misclassification of employees as independent contractors

Employer Misclassification May Become a Crime

by Fred Abramson on April 29, 2010

I have written extensively about the potential problems employers can have by misclassifying their workers as employees.  The IRS has been cracking down on companies that try to pass off regular employees as independent contractors. It now may become a crime.

Congress is about to act on a bill entitled the Employee Misclassification Prevention Act that would impose criminal penalties on companies that misclassify workers. It appears that both the House and Senate is behind the bill, so it is likely to become law.

If this new law is passed, it would impose finds of $5,000.00 for each worker that is misclassified as an independent contractor. According to the American Bar Association Journal, the new law would also require employers to provide new hires with notice concerning their rights

There is an excellent and lengthy article on the subject by the large law firm Pepper Hamilton, LLP.

The new law is a natural progression of the Obama administration focus on cracking down on employers who improperly classify employees as independent contractors.

I would suggest that companies review all of their employment classifications to avoid potential criminal liability. You may be able to minimize the risk to your company by:

  • Wholesale review of all of your workers.
  • Restructuring the relationship that you have with your independent contractors that fall within a gray area of the law by re-classifying them as employees. I would suggest that you should err on the side of caution and classify your workers as employees if you are not sure.
  • Draft written agreements with all of your workers stating their employment status.
  • If you want to limit the workers that you classify as employees, you may have a third-party such as a staffing agency performing the hiring.

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

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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Employers with Independent Contract Workers are Targeted by the Government

by Fred Abramson on February 19, 2010

According to the New York Times, the IRS is cracking down on companies that try to pass off regular employees as independent contractors. More than two dozen states are cracking down on employers that improperly claim regular employees as independent contract workers. The federal government believes that enforcement could yield $7 billion during the next decade.

Among the most often misclassified workers are truck drivers, construction workers, home health aides and high-tech engineers.

As an independent contractor, there is no employer-employee relationship with the person or company that you are doing business with.  The independent contract is a consultant who performs specific duties that the consultant is capable of performing.

At the start of the relationship, it is absolutely vital to have an independent contract agreement (also known as a consulting agreement) drafted to protect both parties.  The consequences of failing to establish a consultant as an independent contractor can have dire tax consequences.

In your independent contractor agreement, it is important to establish that the consultant performing the services  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.

According to IRS, you should be aware of the following common law factors when it comes to providing evidence as to degree of control:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

If you have a legal question regarding independent contractors in New York, contact the Law Office of Frederic R. Abramson at 212-233-0666

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