The potential consequences of improper classification of independent contractors

Some employers have learned some very expensive lessons about misclassifying independent contractors.

There is a minefield awaiting many employers as the strength of the “gig” economy continues to grow. Many employers are interested in taking on workers to do contract work, thus avoiding the expenses that go with having employees. It often seems a simple solution, but as Uber has discovered, those relationship can be fraught with difficulties.

Contractors don’t consider themselves contractors

As in the case of Uber many of the so-called contractors they hired took it upon themselves to drive a car on a full-time basis in order to maximize their income. By doing so they came to view themselves, not as contractors, but as employees of Uber. Many companies are in similar situations. The workers feel that if they are working for a company, contract or otherwise, they should derive some benefit from that relationship beyond just the money they are making. They want benefits. They want a security blanket to offer help in times of illness or disability. These are not offered to independent contractors. People who come from a traditional work relationship cannot grasp the concept of independent contractor as a lifestyle.
The problem with this is that without a true independent contractor relationship the company is at risk. You can find some guidance by reading The IRS and HR: Who is an Employee?

Potential consequences

In a previous blog post I talked about some of the consequences of misclassifying an employee as an independent contractor. These include:

  • You have not paid an “employee” correctly. You may have missed overtime.
  • You have not recorded work time correctly.
  • You have not filed the appropriate federal and state tax forms.
  • You may not have made appropriate contributions to retirement plans.
  • You may not have complied with the ADA.
  • You may not have provided them with the appropriate protections under either OSHA or the NLRA.
  • You may not have been paying appropriate workers’ comp premiums.
  • You may not have given them the appropriate benefits notices and statements.

In addition to these if a contractor is ill and cannot perform work they may be able to claim a denial of Family and Medical Leave protection. If you refuse to renew their contract they may claim discrimination on the basis of some protected status, and given the increasing diversity and age of our working population, that is not hard to do.
Companies with government contracts put their contracts at risk by misclassifying independent contractors. State agencies also get into the fray and fine companies for insurance loss and lack of paying into the unemployment funds.
The consequences can be many and the costs can be steep. Be careful as your urge to make use of the “gig” economy grows.

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