EMPLOYEE OR INDEPENDENT CONTRACTOR?

Employers often choose to classify workers as independent contractors rather than employees because there is less cost and regulation. Many state and federal laws only apply to employers whose workers are employees, including the Internal Revenue Code requiring employers to pay employment taxes and the Fair Labor Standards Act requiring the payment of minimum and overtime wages. Further, many of the laws prohibiting discrimination and harassment in the workplace only apply to protect employees, not independent contractors.

The liability for employers who misclassify their workers as independent contractors rather than employees can be severe. An employer can be obligated to pay back taxes, including the employer's and employee's share of Medicare and Social Security, federal and state income taxes, unemployment compensation taxes and workers' compensation benefits if the employee was injured on the job and not covered under workers' compensation. Tax and workers compensation laws impose individual liability on the persons responsible for the misclassification if the company does not or can not pay.

It is therefore essential that an employer understand the difference between an employee and an independent contractor. There are several tests derived from the statutes and regulations governing the employee-employer relationship. Generally, these tests distinguish an employee from an independent contractor on the basis of the extent of control the employer has over the worker. The more control and supervision by the employer, the more likely the worker will be classified as an employee. Factors to consider include the extent of control the employer has over the details of the work, the type of occupation, whether the employer supplies the tools, the length of time the person is employed, and whether the parties believe they are creating an employer-employee relationship.

There is, however, a "safe harbor" for employers who misclassify workers. An employer must show: (1) a reasonable basis for the classification; (2) a substantial consistency in the employer's treatment of workers; and (3) a consistency in any reporting requirements (i.e. 1099 IRS forms were filed)