One of the first decisions a business needs to make when it seeks to hire help is whether the individual being hired is an independent contractor or an employee. From the business’s perspective, there are several advantages to classifying the individual as an independent contractor. Among other benefits, businesses do not need to pay payroll taxes, unemployment insurance, workers’ compensation insurance, and minimum wage or overtime to independent contractors. As a result, businesses are apt to “choose” to classify individuals as independent contractors. However, as a matter of fact, the business does not truly have a choice and instead must properly classify in accordance with the law given the facts related to the working conditions of the individual.
The incorrect classification of an employee as an independent contractor can prove costly to a business in a variety of ways. For example, the state may bring claims in an attempt to recover unpaid unemployment insurance premiums, along with interests and penalties. Or, the IRS could conduct an audit seeking unpaid payroll taxes, interests, and penalties. Similarly, the Department of Labor, or an individual employee, could file a lawsuit seeking unpaid minimum wage and overtime premiums that result from a misclassification because, after all, nobody tracks the overtime hours of someone who is supposed to be an independent contractor. These claims carry with them the potential for liquidated damages (doubling the unpaid wage) and attorney’s fees owed to the other side; furthermore, these claims can be brought on behalf of a class with relative ease. Of course, any of these proceedings will require a business to incur substantial expense in mounting a defense.
Given this landscape, getting ahead of the claims by ensuring compliance is an effective strategy for a business to minimize its risks of misclassification and avoid the consequences of the false choice. Of course, because there are a multitude of laws at both the state and federal level that are concerned with the distinction between employees and independent contractors, there are a multitude of variations as to the applicable independent contractor/employee test. These various tests are generally multi-factored and very fact-intensive (as one would expect from a seven or eleven point analysis). However, the general theme is that the more control exercised by the business over the individual the more likely the individual is to be classified as an employee. Given these tests, and the fact that this determination is not simply an employer’s choice, it is important for businesses to carefully review with counsel any individuals that have been classified as independent contractors to ensure the business understands its risk. From there, taking preventative steps to reduce the risk of non-compliance is often a business’s most cost-effective strategy in the long run.
ABOUT RUSSELL BERGER
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Russell Berger is an accomplished labor and employment attorney who is well-versed in litigating in both state and federal courts, as well as providing counsel to employers on employee matters. He represents employers, businesses and professional clients in employment disputes throughout the country. Mr. Berger primarily focuses on litigating and counseling clients regarding matters of minimum wage and overtime under the Fair Labor Standards Act and state laws, wrongful termination, non-compete agreements, and employment and severance agreements. Mr. Berger’s practice also includes handling claims and providing counsel regarding retaliation, discrimination and harassment (under Title VII and state anti-discrimination laws), as well as under other federal statutes, such as the Family Medical Leave Act (FMLA), the Age Discrimination in Employment Act (ADEA), and American with Disabilities Act (ADA). He also handles other work related issues such as employment contracts and general contract claims, employment-related tort claims, and other business and professional tort claims.
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