If you have someone work for you, then you, the employer, need to determine whether you have hired an “independent contractor” or an “employee.” “Classification” is the term employment lawyers use to sort out whether the worker is an employee or an independent contractor. Classification has very important legal and financial implications for you, the farm or business owner.
Classifying a worker as an employee requires that you, the employer, withhold income taxes and pay one-half of FICA tax, federal and state unemployment taxes, maintain workers’ compensation insurance and make numerous filings during the course of the year. In light of these tasks and expenses, farmers and small business owners are quick to resist the reality that their worker should probably be classified as an employee when calling them an independent contractor seems so simple.
The independent contractor takes care of their own tax obligations. You, the business owner, must report payments to your independent contractor via a 1099. As a result, new and small businesses and certain industries have been inclined to hire “independent contractors” as though it is simply an option that allows them to avoid a lot of paperwork and tax withholding.
However, if a governmental agency finds that you have “misclassified” an employee as an independent contract, you will be in a very difficult, expensive position. Governmental agencies, to include the IRS and Department of Labor, Michigan’s Unemployment Agency and Department of Treasury cooperate and share information. So, if one agency questions your classification, it is likely to work with other agencies to maximize recovery of money that is payable to any government entity.
But how will they know? Even if you have obtained the worker’s signature on a well-drafted independent contractor agreement, what is likely to happen if they stop receiving work from you? Will they file a claim for unemployment compensation? If they get hurt “on the job” would they seek workers’ compensation? If either of these things occur, your classification will come under rigorous scrutiny.
Additionally, Administrator’s Interpretation, No. 2015-1, issued by the U.S. Department of Labor Wage and Hour Division Administrator David Weil cites numerous complaints to the Department of Labor’s Wage and Hour Division by workers asserting that they have been misclassified. An increase in complaints is likely the result of the fact that this topic is getting the attention of the mainstream press, where Millennials and workers displaced by the recession are increasingly likely to rely upon multiple “gigs” rather than traditional employment.
As explained in Administrator’s Interpretation, No. 2015-1, when an employee is improperly classified as an independent contractor:
- the worker does not receive “important workplace protections” such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation.”
- “Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers.”
- “some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.”
For these reasons, The Administrator’s Interpretation was issued to provide additional guidance toultimately curtail misclassification. The DOL is, in no uncertain terms, making known its effort to rein in independent contractor classification and to bring enforcement actions.
When do you need to classify your worker as an employee? Detailed definitions and a multi-factoral test are included in Administrator Weil’s Interpretation. Before you drive into such details, focus on “the goal” of the test according to the DOL: “to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” So, if someone working for you appears to have no other source of income, be very wary of inclination to call them an independent contractor and consider:
- Does the worker have an opportunity for profit or loss? If the worker is in business for him or herself, they face the possibility of profit or loss. If simply working more hours for your business is all that really permits them to make more money, the worker is your employee.
- Is the work performed integral to your business? If it is integral, you have hired an employee; in contrast a true independent contractor’s work is unlikely to be integral to your business.
The financial risk of misclassification is too high to ignore. Your business can be required to pay every tax and other payment you would have paid to Federal and State authorities, if you had properly classified the worker as an employee, along with back pay, overtime, plus fines, penalties and interests. In light of this risk, you should seek the advice of an attorney who specializes in employment law if you are concerned that you have misclassified a worker or if you were thinking about hiring an independent contractor. An attorney experienced in this area of law will help you reduce the risk and expense, going forward, to include advising you with regard to the benefit of seeking “amnesty.” If your attorney thinks you have misclassified, but doesn’t mention amnesty, you need to keep looking for an attorney that truly specializes in this area of law.
If you feel confident that your worker is an independent contractor, are you prepared to respond to any agency that might scrutinize your decision? Your employment attorney will work with you to be sure that your contract, and every other aspect of the relationship, is consistent with your classification and that you are gathering records to support the classification.