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Overview of Independent Contractor Misclassification
It is the job of an employer to decide, based on the specifics of individual jobs, whether a worker is an employee or a contractor. Making the right determination could be costly, since an employee paid as a contractor could be entitled to legal action if erroneously misclassified as an independent contractor.
According to the Department for Professional Employees, the practice of misclassification is a major issue in the United States, with employers misclassifying millions of workers who should have been categorized as employees.
Independent Contractors
An independent contractor is a worker who provides a service or good to a business or individual while retaining individual control over how that service/good is provided. This means that the worker is only controlled by the employer through a binding agreement, like a contract.
Most independent contractors are self-employed, work for multiple companies at the same time, and consider the people they work for their clients.
Independent Contractor IRS Test
The Internal Revenue Service (IRS) provides a few tests to determine how an employee is classified for tax purposes and whether independent contractor misclassification has occurred.
The federal agency’s test looks at three different elements to decide whether or not someone should be classified as a contractor. These include:
- Behavioral analysis: Does the company control the environment/work of the worker?
- Financial: Does the employer control the business aspects of the worker?
- Relationship: Is there a contract or other written agreement outlining what the relationship looks like or how the person is paid?
Department of Labor Test
Another method to determine whether or not someone is an independent contractor is known as the economic reality test for independent contractor misclassification. The purpose of this test is to figure out whether the worker is economically reliant on the employer. Employers are encouraged to look at both of these tests to determine whether or not they have made an error in listing someone as a contractor when employee would have been more appropriate.
Worker Misclassification
Due to the complexity of the issues involved, it’s not always easy for companies to tell if someone should be a contractor or an employee. The most important aspect of this has to do with the employer’s responsibilities for an employee versus a contractor.
The key distinction, according to the Harvard Business Review, is that most people who work for a company are considered employees through state and federal statutes, making them eligible for protections under those laws.
Employee Labor Protections
Some of the most basic labor protections are not in place to help contractors, and instead only allow protections for employees. These include minimum wage and overtime. Protections like unemployment insurance and workers compensation are also for employees and not contractors.
When companies purposely or wrongfully classify someone as a contractor in order to avoid providing these protections, the worker can bring legal action if it can be shown that they were an employee and were, for example, eligible for overtime payments. Companies are increasingly being accused of violating this law to avoid paying overtime and providing other protections when the work environment of the person in question more closely aligns with that of employee rather than contractor.
