Using Independent Contractors just got riskier!

The federal government is handing out money to states to catch the improper use of independent contractor status
The federal government is handing out money to states to catch the improper use of independent contractor status

One area of employment law that has always been fraught with danger for employers has been the use of independent contractors. I have written about it before, here and here as examples. The use of independent contractors is scrutinized by several government agencies, both federal and state. The use of ICs is looked at by the US Department of Labor, the IRS, state departments of labor, state workers’ agencies and state tax departments. Incorrectly calling someone an independent contractor can cause you a world of pain and it just got riskier.

Feds spend money to catch cheaters

One of the goals of President Obama and the labor department are to reduce misclassification of employees. This means improper use of exemptions under the FLSA (that is being worked on this fall) and the improper use of the status of independent contractor. To this end the government has allotted $10.2 million to 19 states to help fund their efforts to eliminate the improper use of independent contractors. The Consolidated Appropriations Act of 2014 provides funds that “will be used to increase the ability of state unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report the wages paid to workers” according to a press release. For already being very good at finding improper use of the IC classification, four states received extra money as a reward.
The states that received the grant money include: California, Delaware, Florida, Hawaii, Idaho, Indiana, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin. The states that got the extra money were Maryland, New Jersey, Texas, and Utah. All of the states intend to use the money to increase their audit and education efforts according to the attorneys at Pepper Hamilton LLP.

Frequent violations

In the work that I do I frequently find companies using the independent contractor status incorrectly. Most are small businesses who don’t know the ins-and-outs of the law and they see it as a wiser business decision that saves them money and hassle. Unfortunately they find out that it was a riskier decision that costs them more money in the long run. Big businesses are not immune to making this mistake. FedEx found out the hard way that their drivers could not be considered independent contractors, though I am not how they ever thought that was a good idea.
What is necessary to insure good compliance
All the government agencies involved have rules that must be followed to insure that someone is truly an independent contractor. I am not going to repeat them all here, rather I will use the IRS rules. There are a number of factors that go into defining an IC, but the primary one is the amount of control an employer exercises. The IRS defines that this way:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. 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.)
  3. 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?

It essentially comes down to if they cannot tell the difference between your employee and your contractor the contractor is going to be declared an employee.
Other things that are needed are:

  • A good contract
  • A firm statement that contractor is not considered an employee and cannot file for unemployment

Even given those things an agency may still make an adverse determination based upon the totality of the evidence.

Start now

If you have now read this and thought “OMG, I am in trouble” then start now to correct your situation. Seek advice on what you can do. That will generally be provided by an attorney, a consultant, an accountant, an industry association or some combination of this group. Waiting until the government comes knocking on your door is not a wise business decision.

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