Reality Check – Employee Misclassification is Very Costly!

Why Use Independent Contractors?

Business owners appreciate the flexibility and potential cost savings of using Independent Contractors to provide goods and services to their companies.

What Are the Risks if Owners Get It Wrong?

Those cost savings could easily evaporate if the company incorrectly labels an Employee as an Independent Contractor.

This is a huge issue.  As the Federal and state governments seek more and more revenue, they have become more aggressive in their efforts to re-classify every Independent Contractor as a W-2 employee.  They are sharing information with each other, which increases each employer’s risk of getting swept up in a wage-and-hour compliance audit.

Employers face liability for such things as uncollected taxes, Social Security contributions, and unpaid overtime.  Government agencies impose fines and penalties.  Plaintiff’s lawyers file expensive class action lawsuits.

Lack of a bright-line test for determining a worker’s status as either an employee or independent contractor further complicates each CEO’s life.

How Can an Owner Get it Right?

Understand how to choose and apply, from the very start, the right classification for each person that provides goods or services to your company.

Courts and government agencies such as the U.S. Depart of Labor often use an “Economic Realities test.”

The more an individual is, in reality, independent of the control of one company, the more appropriate it is to treat that person as an Independent Contractor.

Factors favoring Independent Contractor            Factors favoring Employee

1. Uses a separately formed business with its own business name and Employer I.D. number. 1. Uses his/her own name and Social Security number.
2. Has multiple customers. 2. Has only one entity paying him or her.
3. Provides a service (e.g. landscape maintenance) that is not integral to a customer’s business. 3. Does work that is integral to the entity’s business, such as a software engineer working at a software development company.
4. Owns and uses its own equipment and supplies in performing its work. 4. Uses equipment and supplies provided by the entity.
5. Has complete control over how to perform the work. 5. Has a supervisor who has significant control over when and how the work gets done.
6. Customer pays a set price for a completed product. 6. Gets paid an hourly wage or a fixed salary.

If you are uncertain how to apply this test to one or more people, consult with a lawyer who has substantial experience applying it on the inside of the companies where she or he has worked.

Michael Oswald

Please note: the above post contains educational information. It is not intended as legal advice. Engage an attorney who is licensed in your state to get advice on dealing with any specific legal issue.

© 2018 Michael S. Oswald

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