Employee or Independent Contractor? It’s not just a label.

I received an interesting response to my last post on the correlation between the unemployment rate and discrimination charges, which lead me to this blog post.

A reader suggested that employers could protect themselves by not having any employees and hiring only independent contractors.  Yes, there are many benefits to hiring independent contractors as long as they are truly that – independent.  However, misclassification of independent contractors when they really are employees is common.  This mistake has costly consequences for employers.

Below are 3 costs to employers who misclassify independence contractors:

  • Unpaid taxes.  Should the IRS audit your business and reclassify one or all of your workers as an employee, you now owe the IRS employment taxes, the employer’s share of FICA taxes, and federal unemployment taxes, which were not paid because the misclassified worker was treated as an independent contractor.  Additionally, the employer would be liable for penalties and interest for failure to pay the taxes and failure to file payroll tax returns.
  • Meal and Rest Break Premium Pay.  A worker classified as independent contractor probably did not receive meal and rest breaks.  Thus, a misclassified worker would be entitled to one hour of pay at the employee’s regular rate of compensation for each workday that the meal period is not provided.  A recent case in the California Court of Appeal held that an employee could recover up to two premium payments per work day (one for meal period violation, one for rest break violation).  United Parcel Service, Inc. v. Superior Court.  Furthermore, according to the California Supreme Court in Murphy v. Kenneth Cole Productions, Inc., the penalty for failing to provide rest or meal periods to non-exempt employees is subject to a three-year statute of limitations.  This means that an employee who has been long misclassified could recover up to two premium payments for each day that he or she missed a meal and rest break for the last 3 years (possibly 4).
  • Unpaid Overtime.  Independent contractors are exempt from overtime law.  Therefore, in California, a misclassified employee would be entitled to pay at a rate of one and one-half times the employee’s regular rate of pay for work in excess of 8 hours in one workday, or in excess of 40 hours in one workweek, and the first 8 hours worked on the seventh day of work in any one workweek.  Additionally, the employee is entitled to twice the regular rate of pay for work in excess of 12 hours in one day and any work in excess of 8 hours on the seventh day of a workweek.  Unpaid overtime plus waiting time penalties for unpaid wages add up quickly.

PRACTICAL TIP:  Employers, review your employee vs. independent contractor classifications.  Here is a link to employee classification for the IRS’s purposes.  Contact your employment counsel to review how your state’s laws define independent contractors.

Employees, if you believe you were misclassified as an independent contractor and were entitled to benefits afforded an employee, you should have your job duties reviewed by an employment attorney.

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In: Employment Law

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