Can Misclassification of Workers Lead to Penalties?
Employers may be tempted to classify their workers as independent contractors in order to save costs on employment-related taxes. However, misclassification of workers as either independent contractors or employees can have severe consequences for both the employer and employee. The number of workers being misclassified has been dramatically increasing the past few years across all sectors, including professional services, sales, and management. There is also an increasing trend toward employing gig workers in the delivery and transportation business.
Protections for Employees
When a worker is classified as an employee, federal law protects their treatment at the workplace. Employment laws protect employees from harassment, discrimination, and many other workplace difficulties. Employees may also enjoy certain benefits, such as paid time off or holiday pay, as well as insurance benefits. Employees can also seek compensation when injured in the course of performing their duties. To provide for these benefits and protections, employers must pay employment-related taxes, Workers’ Compensation benefits, and insurance benefits that can be costly.
Employers may be tempted to save on costs by simply labeling the worker as an independent contractor. However, various federal and state laws conduct a fact-based analysis to test whether a worker is truly an employee or an independent contractor. Simply labeling one or the other is not sufficient to maintain that status. The Internal Revenue Service (IRS) will classify a worker as an independent contractor if the entity that is engaging their services does not control the specifics of the work or how it should be done.
Factors Used to Determine Classification
Courts look at the facts surrounding the employment to determine whether an individual has been correctly classified as an employee or an independent contractor. Often, these fall into broad categories of whether the employer has behavioral and financial control, as well as the type of relationship involved. Factors include:
- The degree of control the employer exercises over the worker in terms of hours worked, where the work occurs, or how it is done. Independent contractors typically have more control of how they organize their hours, where they choose to work, or the method by which the work is accomplished.
- If the employee is employed full-time; independent contractors work on a temporary or seasonal basis.
- Whether the employer provides equipment and all the tools required to perform the job; if the worker is using their own equipment, workspace, and materials, they are independent contractors.
- How a worker is paid for the services; an independent contractor would issue invoices when the project is completed or other payment basis.
- Whether the worker only works for one entity; an independent contractor usually has several clients for whom services are provided.
Workers may anonymously report to state institutions about employer misclassifications. However, employer misclassification issues often arise when an employee has been terminated or due to other adverse decisions, such as discrimination or harassment affecting a worker. In a lawsuit alleging such harassment or termination, the worker may also allege additional damages for misclassification. The worker may claim payment for violations of wage standards and overtime pay. An independent contractor would not be eligible for unemployment or Workers’ Compensation, however, by arguing misclassification, this worker can try to receive benefits that were denied to them.
In addition to these issues, a misclassified employee could open the employer to liability for unpaid overtime which carries its own set of penalties.
The legal team at MacMain, Connell & Leinhauser provides a full suite of employment-related representation, including human resource counseling and labor relation matters. For more information, contact us online or call us at 484-318-7106. Located in Pennsylvania, we serve clients throughout Chester County, Philadelphia, and New Jersey.