In my law practice, a repeated topic of conversation with my clients is whether a particular employee is an independent contractor or employee.
This question arises for many reasons, such as the employer’s attempt to avoid being responsible for employment income taxes, worker compensation premiums and liability to third parties for negligence or other causes of action. It also seems our poor economy and perhaps the rising cost of health insurance has been an incentive for businesses to classify workers as independent contractors to save on insurance premiums and employment benefits, like overtime pay.
Even during good economic times, I have observed that intense competition in a particular industry has led to the classification of employees as independent contractors to reduce operating costs. With this job market and especially in non-union employment situations, workers eager to have a job and make a living are not in a position to dictate their proper employment classification.
It is now being reported that the Internal Revenue Service is cracking down on employers who misclassify their workers. As we all know, especially in these tough economic times, our local, state, and federal governments are all looking for more revenue (money). According to a 2009 study by the Treasury Department’s inspector general, misclassification of employees costs the U.S. government approximately $70 billion in taxes. The state also loses significant payroll tax revenue.
For employers, the failure to properly classify workers can lead to a state investigation and an IRS audit, with potential enormous financial liability for unpaid taxes, workers compensation and unemployment tax premiums, employment benefits and fines. Additionally, if the employer finds itself on the wrong end of a USA/State of Florida vs. Employer lawsuit for misclassification of employees, the legal fees and costs to defend such a case will likely be huge.
The IRS recently announced that employers that misclassified workers as independent contractors can participate in a “Voluntary Classification Settlement Program.” Employers qualify if they are not under audit and have filed all the required 1099s for their independent contractors for the past three years. Under the program, the employer will pay 10 percent of the employment tax liability due on compensation paid for the latest tax year. The employer will not be liable for any interest and penalties, and will not be subject to an employment tax audit on the classification of workers being reclassified under the program for previous years. The IRS says it will not share information with the state or its agencies, and no admission of liability or wrongdoing is necessary.
So, employers, what should you do? Employers should seriously evaluate their specific circumstances to determine whether workers are properly classified as an independent contractor or employee. Control over the worker by the employer is central to answering this important question and all facts and factors impacting control must be taken into account. I have advised my clients many times, “Simply having an independent contractor agreement with the worker is not enough by itself to classify the worker as an independent contractor.”
I recommend that employers seek the help of a legal or tax professional well-versed on this issue to comprehensively review the employer’s circumstances and assist in deciding what course of action is best for the employer. The “Voluntary Classification Settlement Program” presently offered by the IRS gives the employer a new, viable option for consideration.
Jeff Cutler is in his second four-year term as a Village councilmember and a practicing attorney with more than 29 years of experience. His areas of specialization include civil, corporate and commercial law, including business and construction law, transactions and finance, personal injury, wrongful death, product liability, and insurance. He may be contacted at 305-446-0100 or by sending email to JCutler@delacruzcutler.com.