An Easy Way To Avoid Lawsuits: Classify Employees Correctly
Overview:
Recently, there have been some high profile cases where employers misclassified workers as Independent Contractors. In one such case, Microsoft agreed to a settlement of $96 million for improperly misclassifying workers as Independent Contractors.
Also, Federal and State officials, many who are facing budget deficits, are aggressively pursuing companies that wrongly classify employees as Independent Contractors. It is assumed that the crackdown will yield at least $7 billion over 10 years. Misclassifying employees as Independent Contractors makes a significant difference in the amount of payroll costs, i.e., federal taxes, social security, Medicare, unemployment insurance premiums, worker's compensation premiums, employee benefits (vacation, sick, retirement, disability, health, etc.), office equipment and space, and overtime. It also affords employers reduced exposure to discrimination lawsuits as well as wrongful discharge. Additionally, several studies have indicated that, on average, misclassified workers do not report 30% of their income.
Many employers misclassify employees as a "tax dodge" which is illegal as well as a violation of the Fair Labor Standards Act (FLSA). The IRS has recently combined with the Department of Labor (DOL) to increase enforcement against employers who misclassify employees. The IRS believes that billions of tax revenue is being lost (over $7 billion) in misclassification of employees, therefore, they are conducting random audits on all size businesses. 100 new agents have been hired to assist with the initiative. The cost of misclassifying employees is massive.
In order to determine if a worker is an Independent Contractor, instead of an employee, the IRS uses a "20-Factor Test" and courts review several factors, including:
- The control exerted by the employer over the Independent Contractor
- The independence level of the Independent Contractor
- Whether the employer of Independent Contractor supplies their own tools and work space
- How the Independent Contractor is paid by the employer
- The relationship and the length of agreement
- The amount of direction given to the Independent Contractor from the employer
- Does the Independent Contractor offer his or her services to the general public or work exclusively for the employer?
Areas Covered in the Session:
- What is an Independent Contractor
- The difference between an employee and an Independent Contractor
- The benefit of using Independent Contractors
- The disadvantage of using Independent Contractors
- The IRS 20-Factor Test
- The consequences of misclassifying employees
- How to properly classify employees
Who Will Benefit:
- HR Managers
- Recruiters
- Business Owners
- Anyone who is responsible for classifying employees