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| Fuzzy About Your Identity? |
Misclassification of Employees as Independent Contractors
This is a problem that has plagued America's workforce (and the government) for many years. Companies have repeatedly, and purposefully, engaged in the practice of misclassifying people who should be deemed employees as “independent contractors.”
It has become such an epidemic that the IRS recently decided that employers who voluntarily come forward to acknowledge that they have wrongly classified workers as independent contractors will, in exchange for their “honesty”, be rewarded by not having to pay any interest or penalties for overdue payroll contributions, along with tax relief benefits.
Although estimates are difficult due to the nature of misclassification, it is been estimated on numerous occasions that misclassification costs state and federal government(s) billions of dollars per year in lost taxes/contributions/funding.
How Many Misclassified Workers Are There in the United States?
This excerpt from a recent report provides some idea:
"Ten to 30% of all employers misclassify their employees, according to a conservative estimate by the U.S. Department of Labor.
A total of approximately 1.8 million workers were found to have been misclassified in four states that have recently conducted studies – Illinois, Maine, Massachusetts, and New York. National figures on the total number of misclassified employees are not available."
So, there are a lot of misclassified workers out there!
How Much in Taxes Are Lost by the U.S. Government as a Result of Misclassification?
That aforementioned article further states the following:
"The IRS estimated that $68 billion of the annual $345 billion gross tax gap for 2001 was due to sole proprietors, business owners who alone own all of a company’s assets, under-reporting their net income by 57%.
If even a fraction of that sole proprietor tax gap was the result of misclassification and/or unreported cash, the federal tax gap due to misclassification would be closer to $10 billion dollars a year."
That's a lotta dough!
NOTE: If you are deemed an independent contractor, you are deemed to be self-employed. Many citizens do not understand that subtle, but critical, nuance.
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| If You Are Part of the Team, You Are Not an Independent Contractor |
There are a number of factors, more than 15 in fact, that governmental agencies and/or the courts examine when making this determination.
However, let me give you the simple factors to consider. I can virtually assure you that you are an employee if you answer Yes to most or all of the following questions:
* Do you go to your employer's office on a regular basis?
* Do you have a desk or designated work station at your employer's office?
* Do you have a company e-mail address?
* Do you have a phone extension at the office?
* Do you have a business card provided to you by the company?
* Do you ever attend meetings outside of the office with company employees?
* Are you required to attend regular meetings scheduled by the company in the office?
* Do you use a computer and other work materials provided by the company on a regular basis?
* Has the company ever warned or disciplined you?
* Is your work product reviewed/approved/edited by a supervisor employed by the company?
* Are you required to follow the rules found within the company's handbook?
* Do you get reimbursed for expenses or travel incurred while performing your work?
* Do you fill out a time card? or,
* Are you required to submit your hours worked on a company form?
* Do you regularly utilize company forms and/or software when completing your job duties?
* Are your hours of work by and large scheduled by the company?
I could go on, but I expect that you get the general idea. Broadly stated, the "legal test" is whether the company "controls the manner and means of your day-to-day activities." If it does engage in such control, you are an employee no matter what paper you signed.
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| SHOCKER! It's All About the Benjamins for Corporate America |
For employers, there are many very significant benefits to having independent contractors versus employees.
First, the most obvious benefit, is that independent contractors are paid on a 1099 basis, as opposed to a W-2 basis. This means that companies do not have to make FICA Contributions (FICA stands for the Federal Insurance Contributions Act) on wages paid to independent contractors.
In addition, workers classified as independent contractors are not entitled to workers' compensation or unemployment benefits. This means that companies can save significantly due to the fact that they are not obligated to make workers' compensation or unemployment insurance contributions.
Another cost-saving benefit of utilizing independent contractors is that they do not receive the same perks as regular employees, such as vacation and sick pay, holiday pay, life insurance, short- and long-term disability insurance, stock plan participation, sharing in 401k programs, etc.
Further, in many companies severance is offered to terminated employees. Such severance is not, however, available to independent contractors. .
But that's not all.
Critically, independent contractors are not entitled to protection under overtime laws such as the Fair Labor Standards Act, and companies cannot be sued by independent contractors under employment laws prohibiting discrimination, sexual harassment, retaliation, wrongful termination, etc.
Finally, at least with regard to the major benefits of having independent contractors versus employees, independent contractors can be bound by all necessary employer policies, such as work rules, non-compete agreements, etc.
In short, having independent contractors versus employees is, from many perspectives, a win-win situation for Corporate America. Companies save significantly on payroll expenses, employee benefits, workers' compensation and unemployment contributions, while at the same time eliminating obligations to comply with state and federal employment laws. Meanwhile, companies are able to require their contractors to adhere to company policies, and can limit their right to compete against the company subsequent to the end of their relationship.
What is the Downside to Having a Significant Number of Independent Contractors Working for a Company?
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| No One Can Other Than Mom or Wife Can Tell Him to Take His Feet Off of the Table! |
Thus, employing a large number of independent contractors creates, at least in theory, a significant risk for employers that required assignments will not be completed in a suitable or timely fashion.
How do Companies Get Around the Risks of Utilizing Large Numbers of Independent Contractors While at the Same Time Benefiting From Same?
Hence, while Corporate America loves the financial benefits of employing independent contractors, it is quite wary of actually treating such persons as independent contractors. So, the work around is: call them independent contractors, but treat them like employees. This is called "misclassification."
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| Doesn't Make it So! |
The most prevalent strategy is to have the individual sign a document called an "Independent Contractor Agreement." The ordinary person believes that, if they sign such an agreement, they lose the right to argue that they are anything other than an independent contractor.
Not so. Such an agreement in fact has little impact on the determination of whether someone is truly an independent contractor, and in no way is binding on an individual. Rather, the "legal test" employed in determining whether a person is an employee versus an independent contractor is based upon an examination of the parties' actual relationship, not what a piece of paper says.
You can call a donkey a racehorse, but its still a donkey.
Think about it - if a mere written document would end any analysis of the issue, then no companies would ever be found liable on a misclassification theory. Yet, such determinations are made all of the time.
How Much in FICA Contributions Does a Misclassified Worker Lose?
The numbers are pretty straightforward.
* Social Security Contributions. In 2013, employers must make a contribution equal to 6.2% of an employee's earnings into the Social Security Fund. The employee then makes a matching 6.2% contribution to the Fund, for a total contribution of 12.4%. If you are self-employed (i.e. independent contractor) you must make the entire 12.4% SS Contribution on your own.
* Medicare Contributions. In 2013, employers must make a contribution equal to 1.45% of an employee's earnings into the Social Security Fund. The employee then makes a matching 1.45% contribution to Medicare, for a total contribution of 2.9%. If you are self-employed (i.e. independent contractor) you must make the entire 2.9% Medicare Contribution on your own.
So, person who has earned an average of $50,000 per year working as an independent contractor for the past 5 years will have paid an additional $3,875 per year in FICA Contributions ($3,100 in SS, $725 in Medicare) than he/she would have had he/she been an employee. That is a total loss to the worker of $19,375 over that 5-year period. Not chump change.
Can I Sue to Recover Lost FICA Contributions if I Was Misclassified?
Unfortunately, a private individual cannot recover these losses in a lawsuit (the Internal Revenue Code does not allow you to do so). Rather, only governmental agencies can seek recoupment of these monies. Often, though, if they do not grant amnesty to a self-reporter, they simply seek some penalties and a "go forward" agreement for future compliance. I do not hear many misclassified workers calling to tell me that they have received reimbursement for these losses via a check from IRS.
Can I Sue to Recover Lost Benefits Such as Vacation and Sick Pay, Life Insurance, Short- and Long-Term Disability Insurance, Stock Plan Participation and 401k Plan Participation Benefits if I Was Misclassified?
Yes!
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| This is Where You Can Go for Back Benefits |
Where a person has over a period of years been deprived of such benefits, the claim may be substantial enough to warrant pursuit by an attorney.
NOTE: There is a statute of limitations on these claims, so do not delay too long before seeking counsel.
NOTE: Some of these claims, such as those relating to long-term disability pay and retirement benefits, may be governed by a statute known as ERISA. See below discussion of ERISA for more about that.
While such claims on an individual basis may be small, if you are part of a group of workers who have been misclassified, the case could be substantial.
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| You May be Entitled to Severance |
Severance is another big misclassification issue.
Severance is typically available via company policy or in accord with a Defined Benefit Plan approved by the IRS. Many large companies have DBPs.
However, only employees may reap the benefits of DBPs. So, the terminated worker who was misclassified loses out not only on unemployment compensation, but severance as well. But, if you have been misclassified, you may sue in court for severance as well.
Class-Actions by Misclassified Workers
There have been a number of very prevalent class-action lawsuits filed by large groups of misclassified employees against companies that have Defined Benefit Plans. These lawsuits are often (but not always) filed under a statute called ERISA. Microsoft got hit on such a claim about 15 years ago.
If your company has a DBP, you may eligible under ERISA to sue for benefits provided under such plan, which typically provide for long-term disability, severance pay and retirement benefits.
What is ERISA?
ERISA is a federal statute that governs company retirement plans, commonly referred to as Defined Benefit Plans. Many DBPs provide for benefits such as long-term disability, severance and retirement. Click Here for an overview of ERISA.
Can I Sue to Recover OVERTIME if I Was Misclassified as an Independent Contractor?
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| Overtime Claims by Misclassified Workers Common and Often Lucrative! |
Again, this is accomplished via the filing of a lawsuit, often under the federal law known as the Fair Labor Standards Act ("FLSA"). Such suits also frequently include claims for lost benefits such as vacation pay, severance, etc., as described above.
Click Here for an overview of federal overtime laws in the United States to analyze whether you are a non-exempt employee.
FLSA provides substantial penalties for failure to pay overtime, including double damages, and payment of your attorney fees.
It is not uncommon to see a group of independent contractors employed by one company come together to file a lawsuit in federal court seeking payment of overtime under FLSA and other benefits under ERISA on the grounds that they were in fact employees under the law who were deprived of their rights to compensation and benefits.
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| Title VII Protects Misclassified Workers |
Can I Recover Sue for Discrimination or Sexual Harassment if I am Misclassified as an Independent Contractor?
Yes, for the same reasons and utilizing the same mechanisms as described in the above sections relating to benefits and overtime. You need simply prove you were misclassified as an independent contractor when in fact, under the law, you were an employee. This then clears the path for your lawsuit under Title VII.
Can I Get Unemployment Benefits if I am Misclassified as an Independent Contractor?
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| APPEAL! |
When you apply, the Unemployment Department will not have any earnings for you, so it will deny your application on that basis. Appeal that determination, and you will (in Pennsylvania) get a Referee Hearing. Win at that Hearing by proving that you were in reality an employee subject to the direction and control of the employer, and you will win benefits unless, of course, you quit without good reason or were fired for willful misconduct.
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| Available to All "True" Employees |
Yes, although you will likely need to obtain a determination as to your status from the U.S. Department of Labor first. Failing that, you will have to pursue a lawsuit in federal court.
Can I Get Workers' Compensation Benefits if I am Misclassified as an Independent Contractor?
Yes, you can. If you have suffered an injury while working under an independent contractor arrangement, you can seek a determination from a workers' compensation referee or judge that you were in fact an employee under the law despite your misclassification as an independent contractor, and are therefore eligible for workers' compensation benefits. This is also a common dispute in many states.
Do you want IRS to investigate your workplace and determine your status? Click Here for the form you should complete. Before you do so, however, you may first want to speak with an attorney concerning the pros and cons of utilizing this process.
John A. Gallagher is an employment lawyer who represents employees in Pennsylvania.
Click Here if you have questions about any aspect of employment law, from wrongful termination, to wage and overtime claims, to discrimination and retaliation laws, to Family and Medical Leave…
Click Here if you have questions about any aspect of Pennsylvania Unemployment Law, from willful misconduct, to voluntary quit, to independent contractor, to Referee Hearings, to severance issues…
Click Here to e-mail John directly.
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