One of the many issues that employers face is the possibility that individuals who perform work for the company are misclassified as independent contractors and not employees. In some instances, an employer may intentionally misclassify an employee in order to avoid having to provide the benefits to that person that employment confers. But, it is also possible that a relationship that an employer truly intends as non-employment will be deemed misclassified by the court. Therefore, it is important for employers to understand how the determination of whether a worker is an employee or independent contractor is made.
Generally speaking, there are two types of workers: independent contractors and employees. If a worker is not considered an employee, the employer can avoid having to provide the worker with the benefits that employees are entitled to. Some of these include overtime compensation, workers’ compensation, insurance, and family or medical leave. This can result in significant cost savings for the employer. But, it is important to correctly classify employees.
There are many factors that affect whether a worker is considered an independent contractor or employee, with many of them relating to the amount of control the employer has over the worker. Specifically, these factors include, but are not limited to, the following:
- The amount of direction the employer has over how the worker completes the work;
- Whether the employer provides for training of the worker;
- Whether the relationship is exclusive or is it possible for the worker to perform similar work for other companies;
- Who is responsible for providing tools and supplies; and
- Whether the work is a key aspect of the business.
Consequences for Misclassifying
A company that misclassified a worker may be held liable for the employment taxes for that worker, unless the employer had a reasonable basis for not treating the worker as an employee. Further, the employer must not have treated a worker holding a substantially similar position as an employee for any periods beginning after 1977. Otherwise, it may be determined that the worker is actually an employee. In addition, workers who believe they were misclassified can file a lawsuit against their employer. These lawsuits can result in large awards for plaintiffs, such as for back wages for overtime work that was not paid.
The Department of Labor (DOL) and the Internal Revenue Service (IRS) are working together to address this issue. The agreement to a Memorandum of Understanding, signed in 2011, was intended to improve efforts to end the misclassification of employees. Through this initiative, the DOL, IRS, and participating states will share information and coordinate efforts to reduce misclassification. The DOL would like to reduce the practice of misclassifying employees in order to “level the playing field for law-abiding employers” as well as to provide protection for employees. Currently, Pennsylvania is not part of this initiative.
Help with your Business
If you are a business owner, it is possible that you may misclassify a worker completely by accident. In order to best protect yourself, you should speak with the experienced team at the Philadelphia Small Business Law Center. For more information, contact us today.