Companies that reduced their in-house employee workforce, in favor of retaining independent contractors (often called 1099 workers for the Internal Revenue Service (IRS) form issued to reflect their yearly compensation), seeking a perceived cost-saving measure, may have created a serious liability. Neither the hiring company nor the independent contractor can simply decide to designate an individual as a 1099 independent contractor without regard to the IRS classification factors which define an independent contractor. Parties cannot simply sign a written contract that states an individual is an independent contractor and make it so.

Employee misclassification can lead to legal challenges of all sorts. The IRS routinely examines the classification of independent contractors and if they find that an independent contractor has been misclassified and should, in reality, have been an employee, the ramifications can be severe. It can certainly result in being forced to pay the taxes of the misclassified employees and may also carry associated penalties. It is much easier for the IRS to collect unpaid back taxes and penalties from a hiring company rather than chase every misclassified independent contractor who failed to report the income. It is the hiring company’s responsibility to classify the individual correctly and it is the hiring company that will likely pay dearly for misclassification.

The independent contractors themselves, even after enjoying the benefit of being paid gross compensation from the company instead of receiving a pay check, may nonetheless later claim they were actually performing and being managed like employees. With that line of thinking, they should therefore be eligible for the health and welfare benefits granted to the company’s other employees, entitled to workers’ compensation or due unemployment pay, for example. Over the last 20 years, there have been a variety of investigations and lawsuits related to workers who were called independent contractors, but nonetheless served in employee roles. This has resulted in the payment of unpaid back taxes and/or benefits expenditures amounting to hundreds of millions of dollars by the hiring company, specifically due to misclassification issues.

• Behavioral: Does the company control or have the right to control what the worker does and how they do their job?

• Financial: Are the business aspects of the worker’s job controlled by the payer? (how the worker is paid, expense reimbursement, who provides tools/supplies, etc.)

• Type of Relationship: Are there written contracts or employee type benefits? Will the relationship continue and is the work performed a key aspect of the business?

Protection Starts with Preparation
While each employer/contractor relationship is different, there are multiple subject areas to be considered. An examination of both the position or nature of the task to be performed, as well as whether the person identified to fill the role may be viewed as an independent contractor, may factor into the analysis of the classification. Examples of some of the subject areas which may be considered are as follows:

Identify Misclassification Risks and Solutions
According to the Bureau of Labor Statistics, over 10 million American workers are classified as independent contractors. Companies that understand the challenges of utilizing and properly classifying independent contractors will gain the most advantage from those workers and avoid costly misclassification errors. Many businesses have embraced payroll service or referred employee programs to better manage their labor workforce, including the classification of their independent contractors. A staffing agency can provide a broad pallet of options to educate and rectify employee classifications on a go forward basis. Additionally, an agency can assist your company in identifying potential problem areas and propose possible solutions.

Rely on Resources You Trust
Successful deployment of independent contractors depends on understanding the benefits, risks and rules. For more information on effective employee management and other workforce strategies, please contact Mark Zolikoff at mzolikoff@volt.com or visit www.volt.com.