Brown Law Office 972-355-0092
Brown Law Office 972-355-0092
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Employer Law FAQ

What Happens if Employers Misclassify Employees as Independent Contractors?

It is imperative that employers take care in determining whether or not an individual is an employee or an independent contractor. Employers can save money and conserve resources by hiring independent contractors. But the savings will be negated by heavy penalties at the state and federal level if employers wrongly classify employees as independent contractors. These penalties may include:

  • Paying back all of the withholdings that the employer should have taken from the employee's paychecks - even if the employee already paid them
  • Paying penalties to the IRS for failure to pay employment taxes on the employee
  • Paying back unemployment and workers' compensation insurance premiums to the appropriate state funds for the employee
  • Criminal penalties if the employer has a pattern of misclassifying employees

Employers also may face lawsuits from the misclassified employee, seeking to recover lost benefits, unpaid overtime compensation, disability payments and workers' compensation.

Why are Independent Contractors a Cheaper Employment Option?

Employers do not have to pay Social Security and Medicare taxes for independent contractors, who are responsible for paying their own taxes. Employers also do not have to pay unemployment insurance or workers' compensation insurance for independent contractors. Likewise, employers do not provide any costly benefits to independent contractors, like health insurance, disability, paid-time off or contribute to retirement savings plans or pensions.

How are Employees Distinguished from Independent Contractors?

Just because an employer does not pay taxes or provide benefits to an individual do not alone prove the individual is an independent contractor. Since it can be difficult to determine whether an individual is an employee or an independent contractor, courts look to the totality of the circumstances of the employment relationship. While jurisdictions use different factors to distinguish an employee from an independent contractor, some of the factors that may be considered include:

  • Length of the employment relationship - is it for a definite term or on-going
  • How payment is determined - is it based on an hourly or project basis
  • Which party provides the supplies to complete the work
  • Who controls how the work is completed
  • Who controls the final product of the work
  • Can the individual hire assistants and others to complete the work

The most important consideration is whether the employer has the right to direct and control the work of the individual. If the employer does, then the relationship is likely one of employer-employee.

The IRS has its own set of factors in determining the nature of the employment relationship, which mirror the type of factors courts consider in making the same determination. The IRS focuses on the degree of control and independence the individual has from the employer. To make this determination, the IRS considers three factors:

  • Behavioral control: who controls what the individual does and how it is done?
  • Financial control: who controls and pays for the business aspects of the relationship, such as supplies, workspace, assistants?
  • Nature of the relationship: what is the overall relationship between the parties?

Employers concerned about misclassifying employees as independent contractors can request a determination of the relationship status from the IRS by submitting Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).

For help correctly classifying employees and independent contractors, contact an experienced attorney in your area. He or she can draft employment contracts and address any other legal issues in running your business.

Copyright © 2008 FindLaw, a Thomson Reuters business

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

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Betty L. Brown
Board Certified by the Texas Board of Legal Specialization
in Labor and Employment Law
Fountain Park
1021 Long Prairie Road, Suite 402
Flower Mound, TX 75022
Phone: 972-355-0092
Fax: 972-899-9635
E-mail: betty@brownemploymentlaw.com