Utilizing a mix of independent contractors and full-time employees offers organizations staffing flexibility and cost savings. In today’s “gig economy,” it’s not surprising that more and more companies are moving in this direction. However, there can be significant risks and penalties if workers are misclassified.
With independent contractors, organizations avoid paying the benefits that most employees are entitled to, such as health insurance, paid time off, and the employer’s side of payroll taxes. But if a company classifies a worker as an independent contractor and regulators believe that the worker should be properly classified as an employee, the company runs the risk of owing back taxes and penalties, even if the misclassification was unintentional. Employers beware.
It’s easy to understand core examples of both these classifications. Employees come in every day, punch the clock, and work a set schedule under the employer’s direct supervision. Independent contractors perform a specific, one-off job, set their own hours, and decide how to perform the work for which they are hired. But in many cases, the distinction between employee and independent contractor is less clear-cut, and careful analysis is required to avoid the penalties associated with misclassification.
In April 2019, Wisconsin Governor Tony Evers announced the creation of a Joint Enforcement Task Force on Payroll Fraud and Worker Misclassification. The Task Force’s mission is to seek out workers who have been misclassified and punish businesses that have applied the wrong label. The government’s interest in misclassification is obvious: businesses generally do not have to pay unemployment insurance taxes and worker’s compensation premiums for independent contractors, but they do for employees. So, if a business misclassifies workers as independent contractors when they should really be classified as employees, the government misses out on revenue. Governor Evers, in the Executive Order creating the Task Force, stated that Wisconsin has lost millions of dollars in revenue that was not paid because of worker misclassification.
In addition to tax issues, employers must obey the state and federal laws prohibiting discrimination in interacting with employees but may not have the same obligations when dealing with independent contractors. Thus, the government has an interest in ensuring that workers are properly classified for purposes of civil rights law enforcement.
The distinction between independent contractor and employee is critical to personal injury and tort law as well. An employer will generally be responsible for the injuries caused or torts committed by its employees when they are acting within the scope of employment. However, the employer will generally not be responsible for the torts committed and injuries caused by an independent contractor. As an example, if a worker hits a pedestrian with their car while working, whether the hiring party is on the hook for damages may swing on whether that worker is considered an employee or an independent contractor.
Unfortunately, differences are not black and white, and the classification may vary based on the purpose for which the distinction is made. For worker’s compensation insurance, one test is applied, but for unemployment insurance, a different test is applied. Under fair wage laws, a third test is applied, and for civil rights purposes, a fourth test determines the proper classification. Therefore, a worker might be properly classified as an employee under one test and an independent contractor under another. Adding to the complexity, applying the factors often involves judgment calls and ambiguity.
Some of the key issues in making the distinction are the level of control, the degree of economic independence the worker has, and the risk relationship between hiring party and worker. When a worker’s performance of duties is tightly controlled, it is likely that the worker should be classified as an employee. A worker that faces the risk of non-payment if they perform poorly should more likely be classified as an independent contractor. If the worker owns their own business, works for many different hiring parties, and is not dependent on one particular hiring party to stay solvent, it is also more likely that the worker should be classified as an independent contractor. Unfortunately, even these guidelines can become blurry in specific cases.
Navigating the distinction between employee and independent contractor requires competent legal advice, both in terms of ensuring that the workers already in place are properly classified, and in structuring the working relationship to make it more certain that workers fall into the category the business prefers. If you have any questions regarding the differences between employees and independent contractors or if you would like a review of your business practices to see how they might affect proper classification, please contact attorney Ryan M. Billings at (414) 962-5110 or firstname.lastname@example.org.
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