Because employers are not required to provide and pay for things like Medicare, Social Security, payroll taxes and unemployment insurance with independent contractors, many owners simply classify their workers as such. Additionally, since independent contractors aren’t subject to minimum wage laws, overtime, vacation pay, and other benefits – unscrupulous businesses have used misclassification as way to both cheat the government and exploit their workers.
Because of this, both the IRS and the US Department of Labor have taken a very serious stance on employers who they discover have misclassified workers who should be employees. As a result, there are some serious penalties that any employer who has employees misclassified is risking – even if they are doing so unintentionally. Here is some information to help protect you and your business from misclassification:
How to tell the difference
First and foremost, you need some accurate criteria on which to determine whether or not your employees should be classified as such or if they are indeed independent contractors. According to the IRS, the criteria comes down to three specific aspect of your working relationship with a worker and who ultimately has the control in each of these. Specifically, these are:
If you, as an employer, have any say so in when, where, how, a worker accomplishes the task you need, they are likely an employee and not an independent contractor. If you ultimately retain the right to determine how the work your workers are doing gets done – then they are employees. Conversely, if workers who accomplish the work of your business decide to take on jobs on their own and use their own methods to accomplish them, they are independent contractors.
The Type of Employer-Worker Relationship You Have
There are a few significant things about your relationship with your workers that determine if they are employees or independent contractors. Only provide benefits like insurance, vacation, sick time, pensions, etc. to employees. In general, if you have a long-term expectation on their work for you and if they perform the main functions of your business, they are likely employees. Conversely, if your expectation of a worker is only for the short term and you do not provide benefits like those mentioned above they are an independent contractor.
Who controls how the worker gets paid and where they can get paid from?
If your workers work for flat rates on a job-to-job basis they dictate instead of regular wages and if they are free to offer their services to other employers while having significant personal investments in the tools or facilities with which they use to perform their work – they are independent contractors. Conversely, if your workers cannot advertise to other employers, earn a regular wage, and in reality only work for you, they are more than likely employees.
Notice that I’ve said in many places that a worker is “likely” an employee or a contractor. This is because things can be construed differently in different circumstances. The IRS will, if you ask, make a determination for you as to whether a worker is an employee or independent contractor. However, the process can be lengthy taking up to half a year to get a response.
What are the penalties for misclassifying employees?
Because of the stiff stance of the Department of Labor and the IRS on misclassification there are some very serious penalties that you as an employer will want to avoid if at all possible:
· You may be obligated to pay any past wages employees are due under FLSA. This amount includes both overtime and minimum wage requirements of the FLSA.
· You may also be obligated to pay back taxes for state, federal, social security, Medicare, and unemployment as well as any associated fines.
· Any due workers compensation benefits
· Mandatory provision of all legally required wages and benefits to existing and new employees moving forward.
What to do if your employees are currently misclassified
If you realize that you’ve made a mistake and you’ve misclassified employees for at least three years you can use the Voluntary Classification Settlement Program. This program is not available if you are already under an IRS audit, but if you are eligible it will allow employers to receive partial federal tax relief. To do this you must fill out IRS Form 8952. This form must be filed at least 60 days prior to the date at which workers will become reclassified as employees. This not only protects you legally but helps build trust between yourself and your employees.
Still have questions?
Please call us for a free appointment with Miami business Attorney Yoel Molina in our Miami office at 305-548-5020.