Employment Law Blog

CONSEQUENCES OF MISCLASSIFYING WORKERS AS INDEPENDENT CONTRACTORS

Over the past several years, more and more employers are attempting to cut costs by hiring individuals as independent contractors as opposed to employees. This trend, however, has caught the attention of the Federal Department of Labor, which this year has again increased its budget to “detect and deter” misclassification of workers as independent contractors. This budget also includes the addition of dozens of new full time employees dedicated to investigate possible violations resulting from misclassification.

Misclassification occurs when businesses hire independent contractors to do the work that an employee would normally do. In order to determine whether you have properly classified a worker, it is helpful to understand some of the general characteristics of each type of worker:

EMPLOYEE

• Typically does not have a contract.

• Is paid by the hour.

• Tools to do the job are provided by the Employer.

• Is reimbursed expenses.

• The work is controlled by the employer in terms of hour, nature, method, and manner of work.

CONTRACTOR

• Typically is hired under a written contract.

• Is paid by the job or project.

• Provides own tools and supplies.

• Expenses related to the project are included in the contract price.

• Is largely left unsupervised to complete the job or project.

If you have misclassified workers, you can expect fines and penalties from nearly every government agency that oversees employees – from the IRS, to the Department of Labor, to the Unemployment Commission, to the Department of Workers’ Claims.  Each of these departments loses tax revenue when the individuals are misclassified.

To avoid a costly and time-consuming investigation, any business owner who hires independent contractors should immediately conduct a self-audit to determine if the business is misclassifying its workers.  This is true even if you believe that you are not vulnerable.  All it takes is one worker making an anonymous call to the state or federal department of labor to trigger an investigation into your hiring practices. Such an investigation is likely to result in fines and costs which exceed any potential cost savings.

Cynthia L. Effinger, an Associate of the firm, joined McBrayer law in 2012. Ms. Effinger has a broad range of legal experience gained through 13 years of practice throughout the Commonwealth of Kentucky where her clients conduct business. Ms. Effinger’s practice is concentrated in the areas of employment law and commercial litigation. She also has experience with First Amendment litigation, securities litigation and complex litigation. Ms. Effinger can be reached at ceffinger@mcbrayerfirm.com or at (502) 327-5400, ext. 2316.

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This article does not constitute legal advice.