This bill currently is pending, but in the meantime, government agencies charged with collecting certain taxes from employers are wasting no time increasing their enforcement efforts. These agencies’ efforts to ensure that individuals properly are classified as either employees or independent contractors are not surprising: the government wants to collect taxes it would not otherwise receive. Employers are not required to pay income tax, Social Security, Medicare, and unemployment and worker’s compensation insurance on independent contractors. Independent contractors, who often are individuals, many times do not accurately report their own income. In addition, independent contractors are not entitled to protection under certain federal employment statutes, such as minimum wage, overtime, and antidiscrimination laws.
A recent study by the Department of Labor suggested that as many as 30% of all employers misclassify workers as independent contractors. So how do employers know whether and how to classify someone as an employee or an independent contractor? The answer often depends on which government agency is involved. For example, the Internal Revenue Service (for federal income taxes) and state Departments of Labor (for unemployment insurance) each have their own specific standard for determining whether an individual qualifies as an “independent contractor.” Even federal employment statutes such as Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on protected class status such as race and sex, and the FLSA have distinct tests to determine whether an individual is a covered employee or an independent contractor who is not entitled to the statute’s protections.
Although the tests applied by government agencies do vary, the overarching consideration is the amount of the employer’s control over the individual, both financially and in the manner of work. Common factors include:
- Payment to the individual (per hour or a fixed fee; the tax form used to report income; the individual’s opportunities for profit or loss);
- Equipment, supplies, and facilities used by and provided to the individual;
- Instructions or training provided to the individual;
- Permanency of the relationship;
- Existence of a contract governing the relationship; and
- Whether the individual’s work is part of the employer’s core business.
The costs of misclassifying a worker can be substantial. Employers are advised to review carefully their classification policies and procedures in an effort to avoid a government investigation or monetary penalties. FMG’s Labor and Employment Law group can assist with performing a compliance audit and identifying potential issues.
For more information regarding this article, please contact Ben Mathis at 770.818.1402 or by email at [email protected] or Amy Combs Bender at 770.818.1421 or by email at[email protected].