What is Employee Misclassification as Independent Contractors

Employee misclassification is very common in the United States. It occurs when employers misclassify their employees as independent contractors. Why would they? Mostly in order to shorten their spendings.

To fully understand employee misclassification, there is an important distinction to be aware of.  And that is the difference between an employee and an independent contractor.

Understanding the incentives of employers and the legal consequences that await them if caught, is also important. Besides that below, you will also find a few tips on how to handle the situation if you have been misclassified as an independent contractor.

Employee vs. Independent Contractor

How to differentiate and what rights do each have? According to the following IRS publication, the main telling factor is how much control the employer has over the worker. The control refers both to the behavioral and financial aspects.

Employees are monitored considerably, while independent contractors are more of free spirits in that regard. If the employer knows where the worker worked, what equipment they used, then the worker classifies as an employee.

Along with that, independent contractors are financially responsible for the tools they use. Furthermore, an independent contractor usually receives a flat fee and is open to other offers. same cannot be said about employees who work full time or are paid hourly. Finally, independent contractors cover travel or business expenses themselves while employees enjoy a number of benefits such as health insurance unavailable for independent contractors.

What Independent Contractors Do Not Have

If you are an employee based in California, you are protected under:

• The California Labor Code

• The California Family Rights Act

• The Fair Employment and Housing Act
  
  

Independent contractors are not. So, being misclassified would mean losing this protection. As an independent contractor, you will also loose state-subsidies meant for employees who take leaves of absence in cases of childbirth, illness or injury.

Employer's Reasons

Misclassification as independent contractors is a trick that benefits the employer financially. Here is what responsibilities an employer avoids by misclassifying employees:

• Not paying overtime

• Avoiding the share of employee's Social Security and Medicare taxes

• Not giving employee benefits such as vacation, holidays and sick pay

• Avoiding unemployment compensation tax

• Avoiding worker's compensation insurance

The Consequences of Employee Misclassification

For an employer to get caught, an employee should file a complaint with the state Department of Labor or with the U.S Department of Labor (DOL).

It is more common for the DOL to take cases where more than one employee was misclassified. It will begin an investigation which will encompass all employees and independent contractors for a three-year time.

The penalty for an employer will depend on what the DOL or the IRS determined. They can deem misclassifications as unintentional, intentional or fraudulent.

In case the IRS identifies fraud or intentional misconduct additional penalties can be imposed. For example, an employer might have to pay 20% of all paid wages along with 100% of FICA taxes (employee's share as well).

A criminal penalty might cost an employer up to $1,000 per one misclassified employee as well as one year in prison.

How Should Employees Fight for Their Rights?

Start by discussing it with your employer. Let them know about your concerns and see if they will reclassify you. If they refuse to do so, demand a detailed explanation of why you are considered an independent contractor instead of an employee.

If the negotiation with your employer failed, your our next step will be contacting the IRS. You can request them to identify your employment status for federal tax purpose. You can do that by filling out the IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

This form will ask you a number of questions regarding how the employer treats you on your job. They will then contact your employer to see what their side of the story is and then determine your status for the purpose of federal employment taxes. However, the decision that the IRS will make will not be binding on your employer. In any case, ignoring the IRS's decision can get the employer into trouble.

Filing an Unemployment Insurance Claim

In case you are fired, you can file an insurance claim with your state unemployment agency. If you tell them you have been misclassified as an independent contractor, they will investigate the matter. If they decide in your favor you will receive an unemployment insurance from your employer, who will also have to pay your insurance premiums.

Filing a Worker's Compensation Claim

In case you have been injured and your employer refuses to provide you with worker's compensation coverage, then file a claim with your state worker's compensation insurance agency.

Employee misclassification is yet another illegal reason for employers to spend less. It deprives employees of rights they should be entitled to. If you suspect you have been a victim of employee misclassification, it is time for you to press charges and restore your rightful status.