Over the past few years, there has been a concerted effort by the US Department of Labor and state attorneys general to target businesses that misclassify employees as independent contractors. Utilizing independent contractors can, under some circumstances, help to reduce payroll expenditures and limit potential employment-related lawsuits and liability. However, courts and regulatory agencies have increasingly ruled against businesses’ attempts to label workers as independent contractors when those workers, in all material respects, fit the definition of employees.
In light of ever-increasing regulatory scrutiny, businesses should seek knowledgeable counsel when deciding whether to designate workers as 1099-eligible independent contractors or W-2 employees.
Independent Contractors: Workers with(out) Benefits
Businesses that can properly classify workers as independent contractors, rather than employees, may be able to reap certain tax-related benefits and limit potential liabilities. For example, businesses that only use independent contractors may not have to pay social security taxes, or obtain state unemployment insurance or workers compensation insurance. In addition, businesses may not have to include independent contractors as eligible participants in standard benefits packages. Further, businesses may be able to push business-related expenses on to independent contractors that they otherwise would need to cover if the workers in question were employees.
In addition to those financial benefits, businesses may be able to limit exposure to potential lawsuits that employees (but not independent contractors) would otherwise be entitled to bring. Unlike independent contractors, employees can bring suits based on discrimination, wrongful termination, overtime pay, and other similar causes of action.
How Do You Determine When a Worker is an Employee as Opposed to an Independent Contractor?
Determining whether a worker is an independent contractor, rather than an employee, requires a fact-intensive, case-by-case analysis. The analysis is based largely on a list of classification criteria provided by state and federal regulatory bodies. Some key criteria include:
(a) whether the business has control (or the right to control) the worker’s work-related activities and how the worker provides his or her services;
(b) how compensation is determined, whether expenses are reimbursed, and which party provides necessary work-related equipment;
(c) whether employee-type benefits are provided; and
(d) whether the working relationship is open-ended or for a limited time/scope.
When businesses are permitted to hire independent contractors, such classification, among other things, reduces the amount of taxes businesses pay to state and federal governments. State and federal governments are very interested in taxes. As a result, it is not uncommon for their agencies to audit businesses that hire independent contractors to confirm compliance with laws governing classification of workers. Businesses that are found to have violated such laws face significant penalties and may have to pay back wages and taxes for wrongly-classified workers.
Given the foregoing, it is highly recommended that businesses retain competent legal counsel to ensure that workers are properly classified.
If you are interested in learning more about this topic or require counsel in connection with worker classification-related matters, please e-mail us at firstname.lastname@example.org, or call us at (212) 246-0900.
The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.
This blog post was originally published in 2016 and updated on November 11, 2021.