Employment Law

Q. I operate a small family business in Nassau County. We pay all of our workers as independent contractors, but I am not clear on the distinctions between employees and independent contractors. What are the consequences of misclassification?

A.The consequences of misclassification can be significant. The IRS has announced plans to audit 6,000 businesses by 2013 to determine whether unpaid taxes and administrative penalties should be levied against employers who have misclassified employees as independent contractors. Employers who misclassify employees as independent contractors in order to avoid paying taxes and benefits face stiff administrative penalties and the imposition of costs against them.

Additionally, the Federal Department of Labor has launched a misclassification initiative as part of Vice President Biden's Middle Class Task Force. The purpose of this initiative is to investigate, deter and correct worker misclassification. There are now almost four times as many Fair Labor Standards Act cases filed against employers alleging misclassification than there were in the late 1990's. State legislatures also are formulating legislation aimed at combating misclassification. A New Jersey bill, for example, would deem maritime truckers to be employees and not independent contractors.

In general, "independent contractors", unlike "employees", are in business for themselves. They set their own schedules, and they pay their own expenses. To determine whether a worker has been wrongfully misclassified as an independent contractor, federal courts apply a three-factor test focused on the facts and circumstances of a work relationship in light of (1) behavioral control, (2) financial control, and (3) the relationship between the parties.

If you are concerned about potential liability for past misclassification, you can take advantage of the new IRS Voluntary Classification Settlement Program, which allows eligible employers to voluntarily reclassify workers as employees where appropriate in return for partial amnesty for past misclassifications.