Surveys show that the gig economy encompasses anywhere from 7% to 35% of the U.S. workforce. Whether someone works as an independent contractor by choice or because of a lack of alternatives, it is important that he/she is properly classified as one under federal and state law to avoid legal problems. If you are working for a business and classified as an independent contractor, how do you know whether you are misclassified?
INDEPENDENT CONTRACTOR VS EMPLOYEE
The difference between an independent contractor and an employee is not always clear. While typically independent contractors provide services to multiple companies and have significant control over their work, the determination is very fact-specific. The U.S. and New York State Departments of Labor and IRS provide guidelines to help determine how a worker should be classified. The factors used to determine classification are similar and essentially turn on the level of control asserted by the employer over the worker. Relevant considerations include:
- Behavioral control. Does the business have the right to direct and control the work performed by the worker, even if that right is not exercised? For example, is the business providing detailed instruction or training on when, where, and how to perform the work and what tools to use? If yes, then the worker is likely an employee. The amount and detail of instruction given to the worker is a good sign as well. The IRS has explained that the less detailed instructions are, the more likely someone is an independent contractor.
- Financial control. Does the business have a right to direct or control the financial and business aspects of the worker’s job? For instance, independent contractors often work for a specific contracted amount, whether it’s daily, weekly or at the completion of a job. Independent contractors can also take work from other companies, and typically have to pay their own expenses. Employees, on the other hand, are most often paid hourly or earn a salary and can be reimbursed for expenses incurred in the course of doing their job.
- Type of relationship. How do the parties perceive their relationship? Certain facts tend to indicate an independent contractor relationship such as working pursuant to a written contract, lack of employee benefits and services provided that are not a key activity of the business. An additional factor is the permanency of the relationship. If a working relationship is expected to continue indefinitely, instead of on a specific project by project basis, this weighs in favor of the worker being classified as an employee.
IMPLICATIONS OF MISCLASSIFICATION
For employers, the consequences of misclassification are severe. A company does not have to withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on wages paid to an independent contractor. In addition, they don’t have to pay minimum wage, overtime, unemployment benefits, healthcare benefits, or other benefits afforded only to employees. As a result, if a worker is subsequently determined to be an employee, the employer may be liable for tax evasion, punishable by heavy fines and potential criminal penalties. In addition, the business may owe back pay for unpaid wages, including overtime, workers’ compensation benefits, retirement contributions, and employee benefits for each misclassified worker. Civil penalties, attorney fees, and criminal sanctions may also apply.
Workers who are found to be misclassified as independent contractors may be entitled to back pay and benefits as well as other remedies.
If you are entering into an independent contractor relationship or you are in one and suspect you have been misclassified, consult an experienced employment attorney to determine the best way to address the situation.
