Business owners make the mistake of thinking they have a choice in how they classify their workers—they don’t. The IRS reports that millions of workers are misclassified yearly.
There are several reasons why this happens. The state and federal laws that define employees and contractors are complicated. Sometimes employers intentionally misclassify their employees as independent contractors to make payroll easier or to cut labor costs.
What Is an Independent Contractor?
The IRS has three different questions or categories to determine whether a worker is an employee or a contractor. All three center on how much control the employer has over them:
- Behavioral
- Financial
- Type of Relationship.
Does the employer determine how the worker behaves or performs her job (behavioral)? Independent contractors should be in a position to either make a profit or sustain a loss (financial) based on their own decisions.
That second one may cause confusion. But imagine you hire someone to bake a cake. You tell the contractor when you need it. The contractor determines how and where he buys the ingredients and the hours he works. Employers get to determine the result, but a contractor is going to decide on how to achieve it. The contractor’s decisions and actions will be a factor in how much profit is created.
When the cake is delivered, the relationship ends (type of relationship). Type of relationship can also be classified by whether benefits (medical, dental, retirement, etc.) are conferred. Contractors don’t typically receive these.
Employees
If the employer asks an employee to bake a cake, the employer determines how it is made, when it is delivered, and the hours the employees work to create it. They supply the tools and ingredients to make it as well.
It is up to the employer to realize a profit. Employees usually undergo training. Their actions are governed by an employer. Think of someone who makes sales calls. If he is an employee, there might be a script he reads from that was written and/or approved by the employer.
When employers deal with employees, it is the employer who decides how the employee is paid.
Employee or Independent Contractor? Understanding the Classification Standards
The changes in work are shifting how employers classify workers. Many employers list employees as independent contractors to avoid having to pay overtime, minimum wages, taxes, and benefits.
A recent National Employment Law Project study found that 30% of all employers are misclassifying employees. These are serious violations of federal and state labor laws. The practice is called payroll fraud, where employers intentionally or unintentionally misclassify employees. The consequences include paying back taxes, fines, and outstanding employee benefits.
What Is the Difference Between an Independent Contractor and an Employee?
An independent contractor is self-employed and provides a service to a company or individual. They manage their business and are not under the direct control or supervision of the company that hires them. The contract outlines the terms of the work, expectations, and payment.
An employee is hired by a business to perform specific tasks. They are subject to the employer’s direction and control. Employees are given the schedule, tools, and training to perform their job. If laid off, they receive retirement, paid leave, health insurance, and unemployment benefits.
The most significant difference between an independent contractor and an employee is the level of direction and control. Independent contractors have greater control over their work and run a service business. Employees are directly controlled and supervised by their employers to perform a specific job.
The state and the IRS are aggressively investigating employers who are misclassifying employees as independent contractors. Here are the standards used to decide whether you are an employee or an independent contractor:
Degree of Control
The degree of control is the most critical factor in deciding whether you are a worker or an independent contractor. Investigators examine factors such as how much control is exerted over where, when, and how the work is done and whether any training or tools are provided. An employer-employee relationship has all of these factors in place.
An independent contractor has a greater amount of freedom over their work. They are hired to complete a specific project or task and are responsible for getting the job done. The where, when, and how the work is done are irrelevant under this arrangement. The employer has less control and doesn’t provide any tools or training.
Economic Dependence
Economic dependence looks at the employee’s level of dependency on the employer. Typically, an employee relies on their employer for income, benefits, and job security. Independent contractors are self-employed and don’t rely on one employer for a livelihood.
Nature of Work
The nature of the work looks at the employee’s flexibility in performing the work. Some jobs, such as retail or manufacturing, require following specific company standards and guidelines. These employees use a high degree of skills in performing particular jobs, coming in at certain hours, working for one employer, and getting paid by the hour.
An independent contractor has more flexibility over the nature of their work. Employers need more control and are only concerned with completing projects according to specific standards.
Employers that misclassify employees as independent contractors must cover the back pay, fines, and penalties for these violations. You have rights; a skilled attorney will review your situation to determine whether you are rightly classified as an employee or an independent contractor.
The Consequence of Misclassification
The misclassification of employees is a severe offense. Federal and state officials could order you to do a mandatory test of the standards. Different government agencies can order a review and make you reclassify a worker as an employee. You could be forced to pay substantial fines and back taxes. These issues could put a small business or company out of business.
In Florida, misclassification can result in fines and civil penalties from the Florida Department of Economic Opportunity and the Florida Department of Revenue. The state makes it illegal for an employer to retaliate against employees who report their employers. The state can retaliate against the employer by taking further legal action against them.
Florida uses ten standards to decide the relationship between an employer and an employee:
- The control the employer has over the details of the work.
- Are you engaged in a different opportunity or business?
- Is the work done under the employer’s direction or by a specialist without supervision?
- The skill required to perform the job.
- Does the employer provide tools, training, equipment, and an office in which to work?
- The length of the relationship.
- Are you paid by the job or the hour?
- Is the work part of the regular business activities for the employer?
- Do both parties believe they are creating a relationship as an employer-employee or independent contractor?
- Is the hiring party a business or an individual?
The state uses these tests to see if you should classify your employees as independent contractors.
Businesses also face the possibility of a lawsuit from misclassified employees. They could ask a court to award them back pay, punitive damages, pain, suffering, emotional distress, and back benefits. Workers in many different industries have filed lawsuits against their employers for misclassification.
Contact Feldman Legal Group Today
Employment law is complex, and you need an attorney to guide you. The Feldman Legal Group has decades of experience working with employer misclassification cases. We understand the law and know how to ensure your rights are respected.
Our track record speaks for itself, with our clients giving us five-star reviews. Your attorney listens to what you say and explains how the process works in simple terms. We handle everything so you can sit back and relax while we take care of the legal issues.
Our team of professionals investigates and looks for evidence to strengthen your case. We are advocates who are unafraid to stand up and fight for you. Time is of the essence in these cases, and you want to reach out to us right away for help. Call Feldman Legal Group today at (813) 639-9366 to schedule a consultation to discuss your case with an attorney.
