It’s very tempting to hire people and label them as independent contractors. You’re saving money because independent contractors aren’t entitled to employee benefits, overtime and wage-and-hour protections. But this is a risky strategy. Courts have been cracking down on employers who misclassify workers as independent contractors when they’re really employees.
How to Correctly Classify Employees
So how do you tell whether you can safely label a worker as an independent contractor? It varies a bit from state to state, but in states like Massachusetts, California and New Jersey, courts will generally assume a worker is an employee unless the following are true:
- The worker is free from your “direction and control"
- The worker doing something outside your company’s usual course of business
- The worker is engaged in an “independently established trade, occupation, profession or business” of the same nature as the service they are providing to you
Other states focus on whether the services being provided are “an integral part” of the employer’s business, how permanent the relationship is, and how much control the company has over the worker. If any of those factors are significantly present, the involved court might deem the worker to be employee.
The Costs of Misclassifying Employees
Misclassification is costly to the employer. Failing to provide W-2s for employees can subject you to back taxes totaling up to 41.5% of their wages for the past 3 years. In addition to damages, you might have to pay attorney fees. If the IRS thinks you intentionally misclassified employees, you can face criminal charges.
So if you’re wondering whether it’s safe to try to classify some of your workforce as “independent contractors,” you should really talk to an employment lawyer first to determine if you’d be complying with the law. At LawrenceQueen, we can help you ensure all aspects of your business operations are compliant with both state and federal laws. Reach out to us so we can help you avoid costly mistakes.