Financial: Are the business aspects of the worker’s job controlled by the payer, i.e., how is the worker paid, whether expenses are reimbursed, who provides tools/supplies, etc. The financial factors fall into the categories of significant investment, unreimbursed expenses, opportunity for profit or loss, services available to the market, and method of payment.
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? The factors used to evaluate the relationship between the parties include whether written contracts exist, the availability of employee benefits, the permanency of the relationship and the services provided as key activity of the business.
Baird Quinn Represents Companies and Workers on Misclassification Issues
Baird Quinn’s labor and employment attorneys have significant experience representing businesses and workers on misclassification issues. They have represented businesses in audits by governmental agencies designed to determine whether workers have been misclassified as independent contractors. Baird Quinn’s employment attorneys have also represented workers in recovering lost wages, overtime and benefits due to a misclassification issues.
If you need legal representation in dealing with a misclassification issue, please contact Baird Quinn’s labor and employment lawyers for assistance. You may obtain additional information regarding our Denver FLSA lawyers at the following link. Contact Us