Independent contractors are a growing segment of the retail workforce. Lower costs, reduced liability, and hiring fl exibility are just a few reasons that retailers fi nd hiring independent contractors to be so attractive. While these benefi ts are alluring, retailers need to be aware of the risks involved when engaging independent contractors.

The most signifi cant potential liability of worker misclassifi cation is back federal, state and local payroll tax withholding (e.g., FICA and income tax). The IRS has made reviewing employee misclassifi cation a priority when conducting audits. Other potential liabilities include overtime, benefi ts, and unemployment compensation. Often, the way the IRS becomes aware of misclassifi cation issues is through communication with state unemployment or revenue agencies, who regularly share information with the IRS on employee misclassifi cation.

Recently, a number of retailers, as well as other organizations, have paid the price for wrongly classifying workers as independent contractors. Several national supermarkets have settled lawsuits for several million dollars, where workers, employed by subcontractors alleged that the retailers were responsible for overtime and other Fair Labor Standards Act violations, under a joint employer theory. Retailers had argued that the workers were contractors and not employees. Most recently, the IRS opened many eyes when it hit FedEx with $319 million in federal tax liability for 2002 alone (the IRS is still auditing other years) because FedEx classifi ed the delivery drivers as independent contractors, while the IRS found them to be employees.

The lesson from these cases is clear—retailers interested in hiring independent contractors must be cautious. Courts and regulatory agencies use numerous legal tests to determine whether a worker qualifi es as an independent contractor or is an employee. Any test is fact-intensive and inherently subjective. However, the most critical test is the right of the employer to control the work being done.

In short, the fi nancial impact of misclassifying workers can be enormous. Accordingly, retailers should closely scrutinize any work situation before classifying a worker as an independent contractor.