Many think an employer can “1099” workers as long as there is an agreement with the employee and both are satisfied. This is totally wrong and is a very expensive mistake.
Classifying a worker as an independent contractor means the employer is not liable for federal tax withholding, paying state unemployment taxes, maintaining workers compensation insurance or following state and federal wage and hour laws. The problem is the government may see this as evading taxes and statutory obligations.
Neither an employer nor a worker has the authority to choose to avoid legal duties. The agreement between employee and employer does not govern.
Government generally uses one of two tests to decide whether a worker is an employee or independent contractor. The ABC test is gaining in use because it is clearer – and tougher to get around. A company defending an independent contractor classification must show an individual providing services: A) is free from control and direction; B) performs services outside the usual course of the enterprise’s business for which such service was performed; and C) is engaged in an independently established trade, occupation, profession, or business.
Others use the “IRS” test. Here, twenty factors are weighed to make the decision.
There are other tests used. The US Department of Labor uses a six-factor economic realities test to determine liability under the Fair Labor Standards Act. California uses a multi-factor test. Generally speaking, all these other tests turn on whether the employer has the right to control the worker. If the employer controls what work will be done and how, the worker is an employee. No agreement, label or waiver matters.
An employer who misclassifies employees is liable for back taxes, insurance premiums, unpaid wages and overtime, late fees and penalties. This is on top of liability for civil lawsuits filed by misclassified employees.
Government agencies often share information and each has the power to audit to ensure compliance. The employer is required to defend its classification.
If an inquiry or audit is triggered by an independent contractor applying for unemployment, filing a worker’s compensation claim, or reporting non-compliance; strict anti-retaliation and whistleblower protections create significant liability if adverse action is taken against the worker.
Employment laws are passed for the protection of employees. They are construed broadly in favor of finding employee status.
If workers can be truly independent contractors, the employer should engage counsel to avoid the implications of misclassification. Counsel should also be used to craft independent contractor agreements that incorporate the language necessary to demonstrate that the contractor truly meets the standards.