Employee misclassification occurs when employers fail to property classify a worker as either an independent contractor or an employee. The identification of a worker as either an independent contractor or an employee can have significant consequences on the type of pay and benefits that the individual receives.
Employee misclassification occurs when an employer treats a hired employee as an independent contractor, or vice versa. In general, a full-time employee may be entitled to benefits including:
- Sick leave; and
- Worker’s compensation.
An independent contractor is generally not entitled to receive these benefits under the law from the entity they are providing services to unless provisions stating otherwise are included in their contract.
What is the Difference between an Employee and an Independent Contractor?
According to the guidelines provided by the Internal Revenue Service (IRS), an employee includes any individual who performs services for an employer in a situation in which the employer can control the work to be done as well as how it will be done.
An independent contractor, in contrast, is defined as working in a situation where the employer can control the result of the work but not the method or means by which the work is accomplished or completed. In other words, an independent contractor has more freedom to complete their work in their own way.
It may sometimes be difficult to distinguish between an employee and an independent contractor and the difference may be viewed as somewhat subjective. When analyzing cases of employee misclassification, IRS and other authorities will employ what is called the 20 factor test, which assists them in determining a worker’s proper classification.
This test includes the following factors:
- Instructions. Independent contractors direct themselves, whereas employees are given instructions;
- Training. Employees are told to do things by a specific method or procedure, whereas independent contractors are not;
- Integration. The services of employees are integrated into the company’s operations, not separate from them;
- Services rendered personally. Independent contractors often delegate duties to subcontractors rather than doing the work themselves;
- Hiring, supervising, and paying assistants. Independent contractors can hire their own assistants;
- Continuing relationship. An employee’s relationship with the company is ongoing, whereas an independent contractor may never work for the same employer twice;
- Set Hours of Work – independent contractors make their own schedules
- Full-time work. Employees generally work full-time, whereas independent contractors often work part-time;
- Work done on the employer’s premises. Employees work on site, whereas independent contractors can work wherever convenient or necessary;
- Order or sequence of work to be done set by the employer. Independent contractors can decide how work is done so long as it is finished according to the contract, whereas employees must complete their work according to the direction of their employer;
- Oral or written reports. An individual who must report to their employer on a regular basis is an employee;
- Payments. Employees are paid biweekly or monthly, whereas independent contractors are paid by the job completed;
- Expenses. Employees’ business expenses are often covered by the company; whereas independent contractors must cover their own;
- Tools and materials. An independent contractor will usually provide their own tools and materials needed to complete their work, whereas an employee will use their employer’s;
- Investments. Independent contractors make personal investments in equipment, advertising, etc., whereas employees use equipment which belongs to their employer;
- Profit or loss. An employee’s work will not generally change their pay, while an independent contractor’s may;
- Works for more than one person or firm. If an individual works for more than one person for firm, this is a good indicator that they are not an employee;
- Services available to the general public. An independent contractor makes their services available to the general public;
- Right to fire. An independent contractor cannot generally be fired unless they have not performed up to the standards of their contract, whereas employees can be fired for whatever reason or no reason at all;
- Right to quit. An employee can quit at any time, whereas an independent contractor is legally obligated to finish whatever work was agreed upon.
Why Might an Employer Hire an Independent Contractor?
There are certain advantages to hiring an independent contractor as opposed to another employee. For example, an employer can save money since they are not required to provide or pay benefits or make employment contributions.
In addition, an independent contractor cannot sue for certain employment-related claims such as discrimination and family and medical leave. An independent contractor can also be extremely helpful if they are only hired for a specific amount of time to complete and specific project.
There are, however, some precautions an employer should take when hiring independent contractors to protect themselves from liability and to maintain a productive employment relationship. The best way for an employer to protect themselves from liability is to have a contract with the independent contractor.
This contract should include provisions for the following issues:
- What services are to be performed; and
- The time period those services are expected to be completed in;
- How the independent contractor will be paid;
- How much reporting the independent contractor is required to do;
- Confidentiality obligations, which may, in some cases, include a non-disclosure agreement;
- Warranties; and
- Any restrictions or specifications regarding subcontractors the independent contractor is permitted to hire to assist them in completing the work.
There are also some requirements an employer has with regards to independent contractors. Employers are required to pay Social Security, federal, state taxes on behalf of any employees. For independent contractors, employers must report to the IRS any payments which are made to independent contractors for services that are rendered to their business for more than $600 by filing a 1099-MISC Form.
What are Some Common Employee Misclassification Disputes?
There are several different common categories of employee misclassification disputes, including:
- Wages, especially the method and timing of payment, such as regular wages vs. payments after completion of a project;
- Overtime pay disputes;
- Paid sick leave, medical leave, and other benefits;
- Worker’s compensation; and
- Tax forms and tax consequences.
Depending on the nature of a dispute, a lawsuit may be required to resolve the issue. This may lead to an award of damages, often used to compensate the worker for lost wages, benefits, and other losses incurred.
In the alternative, the worker may be required to return benefits or wages if they were not, in fact, entitled to them. Certain disputes may require investigation from a government agency such as the Wages and Hour Division (WHD) of the United States Department of Labor.
Do I Need a Lawyer for Help with an Employee Misclassification Lawsuit?
It is essential to have the assistance of an employment contract attorney for any employment misclassification issues you may be facing. Employee misclassifications can lead to major legal issues.
If you are the worker who has been misclassified, you may suffer significant losses. Your lawyer can review your situation, determine if you were misclassified as an employee or independent contractor, and assist you with filing a lawsuit to resolve the issue, if necessary.
If you are an employer, having the assistance of a lawyer can help you properly classify your employees. There are requirements for each type of worker and failure to comply with those requirements can result in significant consequences. Your lawyer can also help you defend a lawsuit if you are sued by a worker and represent you during any court appearance.