Misclassification of Independent Contractors Crackdown

by Fred Abramson on March 2, 2010 · 6 comments

Misclassifying an an employee as an independent contractor is one of the most expensive mistakes that a business owner can make. It does not matter whether you intentionally made the mistake. You can be subject to large penalties, fines and even subject the criminal liability.  I have recently reported that the IRS has been targeting employers with independent contract workers.

The problems don’t end with the employer. Misclassified workers can lose:

  • Worker’s Compensation Insurance
  • Unemployment benefits
  • Wage protection such as minimum wage and overtime.

Employers who hire independent contractors have an unfair advantage because labor costs less and they could charge less for their goods and services. If you are in the construction industry, a competitor who improperly misclassifies their workers as independent contractors can underbid you.

The employer who gets caught with improperly classifying workers as independent contractors can be subject to liabilities for:

  • Unpaid Federal, State and Local Income Tax withholdings
  • Social Security and Medicare contributions
  • Workers’ Compensation Premiums
  • Overtime
  • Unemployment compensation
  • State-mandated benefit programs

Audits

The New York Department of Labor conducts two types of audits, general and specific. The general audits are conducted randomly with nothing specific as its subject. It is interesting to note that these audits are not statistically random as specific industries, such as construction are heavily targeted. Specific groups are the subject to targeted audits as well, which are based on a variety of factors, including prior issue with improper classification. The Cornell Law Institute performed an excellent report about the misclassification of independent contractors in New York and is a great resource.

Prevailing Wage Duties

On publicly funded construction projects, some companies use missclassification as a way to avoid paying prevailing wage rates.  A company that is caught can be subject to paying restitution to affected employees, fines for failing to maintain payroll and general records and submit valid and certified records.

Conclusion

Due to the increased scrutiny on the use of independent contractors, employers, especially those in the construction industry need to focus on how they classify their workers. You should conduct audits internally with legal counsel to determine if their are any issues.

If you have any questions regarding the classification of independent contractors, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.

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  • Thanks for the great post Fred. While this is not my area of focus in law (I'm an IP guy), I remember learning in law school that payment of benefits and taxes weigh heavily in the analysis of whether someone is an independent contractor or an FTE. What would companies need to do to protect themselves from getting caught in the trap you mention above (besides hire competent legal counsel)?

  • Thanks for the question Mike. it is absolutely vital to have an independent contract agreement (also known as a consulting agreement) drafted to protect both parties.

    In your independent contractor agreement, it is important to establish that the consultant performing the services is is not under the control of the employer. In addition, the employer may not directly supervise the consultant.

    When it comes time to draft an independent contractor agreement, you should focus on the fee for services rendered and provide a complete description of the services that are to be provided.

  • Thanks for the great post Fred. While this is not my area of focus in law (I'm an IP guy), I remember learning in law school that payment of benefits and taxes weigh heavily in the analysis of whether someone is an independent contractor or an FTE. What would companies need to do to protect themselves from getting caught in the trap you mention above (besides hire competent legal counsel)?

  • Thanks for the question Mike. it is absolutely vital to have an independent contract agreement (also known as a consulting agreement) drafted to protect both parties.

    In your independent contractor agreement, it is important to establish that the consultant performing the services is is not under the control of the employer. In addition, the employer may not directly supervise the consultant.

    When it comes time to draft an independent contractor agreement, you should focus on the fee for services rendered and provide a complete description of the services that are to be provided.

  • Wow.. Interesting.. Thank you for that!


    Best Regards,
    Ioana Stan
    CEO SENIOR
    Tigla Metalica Iasi
    Oferta Tigla Metalica
    Case din lemn rotund

  • Wow.. Interesting.. Thank you for that!


    Best Regards,
    Ioana Stan
    CEO SENIOR
    Tigla Metalica Iasi
    Oferta Tigla Metalica
    Case din lemn rotund

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