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. Despite the state and federal laws that define employees and contractors, they are complicated. Or 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.
- Type of Relationship
Does the employer determine how the worker behaves or performs her job (behavioral)? Independent contractors should also 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 you give benefits (medical, dental, retirement, etc.). Contractors don’t typically receive these.
Employees are the opposite. If the employer asks them to bake a cake, she determines how it is made, when it is delivered, and the hours the employees work to create it. She will 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.
Consequences of Misclassification
Employees have rights, and when they are misclassified, they are unable to use them. Labor laws are built around employees. Minimum wage, for instance, is a right of an employee.
Misclassifying an employee as an independent contractor cuts labor costs. If two businesses are competing with each other, the one who tries to save money through intentional misclassification has an unjust advantage.
Don’t think that misclassifying someone only shortchanges the IRS. The money doesn’t stop at the IRS—it goes towards state and federal programs too.
Feldman Legal Group
Employees who are misclassified as independent contractors are being stripped of their rights. At Feldman Legal Group, we represent those who have been mistreated by their employers. Don’t lose your rights as an employee so someone can cut labor costs unfairly. Contact us online to request an assessment. We can also be reached at 855-442-8089.