Misclassifying a worker can have dire consequences as a violation of various employment, labor and tax laws. Employers may be enticed to misclassify employees given the cost of doing business. Employers do not have to pay employment taxes for independent contractors, nor do they have to offer benefits, pay minimum wage/overtime, purchase workers compensation coverage or adhere to certain anti-discrimination laws.
When determining whether a worker is an independent contractor or an employee, there are several tests that are applied depending on which governmental entity is making the assessment. The IRS, for instance, which loses eye-brow raising amounts of money from misclassification, relies on a fairly exhaustive 20 factor test. Talk about a gray area. Many of the tests used have a commonality, highlighting control over the worker. Although other factors are considered in making the determination, control over the worker has often been looked at as the deciding factor. An employer who has control over the worker’s schedule, method of performance, jobs taken and other work details, likely has hired an employee not an independent contractor.
Recently, the Department of Labor made it more difficult to legally classify a worker as an independent contractor. The DOL strayed from focusing on the control test and adopted the more restrictive economic realities test focused on whether the workers are economically (i.e. financially) independent from the employer. When employing the economic realities test, the DOL instructs employers to consider the following:
- the extent to which the work performed is an integral part of the employer’s business;
- the worker’s opportunity for profit or loss depending on his/her managerial skill;
- the extent of the relative investments of the employer and the worker;
- whether the work performed requires special skill and initiative;
- the permanency of the relationship; and
- the degree of control exercised or retained by the employer.
The DOL specifically guides employers not to give undue weight to the control factor.
As with any of the tests, the economic realities test requires looking at the employer’s relationship with the worker holistically. Each factor should be considered in relation to the others. Needless to say, weary employers may fall into the misclassification trap and it can cause more damage than properly classifying your workers at the start. Employers should seek legal advice when hiring a worker. If you believe that you have misclassified your workers or you have been misclassified yourself, contact an attorney today for a free consultation.