More and more frequently, we see stories in the news of employers that have inadvertently mis-categorized employees as independent contractors. Misclassifying employees as independent contractors can damage your reputation as a business, the morale of your employees as well as your bottom line.
The first step in determining whether or not someone is an independent contractor is to look at the relationship between your company and the individual doing the work. It is best to look at this early in your arrangement, before the person starts performing work for you.
- Is this someone that is performing their job without control or direction from you?
- Are you telling them when & where to work?
- What tools to use?
- Are they in charge of who is working with them?
- Are they making decisions on vendors or supplies? Who is paying for these expenses?
- Are they determining the sequence of their work?
- Do you need to train or teach the employee the methods of the work that is being performed?
- Are they providing services to other businesses?
- Are they paid a flat fee or by the hour?
- What sort of contract or agreement do you have with this person?
- Is the job only needed for a set period of time?
- Do you have other employees performing the same type of work?
Independent contractors maintain the freedom and control to direct their work according to the needs of the business that has contracted them.
The Results of Misclassification
Businesses can easily see the financial benefit to hiring individuals as independent contractors because there is no obligation to withold federal, state and Social Security taxes. There is no obligation to pay unemployment or worker’s compensation insurance or offer benefits or vacation time to these workers. There is also no obligation to pay overtime or comply with the Fair Labor & Standard Act regulations with independent contractors. Dishonest companies can see this as a way to save the business money and time, without seeing the repercussions down the road and it is easy for honest businesses to also have to pay for misclassification even if the misclassification is unintentional.
In July 2010, FedEx Ground agreed to pay $3.05 million to the Massachusetts general fund to settle the claim that they had misclassified its drivers as independent contractors. The state was concerned as due to the alleged misclassification the workers were not provided paystubs, were not covered under workers’ compensation insurance, were not paid overtime that was owed and the employer did not deduct or withhold state income taxes for these workers.
Additionally, the state found that the misclassification had led to significant underpayments to the state Department of Revenue, Division of Industrial Accidents and the state unemployment agency. Though FedEx denied the claim, they still agreed to settle and transitioned their Massachusetts drivers to employees over the course of the next year.