More often than not, it all comes down to one central question: Who’s the Boss?
Despite this, many companies get it wrong when it comes to determining the difference between employees of the company and independent contractors working at the company. And getting it wrong can be costly.
In South Carolina a nurse classified as an independent contractor who was injured in an operating room accident was found to be a hospital employee and thus eligible for worker’s compensation because the hospital controlled her work, provided all her equipment, and had the right to fire her. In short, the hospital was the nurse’s boss.
In Illinois a construction company agreed to a settlement of $396,465 in back wages and damages when it was determined to be the boss after the Department of Labor found the company had misclassified employees as independent contractors and denied them proper compensation for hours worked as required by the Fair Labor Standards Act (FLSA).
And in Vizcaino v. Microsoft, the granddaddy of all such cases, thousands of workers classified as independent contractors by the company which makes the operating system you are probably using right now were determined by the IRS to be employees rather than contractors. Delighted to meet the new boss, the reclassified employees filed a class action suit in 1996 alleging that they should have been covered by the company Stock Purchase Plan and applicable 401(k) Plans. The price tag to Microsoft was a settlement for $97,000,000, not to mention complicated corrective contributions to the 401 (k) Plans.
Why do these misclassifications take place?
Often they are based on simple ignorance of the law. A company intends to hire an independent contractor but mistakenly gives the individual a company handbook, supervises him or her too carefully, and even enters the intended independent contractor into one or more company benefit plans. The result is the would-be contractor’s transformation into an employee.
Another company wishes to hire a new employee to perform the same work as certain existing employees but intentionally designates him or her as an independent contractor in order to avoid paying benefits. If a federal investigation discovers that the independent contractor performs the same job in the same manner as one or more company employees, the supposed contractor will be reclassified an employee, triggering all the employer obligations plus potential penalties the company hoped to avoid.
What are the liabilities for misclassification?
Company Benefits. Employees are eligible for company benefits pursuant to the terms of each benefit plan involved and the requirements of ERISA. This includes pension and 401(k) plans, group health plans, disability plans, life insurance and more. The determination that an independent contractor is actually an employee will subject the employer to expenses for all these benefits plus corrective contributions as required. Even further, an independent contractor wrongly classified as an employee and enrolled in a retirement plan could lead to possible disqualification of the plan.
Tax Consequences. An employer must withhold specific amounts from an employee’s salary for FICA, Medicare, and Federal, State, and Local taxes. In the case of a misclassification, employers are liable not only for future withholding but for all amounts that should have previously been withheld, with only a narrow exclusion for situations resulting from an audit in which the misclassification was in good faith and a reasonable basis existed for the mistaken determination.
Fair Labor Standard Act (FLSA) and Employment Law Issues. Unlike an independent contractor, an employee is eligible for overtime for hours worked in excess of 40 hours per week, unemployment compensation, and workers’ compensation, all of which must be provided to the misclassified employee. And an employee sensing he or she is being treated differently than others at the company by being classified as an independent contractor rather than an employee might even file a claim for discrimination if he or she is a member of a protected class under Title VII or state law.
So, with all this at stake, how does a company properly determine “Who’s the Boss?” You can learn more at our upcoming complimentary mini seminar to be held on Tuesday, March 25th at 5:30 pm at the Sterling Heights Chamber of Commerce. Here’s our press release…