Independent Contractors – A Trap for the Unwary
Maybe you need a little extra help around the holidays, or maybe you want assistance from someone with a special skill or knowledge. How you classify such workers is just as important as the work they will provide to your business, as misclassifying a worker as an independent contractor (as opposed to an employee) can have significant financial consequences.
The use of workers classified as independent contractors is pervasive throughout the American economy, particularly in small businesses. Unfortunately, these workers are almost always misclassified by employers, leading to hefty fines once discovered by any one of a number of federal and state agencies. A few tips may help your business avoid significant headaches and liability later on.
While the definition of an independent contractor (as opposed to an employee) varies slightly depending on the context, the fundamentals of these relationships are universal. Notably, the label placed on a worker or the content of any applicable written agreement – whether it is with an “independent contractor,” “consultant,” or “advisor” – means little to nothing to the governmental agencies tasked with ensuring compliance. Rather, a list of non-exclusive factors regarding the nature of the relationship must be considered. For example, the New York Department of Labor, Unemployment Insurance Division states that “independent contractors are free from: supervision, direction and control in the performance of their duties. They are in business for themselves, offering their services to the general public.”
The consequences of classifying a worker as an independent contractor as opposed to an employee are many, including significant penalties, back taxes, and interest. What is more, federal and state agencies have recently signed information sharing agreements with one another. Thus, when one agency discovers that an employer has misclassified a worker as an independent contractor – that agency typically shares this information with all other agencies tasked with policing worker misclassification.
If you currently use independent contractors in your business, it is worth taking some time now to examine whether these workers are properly classified to avoid the ire of federal and state agencies and significant penalties later on.