In the June 2013 issue of Philadelphia SmartCEO magazine, Offit Kurman attorneys Howard K. Kurman and Mike Conley discussed the pitfalls of misclassifying employees as independent contractors. The article, “Misclassifying Individuals as Contractors rather than Employees,” offers advice for distinguishing between the two groups of workers. When does an Independent Contractor become an Employee? According to the Department of Labor (DOL), 30% of employers may be misclassifying workers as independent contractors rather than employees. Because of this, the DOL and Internal Revenue Service (IRS) have joined forces and are working with states to coordinate enforcement efforts, including liability for unpaid wages and severe tax penalties. “Recently, we have observed several circumstances where employers have incurred large financial liability as a result of misclassification of individuals as independent contractors rather than employees,” said Kurman. “What may seem like a clear-cut distinction can easily become muddled when even the best intentioned employer makes an inadvertent mistake.” Fortunately, the IRS provides some guidelines to help distinguish between an independent contractor and an employee with its 20-factor test, also known as the “right-to-control” test. The Fair Labor Standards Act (FLSA) provides additional guidelines, as well. In the meantime, here are a few tips to help you:
- How much control do you have over the worker? An independent contractor controls the manner and means of delivering services; an employee is closely supervised by his employer.
- What is the method of payment? An independent contractor will receive a 1099, while an employee typically receives a W2.
- Independent contractors typically offer their services to many organizations on a non-exclusive basis, while employees typically work exclusively for one organization.
- Independent contractors typically can incur profits and/or losses; employees typically make a salary or hourly wage with no risk of loss or potential for profit.
Of course, these are just a few of the many factors to consider, but typically “the IRS considers a worker an employee if the employer controls what work will be done and how the worker will do it,” explains Conley. If you have questions regarding proper classification of employees and independent contractors, it is prudent to consult with an experienced labor and employment attorney, like the ones found at Offit Kurman. We will help you classify your employees and independent contractors properly and make sure you are prepared for possible investigations. Please contact Howard K. Kurman at 410.209.6417 or firstname.lastname@example.org; Mike Conley at 267.338.1317 or email@example.com.