Misclassifying Employees As Independent Contractors

Misclassification of employees as independent contractors is a serious workplace issue throughout the United States. Many employers mistakenly misclassify their workers as independent contractors, yet it is common for employers to deliberately misclassify their employees to help reduce costs and avoid paying state and federal taxes.

The difference between a true independent contractor and an employee who has been misclassified as an independent contractor is complicated. Unfortunately, a misclassified employee will often lose valuable workplace protections, such as 

the right to join a trade union. He or she may also face an increased tax burden, lose out on overtime pay, and may become ineligible for unemployment and disability compensation. 

Finally, misclassification is a problematic issue for federal, state, and local governments as they will suffer financial losses when employers try to avoid their tax obligations.

Independent Contractor Defined

(IRS) Test To Determine Employee Classification

(DOL) Test To Determine Employee Classification

Reasons Why Employees Misclassify Workers

Independent Contractor Defined

An independent contractor is someone who provides a service or good to an individual or business under the terms of a contract which delineates his or her specific work responsibilities. However, the contractor retains control over the way he or she provides their services.

Furthermore, an independent contractor is not subject to an employer’s direct control, except for instances specifically outlined in a mutually binding contract. The contract for a particular job will typically describe the expected outcome. Therefore, an independent contractor more or less treats an employer like a client. As such, an independent contractor may have several clients and is usually thought of as self-employed.

The distinction between an actual employee and a self-employed, independent contractor is not always clear cut. Many employers may classify their workers as either. Fortunately, there are several standards which can help determine if someone is an independent contractor. 

Below are two independent contractor tests used by the Internal Revenue Service (IRS) and the Department of Labor (DOL) to help define who is an independent contractor.

Internal Revenue Service (IRS) Test:

Because the IRS “suffers” from lost tax revenue, it has taken a strong interest in the issue of employee misclassification. The IRS typically examines a series of circumstances to help determine whether an employer is allowed to control how their workers perform their job duties. 

In most cases, if the employer can control how their workers perform, then those workers will be thought of as employees and not as independent contractors.

Facts that demonstrate evidence of the amount of control and independence fall into the following categories:

Behavioral Factors: Does an employer control or have the right to control a worker and the way a worker performs his or her job? The existence of employee training, for example, could indicate that there is an expectation to follow certain employer guidelines. This alone may show a worker is more likely an employee.

Financial Factors: Are business aspects — such as the way workers are paid, if expenses are reimbursed, etc — controlled by the payer? 

Type of Relationship: Are there employee benefits — such as insurance, vacation pay, etc — or written contracts? Will the working relationship continue, and is the work done an important aspect of the business? 

Department Of Labor’s (DOL) Economic Reality Test

The DOL uses an economic reality test in order to determine who an employee is — as well as who is eligible for FLSA benefits — by establishing if a worker is economically dependent on an employer. The DOL states that “an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.”

The DOL focuses on the following factors:

• Extent of independent business organization and operation. 
• Degree to which the services rendered are a crucial component of the principal’s business.
• Amount of the contractor’s investment in facilities and equipment.
• Nature and degree of control by the principal.
• Contractor’s opportunities for profit and loss.
• Permanency of the working relationship.
• Level of judgment, initiative, and/or foresight in open market competition with others that is necessary for the success of the independent contractor.

Why Employers Misclassify Workers   

Unsurprisingly, many employers are motivated to misclassify workers so they don’t have to pay Social Security and unemployment insurance. Combining tax savings and savings from income and Medicare taxes mean that a typical employer can save between 20 to 40 percent on labor costs.  

Besides tax savings, an employer may benefit from misclassifying an employee in a number of ways, including:

• Some employers misclassify workers to avoid laws enforced by the Equal Employment Opportunity Commission (EEOC). The EEOC is of course the entity responsible for protecting employees’ civil rights.
• Misclassifying an employee as an independent contractor frees an employer from the responsibility of providing a minimum wage and abiding by hourly wage laws.
• Union organizing and bargaining units can be weakened or eliminated by misclassifying workers because independent contractors are not protected by the National Labor Relations Act.
• Some employers misclassify employees to avoid verifying whether workers are U.S. citizens or protected by a work visa, which means that employers can disregard labor laws and exploit immigrant workers.
• Employers can save on health and pension plans because independent contractors are typically not permitted to enroll in employer based plans.

What Can West Coast Employment Lawyers Do For You?

If you have made up your mind to take action, it is important to work with an attorney that specializes in cases like yours. The employment lawyers at West Coast Employment Lawyers have extensive experience handling employee misclassification  cases. We will work tirelessly to gather the facts, find and interview eyewitnesses, hire experts, and fight for your rights.

We work on a contingency basis, which means we only get attorney’s fees if we are able to recover for you. Our legal team is available 24/7 and will take care of your case from start to finish. For a free no-obligation consultation with an employment attorney in California, contact our office at 1-800-247-9235.